Table of Contents

 

 

 

**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**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 January 31, 2011**

 

**OR**

 

**£****         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**

 

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**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**

 

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

 

Indicate by check mark whether the registrant 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 £ No £

 

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  £             |   | Accelerated filer  x              |
|-------------------------------------------------------|--------|---------------------------------------------|
|                                                  |   |                                        |
| Non-accelerated filer  £               |   | Smaller reporting company  £ |
|  (Do not check if a smaller   reporting company) |   |                                        |

 

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 £ No x

 

At March 7, 2011, 57,569,719 shares of common stock of the registrant were outstanding, exclusive of 12,541,000 shares of treasury stock.

 

 

 

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Table of Contents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

**INDEX**

 
| ** **                               | ** **                                                                                                                              | ** ** | **Page**   |
|------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| ** **                               | ** **                                                                                                                              | ** ** | ** ** |
| ** **                               | ** **                                                                                                                              | ** ** | ** ** |
| **PART I.   FINANCIAL INFORMATION** |
| ** **                               | ** **                                                                                                                              | ** ** | ** ** |
| **Item 1.**                              | Financial Statements:                                                                                                                   |       | 3          |
|                                     |                                                                                                                                    |       |       |
|                                     | Condensed   Consolidated Balance Sheets (unaudited) — January 31, 2011 and   April 30, 2010                    |       | 3          |
|                                     |                                                                                                                                    |       |       |
|                                     | Condensed   Consolidated Statements of Income (unaudited) — Three and Nine   Months Ended January 31, 2011 and 2010 |       | 4          |
|                                     |                                                                                                                                    |       |       |
|                                     | Condensed   Consolidated Statements of Cash Flows (unaudited) — Nine Months   Ended January 31, 2011 and 2010       |       | 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                                                                            |       | 42         |
|                                     |                                                                                                                                    |       |       |
| **Item 4.**                              | Controls and   Procedures                                                                                                               |       | 43         |
|                                     |                                                                                                                                    |       |       |
|                                     |                                                                                                                                    |       |       |
| **PART II. OTHER   INFORMATION**    |
|                                     |                                                                                                                                    |       |       |
| **Item 1.**                              | Legal Proceedings                                                                                                                       |       | 44         |
|                                     |                                                                                                                                    |       |       |
| **Item 1A.**                             | Risk Factors                                                                                                                            |       | 46         |
|                                     |                                                                                                                                    |       |       |
| **Item 6.**                              | Exhibits                                                                                                                                |       | 62         |
|                                     |                                                                                                                                    |       |       |
| Signatures                               |                                                                                                                                    | 63         |
|                                     |                                                                                                                                    |       |
| Exhibit Index                       |                                                                                                                                    |       |

 

2

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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)**

 
| ** **                                                                                                                                                                                                                                          | ** ** | **January 31,** | ** ** | **April 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|--------------------|------------|
| ** **                                                                                                                                                                                                                                          | ** ** | **2011**             | ** ** | **2010**           | ** ** |
| **ASSETS**                                                                                                                                                                                                                                          |       |                 |       |               |       |
| Current assets:                                                                                                                                                                                                                                     |       |                 |       |               |       |
| Cash and cash equivalents                                                                                                                                                                                                                           |       | $                    | 375,425    |               | $          | 234,023 |   |
| Short-term investments                                                                                                                                                                                                                              |       | 123,470              |       | 99,555             |       |
| Accounts receivable, net of allowances for   doubtful accounts and sales returns                                                                                                                                                                    |       | 119,079              |       | 74,261             |       |
| Inventories                                                                                                                                                                                                                                         |       | 93,569               |       | 133,993            |       |
| Refundable and deferred income taxes                                                                                                                                                                                                                |       | 10,209               |       | 1,990              |       |
| Prepaid expenses and other current assets                                                                                                                                                                                                           |       | 7,313                |       | 9,380              |       |
| Total current assets                                                                                                                                                                                                                                |       | 729,065              |       | 553,202            |       |
| Property, plant and equipment, net                                                                                                                                                                                                                  |       | 115,402              |       | 121,547            |       |
| Long-term investments                                                                                                                                                                                                                               |       | 101,688              |       | 92,121             |       |
| Goodwill                                                                                                                                                                                                                                            |       | 1,122                |       | 439                |       |
| Intangibles, net                                                                                                                                                                                                                                    |       | 6,268                |       | 4,891              |       |
| Other long-term assets                                                                                                                                                                                                                              |       | 18,218               |       | 25,493             |       |
| Total assets                                                                                                                                                                                                                                        |       | $                    | 971,763    |               | $          | 797,693 |   |
|                                                                                                                                                                                                                                                |       |                 |       |               |       |
| **LIABILITIES AND EQUITY**                                                                                                                                                                                                                          |       |                 |       |               |       |
| Current liabilities:                                                                                                                                                                                                                                |       |                 |       |               |       |
| Accounts payable                                                                                                                                                                                                                                    |       | $                    | 98,333     |               | $          | 85,487 |   |
| Accrued expenses and other current liabilities                                                                                                                                                                                                      |       | 16,185               |       | 19,506             |       |
| Deferred revenues, less cost of revenues                                                                                                                                                                                                            |       | 16,619               |       | 10,661             |       |
| Current portion of long-term debt                                                                                                                                                                                                                   |       | 4,312                |       | 4,286              |       |
| Total current liabilities                                                                                                                                                                                                                           |       | 135,449              |       | 119,940            |       |
| Long-term liabilities:                                                                                                                                                                                                                              |       |                 |       |               |       |
| Long-term income taxes payable                                                                                                                                                                                                                      |       | 84,283               |       | 90,626             |       |
| Non-current portion of long-term debt                                                                                                                                                                                                               |       | 42,584               |       | 45,428             |       |
| Other long-term liabilities                                                                                                                                                                                                                         |       | 13,464               |       | 4,727              |       |
| Total long-term liabilities                                                                                                                                                                                                                         |       | 140,331              |       | 140,781            |       |
| Total liabilities                                                                                                                                                                                                                                   |       | 275,780              |       | 260,721            |       |
|                                                                                                                                                                                                                                                |       |                 |       |               |       |
| Commitments and contingencies (Note 13)                                                                                                                                                                                                        |       |                 |       |               |       |
|                                                                                                                                                                                                                                                |       |                 |       |               |       |
| Equity:                                                                                                                                                                                                                                             |       |                 |       |               |       |
| OmniVision Technologies, Inc. stockholders’   equity:                                                                                                                                                                                     |       |                 |       |               |       |
| Common stock, $0.001 par value;   100,000 shares authorized; 69,345 shares issued and   56,804 outstanding at January 31, 2011 and 64,616 shares   issued and 52,075 outstanding at April 30, 2010, respectively |       | 69                   |       | 65                 |       |
| Additional paid-in capital                                                                                                                                                                                                                          |       | 512,097              |       | 441,077            |       |
| Accumulated other comprehensive income                                                                                                                                                                                                              |       | 1,724                |       | 870                |       |
| Treasury stock, 12,541 shares at   January 31, 2011 and April 30, 2010, respectively                                                                                                                                                 |       | (178,683             | )          | (178,683           | )          |
| Retained earnings                                                                                                                                                                                                                                   |       | 360,776              |       | 270,253            |       |
| Total OmniVision Technologies, Inc.   stockholders’ equity                                                                                                                                                                                |       | 695,983              |       | 533,582            |       |
| Noncontrolling interest                                                                                                                                                                                                                             |       | —               |       | 3,390              |       |
| Total equity                                                                                                                                                                                                                                        |       | 695,983              |       | 536,972            |       |
| Total liabilities and equity                                                                                                                                                                                                                        |       | $                    | 971,763    |               | $          | 797,693 |   |

 

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

 

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**OMNIVISION TECHNOLOGIES, INC.**

 

**CONDENSED****CONSOLIDATED****STATEMENTS OF INCOME**

**(in thousands, except per share amounts)**

**(unaudited)**

 
| ** **                                                                                                              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                              | ** ** | **January 31,**             | ** ** | **January 31,**            | ** ** |
| ** **                                                                                                              | ** ** | **2011**                         | ** ** | **2010**                        | ** ** | **2011** | ** ** | **2010** | ** ** |
| Revenues                                                                                                                |       | $                                | 265,677    |                            | $          | 156,935 |   | $ | 698,208 |   | $ | 445,839 |   |
| Cost of revenues                                                                                                        |       | 186,464                          |       | 118,396                         |       | 499,593 |   | 339,668 |   |
| Gross profit                                                                                                            |       | 79,213                           |       | 38,539                          |       | 198,615 |   | 106,171 |   |
|                                                                                                                    |       |                             |       |                            |       |   |   |   |   |
| Operating expenses:                                                                                                     |       |                             |       |                            |       |   |   |   |   |
| Research, development and related                                                                                       |       | 23,109                           |       | 20,414                          |       | 64,235 |   | 57,699 |   |
| Selling, general and administrative                                                                                     |       | 15,444                           |       | 15,587                          |       | 44,514 |   | 45,956 |   |
| Total operating expenses                                                                                                |       | 38,553                           |       | 36,001                          |       | 108,749 |   | 103,655 |   |
|                                                                                                                    |       |                             |       |                            |       |   |   |   |   |
| Income from operations                                                                                                  |       | 40,660                           |       | 2,538                           |       | 89,866 |   | 2,516 |   |
| Interest expense, net                                                                                                   |       | (318                             | )          | (145                            | )          | (952 | ) | (593 | ) |
| Other income, net                                                                                                       |       | 1,768                            |       | 2,881                           |       | 2,840 |   | 3,672 |   |
| Income before income taxes                                                                                              |       | 42,110                           |       | 5,274                           |       | 91,754 |   | 5,595 |   |
|                                                                                                                    |       |                             |       |                            |       |   |   |   |   |
| Provision for (benefit from) income taxes                                                                               |       | (2,608                           | )          | 467                             |       | 1,263 |   | 2,616 |   |
| Net income                                                                                                              |       | 44,718                           |       | 4,807                           |       | 90,491 |   | 2,979 |   |
| Net loss attributable to noncontrolling interest                                                                        |       | —                           |       | (143                            | )          | (32 | ) | (199 | ) |
| Net income attributable to OmniVision   Technologies, Inc.                                                         |       | $                                | 44,718     |                            | $          | 4,950 |   | $ | 90,523 |   | $ | 3,178 |   |
|                                                                                                                    |       |                             |       |                            |       |   |   |   |   |
| Net income per share attributable to OmniVision   Technologies, Inc. common stockholders:                          |       |                             |       |                            |       |   |   |   |   |
| Basic                                                                                                                   |       | $                                | 0.80       |                            | $          | 0.10 |   | $ | 1.66 |   | $ | 0.06 |   |
| Diluted                                                                                                                 |       | $                                | 0.75       |                            | $          | 0.09 |   | $ | 1.56 |   | $ | 0.06 |   |
|                                                                                                                    |       |                             |       |                            |       |   |   |   |   |
| Shares used in computing net income per share   attributable to OmniVision Technologies, Inc. common stockholders: |       |                             |       |                            |       |   |   |   |   |
| Basic                                                                                                                   |       | 56,174                           |       | 51,273                          |       | 54,541 |   | 50,870 |   |
| Diluted                                                                                                                 |       | 59,936                           |       | 52,554                          |       | 58,205 |   | 52,007 |   |

 

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

 

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**OMNIVISION TECHNOLOGIES, INC.**

**CONDENSED****CONSOLIDATED****STATEMENTS OF CASH FLOWS**

**(in thousands, unaudited)**

 
| ** **                                                                                     | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                     | ** ** | **January 31,**            | ** ** |
| ** **                                                                                     | ** ** | **2011**                        | ** ** | **2010** | ** ** |
| Cash flows from operating activities:                                                          |       |                            |       |   |   |
| Net income                                                                                     |       | $                               | 90,491     |   | $ | 2,979 |   |
| Adjustments to reconcile net income to net cash   provided by operating activities:            |       |                            |       |   |   |
| Depreciation and amortization                                                                  |       | 14,551                          |       | 17,440 |   |
| Change in fair value of interest rate swap                                                     |       | 260                             |       | (839 | ) |
| Stock-based compensation                                                                       |       | 15,094                          |       | 18,225 |   |
| Tax effect from stock-based compensation                                                       |       | 1,777                           |       | — |   |
| (Gain) loss on equity investments, net                                                         |       | (9,811                          | )          | (5,206 | ) |
| Write-down of inventories                                                                      |       | 13,347                          |       | 13,515 |   |
| Loss on disposal of property, plant and equipment                                              |       | 2                               |       | 108 |   |
| Excess tax benefit from stock-based compensation                                               |       | (981                            | )          | — |   |
| Changes in assets and liabilities, net of   acquisition and deconsolidation:                   |       |                            |       |   |   |
| Accounts receivable, net                                                                       |       | (44,908                         | )          | (23,690 | ) |
| Inventories                                                                                    |       | 24,315                          |       | (13,990 | ) |
| Refundable and deferred income taxes                                                           |       | (4,269                          | )          | (2,641 | ) |
| Prepaid expenses and other assets                                                              |       | 3,508                           |       | 1,191 |   |
| Accounts payable                                                                               |       | 15,266                          |       | 52,768 |   |
| Accrued expenses and other current liabilities                                                 |       | (2,576                          | )          | 1,380 |   |
| Income taxes payable                                                                           |       | (5,962                          | )          | 642 |   |
| Deferred revenues, less cost of revenues                                                       |       | 5,716                           |       | 3,590 |   |
| Deferred tax liabilities                                                                       |       | 8,226                           |       | (122 | ) |
| Net cash provided by operating activities                                                      |       | 124,046                         |       | 65,350 |   |
| Cash flows from investing activities:                                                          |       |                            |       |   |   |
| Purchases of short-term investments                                                            |       | (155,256                        | )          | (96,842 | ) |
| Proceeds from sales or maturities of short-term   investments                                  |       | 128,242                         |       | 45,328 |   |
| Purchases of property, plant and equipment, net of   sales                                     |       | (7,057                          | )          | (10,238 | ) |
| Purchases of long-term investments                                                             |       | (282                            | )          | — |   |
| Purchase of intangible and other assets                                                        |       | (5,000                          | )          | — |   |
| Proceeds from sale of SOI                                                                      |       | 3,844                           |       | — |   |
| Deconsolidation of SOI                                                                         |       | (2,816                          | )          | — |   |
| Net cash used in investing activities                                                          |       | (38,325                         | )          | (61,752 | ) |
| Cash flows from financing activities:                                                          |       |                            |       |   |   |
| Proceeds from long-term borrowings                                                             |       | —                          |       | 9,521 |   |
| Repayment of long-term borrowings                                                              |       | (3,414                          | )          | (2,666 | ) |
| Cash contribution by noncontrolling interest                                                   |       | —                          |       | 24 |   |
| Excess tax benefits from stock-based compensation                                              |       | 981                             |       | — |   |
| Proceeds from exercise of stock options and   employee stock purchase plan                     |       | 57,568                          |       | 6,167 |   |
| Net cash provided by financing activities                                                      |       | 55,135                          |       | 13,046 |   |
| Effect of exchange rate changes on cash and cash   equivalents                                 |       | 546                             |       | 65 |   |
| Net increase in cash and cash equivalents                                                      |       | 141,402                         |       | 16,709 |   |
| Cash and cash equivalents at beginning of period                                               |       | 234,023                         |       | 257,808 |   |
| Cash and cash equivalents at end of period                                                     |       | $                               | 375,425    |   | $ | 274,517 |   |
| Supplemental cash flow information:                                                            |       |                            |       |   |   |
| Taxes paid                                                                                     |       | $                               | 1,348      |   | $ | 4,785 |   |
| Interest paid (net of amount capitalized)                                                      |       | $                               | 2,156      |   | $ | 1,609 |   |
| Supplemental schedule of non-cash investing and   financing activities:                        |       |                            |       |   |   |
| Additions to property, plant and equipment   included in accounts payable and accrued expenses |       | $                               | 1,578      |   | $ | 2,343 |   |

 

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

 

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**OMNIVISION TECHNOLOGIES, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Three and Nine Months Ended January 31, 2011 and 2010**

**(unaudited)**

 

**Note 1 — Basis of Presentation**

 

***Overview***

 

The accompanying interim unaudited condensed consolidated financial statements as of January 31, 2011 and April 30, 2010 and for the three and nine months ended January 31, 2011 and 2010 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, 2010 are derived 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 SEC 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, 2010 (the “Form 10-K”).

 

***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 — Recent Accounting Pronouncements**

 

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.

 

In December 2010, the FASB issued additional guidance for entities with reporting units that have carrying amounts equal to zero or are negative. These entities are required to assess whether it is more likely than not that the reporting units’ goodwill is impaired. If it is determined that it is more likely than not that the goodwill of one or more of its reporting units is impaired, then Step 2 of the goodwill impairment test for those reporting unit(s) should be performed. The effective date for this guidance is for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The Company is currently evaluating the impact this guidance may have on its financial position, results of operations and cash flows.

 

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**OMNIVISION TECHNOLOGIES, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Three and Nine Months Ended January 31, 2011 and 2010**

**(unaudited)**

 

**Note 3 — Short-Term Investments**

 

Available-for-sale securities as of the dates presented were as follows (in thousands):

 
| ** **                                                           | ** ** | **As of January 31, 2011** | ** ** |
|----------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                           | ** ** | **Amortized**                                  | ** ** | **Gross********Unrealized** | ** ** | **Gross********Unrealized** | ** ** | **Fair** | ** ** |
| ** **                                                           | ** ** | **Cost**                                       | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| Certificates of deposit                                              |       | $                                              | 1,500      |   | $ | 2 |   | $ | — |   | $ | 1,502 |   |
| U.S. government debt securities with maturities   less than one year |       | 65,570                                         |       | 6 |   | (11 | ) | 65,565 |   |
| U.S. government debt securities with maturities   over one year      |       | 24,975                                         |       | — |   | — |   | 24,975 |   |
| Commercial paper and bond funds                                      |       | 31,426                                         |       | 7 |   | (5 | ) | 31,428 |   |
|                                                                 |       | $                                              | 123,471    |   | $ | 15 |   | $ | (16 | ) | $ | 123,470 |   |
|                                                                 |       |                                           |       |   |   |   |   |   |   |
| Contractual maturity dates, less than one year                       |       |                                           |       |   |   |   |   | $ | 93,747 |   |
| Contractual maturity dates, one year to two years                    |       |                                           |       |   |   |   |   | 4,748 |   |
| Contractual maturity dates, two to thirty-nine   years**(1)**        |       |                                           |       |   |   |   |   | 24,975 |   |
|                                                                 |       |                                           |       |   |   |   |   | $ | 123,470 |   |

 
| ** **                                                           | ** ** | **As of April 30, 2010** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                           | ** ** | **Amortized**                                | ** ** | **Gross********Unrealized** | ** ** | **Gross********Unrealized** | ** ** | **Fair** | ** ** |
| ** **                                                           | ** ** | **Cost**                                     | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| Certificates of deposit                                              |       | $                                            | 2,285      |   | $ | — |   | $ | — |   | $ | 2,285 |   |
| U.S. government debt securities with maturities   less than one year |       | 77,128                                       |       | 12 |   | — |   | 77,140 |   |
| U.S. government debt securities with maturities   over one year      |       | 8,145                                        |       | 5 |   | — |   | 8,150 |   |
| Commercial paper and bond funds                                      |       | 11,999                                       |       |   |   | (19 | ) | 11,980 |   |
|                                                                 |       | $                                            | 99,557     |   | $ | 17 |   | $ | (19 | ) | $ | 99,555 |   |
|                                                                 |       |                                         |       |   |   |   |   |   |   |
| Contractual maturity dates, less than one year                       |       |                                         |       |   |   |   |   | $ | 91,405 |   |
| Contractual maturity dates, one year to two years                    |       |                                         |       |   |   |   |   | 8,150 |   |
|                                                                 |       |                                         |       |   |   |   |   | $ | 99,555 |   |

 

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(1)   Represents variable rate demand notes, which have a final maturity date of up to 33 years but whose interest rate is reset at varying intervals typically between one and seven days.

 

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Table of Contents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Three and Nine Months Ended January 31, 2011 and 2010**

**(unaudited)**

 

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

 
| ** **                                                              | ** **                                | **January 31,** | ** ** | **April 30,** | ** ** |
|-------------------------------------------------------------------------|-------------------------------------------|----------------------|------------|--------------------|------------|
| ** **                                                              | ** **                                | **2011**             | ** ** | **2010**           | ** ** |
| Cash and cash equivalents:                                              |                                      |                 |       |               |       |
| Cash                                                                    |                                      | $                    | 304,662    |               | $          | 183,393 |   |
| Money market funds, certificates of deposit and   U.S. government bonds |                                      | 70,763               |       | 50,630             |       |
|                                                                    |                                      | $                    | 375,425    |               | $          | 234,023 |   |
| Accounts receivable, net:                                               | ** **                                | ** **           | ** ** | ** **         | ** ** |
| Accounts receivable                                                     |                                      | $                    | 122,120    |               | $          | 75,908 |   |
| Less:                                                                   | Allowance for doubtful accounts           |                 | (948       | )                  | (711       | ) |
|                                                                    | Allowance for sales returns               |                 | (2,093     | )                  | (936       | ) |
|                                                                    |                                      | $                    | 119,079    |               | $          | 74,261 |   |
| Inventories:                                                            |                                      |                 |       |               |       |
| Work in progress                                                        |                                      | $                    | 49,262     |               | $          | 76,845 |   |
| Finished goods                                                          |                                      | 44,307               |       | 57,148             |       |
|                                                                    |                                      | $                    | 93,569     |               | $          | 133,993 |   |
| Prepaid expenses and other current assets:                              |                                      |                 |       |               |       |
| Prepaid expenses                                                        |                                      | $                    | 4,469      |               | $          | 6,398 |   |
| Deposits and other                                                      |                                      | 1,928                |       | 2,686              |       |
| Interest receivable                                                     |                                      | 916                  |       | 296                |       |
|                                                                    |                                      | $                    | 7,313      |               | $          | 9,380 |   |
| Property, plant and equipment, net:                                     |                                      |                 |       |               |       |
| Land                                                                    |                                      | $                    | 13,000     |               | $          | 13,000 |   |
| Buildings and land use right                                            |                                      | 58,764               |       | 37,877             |       |
| Buildings/leasehold improvements                                        |                                      | 21,901               |       | 19,148             |       |
| Machinery and equipment                                                 |                                      | 68,389               |       | 64,894             |       |
| Furniture and fixtures                                                  |                                      | 4,816                |       | 4,810              |       |
| Software                                                                |                                      | 6,375                |       | 5,873              |       |
| Construction in progress                                                |                                      | 1,233                |       | 23,419             |       |
|                                                                    |                                      | 174,478              |       | 169,021            |       |
| Less:                                                                   | Accumulated depreciation and amortization |                 | (59,076    | )                  | (47,474    | ) |
|                                                                    |                                      | $                    | 115,402    |               | $          | 121,547 |   |
| Other long-term assets:                                                 |                                      |                 |       |               |       |
| Deferred income tax assets — non-current                 |                                      | $                    | 14,860     |               | $          | 20,440 |   |
| Prepaid wafer credits                                                   |                                      | 2,267                |       | 2,826              |       |
| Long-term employee loan receivable                                      |                                      | —               |       | 1,000              |       |
| Other long-term assets                                                  |                                      | 1,091                |       | 1,227              |       |
|                                                                    |                                      | $                    | 18,218     |               | $          | 25,493 |   |
| Accrued expenses and other current liabilities:                         |                                      |                 |       |               |       |
| Employee compensation                                                   |                                      | $                    | 7,952      |               | $          | 7,490 |   |
| Third party commissions                                                 |                                      | 446                  |       | 1,004              |       |
| Professional services                                                   |                                      | 1,828                |       | 2,383              |       |
| Noncancelable purchase commitments                                      |                                      | 1,391                |       | 4,689              |       |
| Distributor pricing adjustments                                         |                                      | 2,894                |       | 1,871              |       |
| Deferred tax liabilities                                                |                                      | 455                  |       | —             |       |
| Other                                                                   |                                      | 1,219                |       | 2,069              |       |
|                                                                    |                                      | $                    | 16,185     |               | $          | 19,506 |   |
| Other long-term liabilities:                                            |                                      |                 |       |               |       |
| Deferred income tax   liabilities — non-current          |                                      | $                    | 9,267      |               | $          | 1,040 |   |
| Interest rate swaps                                                     |                                      | 3,947                |       | 3,687              |       |
| Other                                                                   |                                      | 250                  |       | —             |       |
|                                                                    |                                      | $                    | 13,464     |               | $          | 4,727 |   |

 

8

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Table of Contents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Three and Nine Months Ended January 31, 2011 and 2010**

**(unaudited)**

 

**Note 5 — Long-term Investments**

 

Long-term investments as of the dates indicated consisted of the following (in thousands):

 
| ** ** | ** ** | **January 31,** | ** ** | **April 30,** | ** ** |
|------------|------------|----------------------|------------|--------------------|------------|
| ** ** | ** ** | **2011**             | ** ** | **2010**           | ** ** |
| VisEra     |       | $                    | 78,022     |               | $          | 72,170 |   |
| WLCSP      |       | 13,891               |       | 11,819             |       |
| XinTec     |       | 4,661                |       | 4,661              |       |
| Tong Hsing |       | 5,114                |       | 3,471              |       |
| Total      |       | $                    | 101,688    |               | $          | 92,121 |   |

 

***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 contributions 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 or VisEra Cayman.

 

The following table presents equity income recorded by the Company for the periods indicated in “Cost of revenues,” consisting of its portion of the net income recorded by VisEra during the periods presented (in thousands) (See Note 14):

 
| ** **    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **    | ** ** | **January 31,**             | ** ** | **January 31,**            | ** ** |
| ** **    | ** ** | **2011**                         | ** ** | **2010**                        | ** ** | **2011** | ** ** | **2010** | ** ** |
| Equity income |       | $                                | 2,367      |                            | $          | 1,550 |   | $ | 5,652 |   | $ | 3,001 |   |
|               |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |

 

***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.

 

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.

 

9

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Table of Contents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Three and Nine Months Ended January 31, 2011 and 2010**

**(unaudited)**

 

The Company accounts for its investment in WLCSP under the equity method. The following table presents equity income recorded by the Company for the periods indicated in “Other income, net,” consisting of its portion of the net income recorded by WLCSP during those periods, and equity method investment adjustments (in thousands):

 
| ** **    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **    | ** ** | **January 31,**             | ** ** | **January 31,**            | ** ** |
| ** **    | ** ** | **2011**                         | ** ** | **2010**                        | ** ** | **2011** | ** ** | **2010** | ** ** |
| Equity income |       | $                                | 692        |                            | $          | 634 |   | $ | 2,072 |   | $ | 1,330 |   |
|               |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |

 

***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 January 31, 2011, the Company’s direct ownership percentage in XinTec was 4.2%. Separately, VisEra Cayman owns a 16.0% interest in XinTec. Consequently, the Company’s beneficial ownership percentage in XinTec was approximately 12.0%. The Company accounts for XinTec as a cost method investment.

 

***Tong Hsing Electronic Industries, Limited***

 

Tong Hsing Electronic Industries, Limited (“Tong Hsing”) is a Taiwan-based public company principally engaged in the development and production of microelectronic packaging. In December 2009, the Company obtained 0.8% of the outstanding shares of common stock of Tong Hsing, or 996,250 shares, when Tong Hsing acquired ImPac Technology Co., Ltd. (“ImPac”) in a stock-for-stock exchange. Prior to the exchange, the Company owned 25.7% of ImPac. In June 2010, the Company participated in Tong Hsing’s secondary offering and purchased an additional 95,570 shares for approximately $282,000. As of January 31, 2011, the Company’s ownership in Tong Hsing was approximately 0.8%.

 

As the shares of Tong Hsing are traded on the Taiwan Stock Exchange and the share price is readily determinable, the Company reported the shares on a mark-to-market basis, net of deferred tax assets. For the periods indicated, the Company recorded the following unrealized holding gains in “Accumulated other comprehensive income” (in thousands):

 
| ** **               | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **               | ** ** | **January 31,**             | ** ** | **January 31,**            | ** ** |
| ** **               | ** ** | **2011**                         | ** ** | **2010**                        | ** ** | **2011** | ** ** | **2010** | ** ** |
| Unrealized holding gains |       | $                                | 86         |                            | $          | — |   | $ | 907 |   | $ | — |   |
|                          |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |

 

***Silicon Optronics, Inc.***

 

In May 2004, the Company entered into an agreement with Powerchip Technology Corporation (“PTC”), formerly Powerchip Semiconductor Corporation, a Taiwan based company that produces memory chips and provides semiconductor foundry services, to establish Silicon Optronics, Inc. (“SOI”), a joint venture in Taiwan. 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 consolidated SOI from April 30, 2005 through May 2010. The purpose of SOI was to manufacture, market and sell certain of the Company’s legacy products. Toward the end of fiscal 2010, SOI began to ship niche products into other markets, including touch panels that track touches with optical sensors, and linear sensors.

 

In June 2010, SOI held its annual meeting of stockholders and new board directors were elected. As a result, the Company no longer held the majority representation on the board of directors of SOI, and was required to deconsolidate SOI. The authoritative guidance for deconsolidation required the Company to record its retained interest in SOI at fair value. Pursuant to the guidance, the Company recorded a gain of approximately $1.6 million in “Other income, net,” which was the difference between the fair value of the Company’s retained interest in SOI of $4.1 million, and the carrying value of SOI’s net assets and noncontrolling interest before the deconsolidation of $2.5 million. (See Note 9.) After the deconsolidation, the Company owned 43.8% of SOI, which the Company accounted for under the equity method.

 

10

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Table of Contents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Three and Nine Months Ended January 31, 2011 and 2010**

**(unaudited)**

 

In the three months ended January 31, 2011, the Company sold its remaining 43.7% interest in SOI for net proceeds of $3.8 million, at which time the Company recorded a loss on sale of $72,000 to “Other income, net.” For the period from November 1, 2010 through the date of the sale, the Company recorded $26,000 for its share of the equity income of SOI. Consequently, as of January 31, 2011, the Company’s ownership in SOI was zero percent and the Company had no continuing investment in SOI.

 

For the periods indicated, the Company recorded equity gain (loss) in “Other income, net” for its portion of the net income (loss) recorded by SOI (in thousands):

 
| ** **         | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **         | ** ** | **January 31,**             | ** ** | **January 31,**            | ** ** |
| ** **         | ** ** | **2011**                         | ** ** | **2010**                        | ** ** | **2011** | ** ** | **2010** | ** ** |
| Equity gain (loss) |       | $                                | 26         |                            | $          | — |   | $ | (241 | ) | $ | — |   |
|                    |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |

 

Noncontrolling interest represented ownership interests in SOI held by parties other than the Company. The following table reconciles equity attributable to noncontrolling interest for the periods indicated (in thousands):

 
| ** **                                       | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------|------------|---------------------------------|------------|
| ** **                                       | ** ** | **January 31,**            | ** ** |
| ** **                                       | ** ** | **2011**                        | ** ** | **2010** | ** ** |
| Noncontrolling interest, May 1              |       | $                               | 3,390      |   | $ | 3,497 |   |
| Cash contribution by noncontrolling interest     |       | —                          |       | 24 |   |
| Dividend distributed to noncontrolling interest  |       |                            |       | — |   |
| Net loss attributable to noncontrolling interest |       | (32                             | )          | (199 | ) |
| Translation gain (loss)                          |       | (70                             | )          | 118 |   |
| Deconsolidation                                  |       | (3,288                          | )          | — |   |
| Noncontrolling interest, January 31         |       | $                               | —     |   | $ | 3,440 |   |

 

The following tables present the summary financial information of SOI, VisEra and WLCSP, as derived from their financial statements for the periods indicated, and prepared under GAAP (in thousands):

 

***Silicon Optronics, Inc***

 
| ** **                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                      | ** ** | **January 31,**             | ** ** | **January 31,**            | ** ** |
| ** **                      | ** ** | **2011**                         | ** ** | **2010**                        | ** ** | **2011** | ** ** | **2010** | ** ** |
| *Operating   data:*             |       |                             |       |                            |       |   |   |   |   |
| Revenues                        |       | $                                | 1,616      |                            | $          | 1,134 |   | $ | 6,420 |   | $ | 3,428 |   |
| Gross profit                    |       | 299                              |       | 202                             |       | 533 |   | 739 |   |
| Income (loss) from   operations |       | 98                               |       | (288                            | )          | (621 | ) | (436 | ) |
| Net income (loss)               |       | $                                | 59         |                            | $          | (254 | ) | $ | (607 | ) | $ | (354 | ) |

 

***VisEra Technologies Company, Ltd.***

 
| ** **             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **             | ** ** | **January 31,**             | ** ** | **January 31,**            | ** ** |
| ** **             | ** ** | **2011**                         | ** ** | **2010**                        | ** ** | **2011** | ** ** | **2010** | ** ** |
| *Operating   data:*    |       |                             |       |                            |       |   |   |   |   |
| Revenues               |       | $                                | 29,933     |                            | $          | 22,425 |   | $ | 83,087 |   | $ | 54,210 |   |
| Gross profit           |       | 6,658                            |       | 3,836                           |       | 19,357 |   | 8,164 |   |
| Income from operations |       | 3,692                            |       | 1,666                           |       | 10,993 |   | 2,252 |   |
| Net income             |       | $                                | 6,153      |                            | $          | 2,326 |   | $ | 12,711 |   | $ | 4,698 |   |

 

11

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Table of Contents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Three and Nine Months Ended January 31, 2011 and 2010**

**(unaudited)**

 

***China WLCSP Limited***

 
| ** **             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **             | ** ** | **January 31,**             | ** ** | **January 31,**            | ** ** |
| ** **             | ** ** | **2011**                         | ** ** | **2010**                        | ** ** | **2011** | ** ** | **2010** | ** ** |
| *Operating   data:*    |       |                             |       |                            |       |   |   |   |   |
| Revenues               |       | $                                | 13,506     |                            | $          | 7,654 |   | $ | 32,564 |   | $ | 18,182 |   |
| Gross profit           |       | 7,233                            |       | 3,735                           |       | 16,332 |   | 8,269 |   |
| Income from operations |       | 3,843                            |       | 3,091                           |       | 10,017 |   | 6,200 |   |
| Net income             |       | $                                | 3,700      |                            | $          | 3,174 |   | $ | 9,702 |   | $ | 6,660 |   |

 

The Company’s share of undistributed earnings of investees accounted for by the equity method as of the dates indicated were as follows (in thousands):

 
| ** **                          | ** ** | **January 31,** | ** ** | **April 30,** | ** ** |
|-------------------------------------|------------|----------------------|------------|--------------------|------------|
| ** **                          | ** ** | **2011**             | ** ** | **2010**           | ** ** |
| Undistributed earnings of investees |       | $                    | 24,317     |               | $          | 20,806 |   |
|                                     |            |                      |            |                    |            |  |  |

 

**Note 6 — Goodwill and Intangible Assets**

 

***Goodwill***

 

The change to the carrying value of the Company’s goodwill from May 1, 2010 through January 31, 2011 is reflected below (in thousands):

 
| ** **                       | ** ** | **Goodwill** | ** ** |
|----------------------------------|------------|--------------|------------|
| Balance at May 1, 2010      |       | $            | 439        |   |
| Goodwill from purchase of assets |       | 683          |       |
| Balance at January 31, 2011 |       | $            | 1,122      |   |

 

Intangible assets as of the dates indicated consisted of the following (in thousands):

 
| ** **                          | ** ** | **January 31, 2011** | ** ** |
|-------------------------------------|------------|--------------------------------|------------|
| ** **                          | ** ** | **Cost**                       | ** ** | **Accumulated   Amortization** | ** ** | **Net Book   Value** | ** ** |
| Core technology(1)                  |       | $                              | 24,410     |   | $ | 18,990 |   | $ | 5,420 |   |
| Patents and licenses                |       | 13,460                         |       | 13,313 |   | 147 |   |
| Trademarks and tradenames           |       | 1,400                          |       | 1,400 |   | — |   |
| Customer relationships              |       | 340                            |       | 129 |   | 211 |   |
| In-process research and development |       | 490                            |       | — |   | 490 |   |
| Intangible assets, net              |       | $                              | 40,100     |   | $ | 33,832 |   | $ | 6,268 |   |

 

----

(1)         During the nine months ended January 31, 2011, the Company purchased certain intangible and other assets, of which $3.4 million was allocated to “Core technology” based on their fair values as of the purchase date.

 
| ** **                          | ** ** | **April 30, 2010** | ** ** |
|-------------------------------------|------------|------------------------------|------------|
| ** **                          | ** ** | **Cost**                     | ** ** | **Accumulated   Amortization** | ** ** | **Net Book   Value** | ** ** |
| Core technology                     |       | $                            | 21,010     |   | $ | 17,856 |   | $ | 3,154 |   |
| Patents and licenses                |       | 13,487                       |       | 12,477 |   | 1,010 |   |
| Trademarks and tradenames           |       | 1,400                        |       | 1,400 |   | — |   |
| Customer relationships              |       | 340                          |       | 103 |   | 237 |   |
| In-process research and development |       | 490                          |       | — |   | 490 |   |
| Intangible assets, net              |       | $                            | 36,727     |   | $ | 31,836 |   | $ | 4,891 |   |

 

12

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Table of Contents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Three and Nine Months Ended January 31, 2011 and 2010**

**(unaudited)**

 

The following table presents the amortization of intangibles recorded by the Company for the periods indicated (in thousands):

 
| ** **                  | ** ** | **Three Months Ended   January 31,** | ** ** | **Nine Months Ended   January 31,** | ** ** |
|-----------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                  | ** ** | **2011**                                            | ** ** | **2010**                                           | ** ** | **2011** | ** ** | **2010** | ** ** |
| Amortization of intangibles |       | $                                                   | 737        |                                               | $          | 1,560 |   | $ | 1,997 |   | $ | 4,826 |   |
|                             |            |                                                     |            |                                                    |            |  |  |  |  |  |  |  |  |

 

The total expected future annual amortization of these intangible assets is as follows (in thousands):

 
| **Years Ending April 30, ** | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|------------|------------|
| 2011                                            |       | $          | 602        |   |
| 2012                                            |       | 1,978      |       |
| 2013                                            |       | 1,902      |       |
| 2014                                            |       | 766        |       |
| 2015                                            |       | 377        |       |
| Thereafter                                      |       | 643        |       |
| Total                                           |       | $          | 6,268      |   |

 

**Note 7 — Borrowing Arrangements**

 

The following table sets forth the Company’s debt as of the dates indicated (in thousands):

 
| ** **                            | ** ** | **January 31,** | ** ** | **April 30,** | ** ** |
|---------------------------------------|------------|----------------------|------------|--------------------|------------|
| ** **                            | ** ** | **2011**             | ** ** | **2010**           | ** ** |
|                                  |       |                 |       |               |       |
| Mortgage loan                         |       | $                    | 25,452     |               | $          | 25,867 |   |
| Term loan                             |       | 4,750                |       | 7,000              |       |
| Construction loan                     |       | 16,694               |       | 16,847             |       |
|                                  |       | 46,896               |       | 49,714             |       |
| Less: amount due within one year |       | (4,312               | )          | (4,286             | )          |
| Non-current portion of long-term debt |       | $                    | 42,584     |               | $          | 45,428 |   |

 

As of January 31, 2011, aggregate debt maturities were as follows (in thousands):

 
| **Years Ending April 30,** | ** ** | **Mortgage   and Term   Loan** | ** ** | **Construction   Loan** | ** ** | **Total** | ** ** |
|-------------------------------------------|------------|-------------------------------------|------------|-------------------------|------------|-----------|------------|
| 2011                                      |       | $                                   | 3,553      |                    | $          | 759       |       | $ | 4,312 |   |
| 2012                                      |       | 2,303                               |       | 1,518                   |       | 3,821     |       |
| 2013                                      |       | 554                                 |       | 3,035                   |       | 3,589     |       |
| 2014                                      |       | 554                                 |       | 3,035                   |       | 3,589     |       |
| 2015                                      |       | 554                                 |       | 6,071                   |       | 6,625     |       |
| Thereafter                                |       | 22,684                              |       | 2,276                   |       | 24,960    |       |
| Total                                     |       | $                                   | 30,202     |                    | $          | 16,694    |       | $ | 46,896 |   |

 

***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.

 

13

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Table of Contents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Three and Nine Months Ended January 31, 2011 and 2010**

**(unaudited)**

 

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.  The Company was in compliance with the financial covenants of the Loan and Security Agreement as of January 31, 2011.

 

Interest rates under the Mortgage Loan and the Term Loan for the dates indicated are set forth below:

 
| ** **    | ** ** | **January 31,** | ** ** | **April 30,** | ** ** |
|---------------|------------|----------------------|------------|--------------------|------------|
| ** **    | ** ** | **2011**             | ** ** | **2010**           | ** ** |
| Mortgage Loan |       | 1.2                  | %          | 1.2                | %          |
| Term Loan     |       | 1.5                  |       | 1.5                |       |

 

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 “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. The loan amount is Chinese Yuan 140.0 million or approximately $20.5 million based on exchange rate in effect at the time of the loan origination. As of January 31, 2011, the Company has borrowed Chinese Yuan 115.0 million, or approximately $17.5 million, under the Construction Loan. The Company is scheduled to draw down the remaining $3.0 million by December 2011. The Construction Loan matures on June 30, 2016.

 

The 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. The interest rate under the Construction Loan was 5.3% at January 31, 2011. The Company was in compliance with the financial covenants of the Fixed Assets Loan Agreement as of January 31, 2011.

 

***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.

 

14

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Table of Contents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Three and Nine Months Ended January 31, 2011 and 2010**

**(unaudited)**

 

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

 
| ** **                                                                                                            | ** ** | **Three Months Ended   January 31,** | ** ** | **Nine Months Ended   January 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                                                            | ** ** | **2011**                                            | ** ** | **2010**                                           | ** ** | **2011** | ** ** | **2010** | ** ** |
| ***Location of   amounts recognized in Condensed Consolidated Statements of Income and amount   of gains (losses):*** |       |                                                |       |                                               |       |   |   |   |   |
| Other income, net                                                                                                     |       | $                                                   | 1,191      |                                               | $          | 194 |   | $ | (260 | ) | $ | 839 |   |
|                                                                                                                       |            |                                                     |            |                                                    |            |  |  |  |  |  |  |  |  |

 
| ** **                                                                            | ** ** | **January 31,   2011** | ** ** | **April 30,   2010** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------|------------|
| ***Location of   amounts on Condensed Consolidated Balance Sheets and fair values:*** |       |                        |       |                      |       |
| Other long-term liabilities                                                           |       | $                           | 3,947      |                      | $          | 3,687 |   |
|                                                                                       |            |                             |            |                           |            |  |  |

 

**Note 8 — Net Income Per Share Attributable to OmniVision Technologies, Inc. Common Stockholders**

 

Basic net income per share attributable to OmniVision common stockholders is computed by dividing net income 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 and restricted stock units. The following table sets forth the number of stock options and restricted stock units that were excluded from the periods indicated:

 
| ** **                                                                            | ** ** | **Three Months Ended   January 31,** | ** ** | **Nine Months Ended   January 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2011**                                            | ** ** | **2010**                                           | ** ** | **2011** | ** ** | **2010** | ** ** |
| Antidilutive common stock subject to outstanding   options and restricted stock units |       | 42,000                                              |       | 7,527,000                                          |       | 259,000 |   | 7,611,000 |   |

 

15

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Table of Contents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Three and Nine Months Ended January 31, 2011 and 2010**

**(unaudited)**

 

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

 
| ** **                                                                                                                       | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                       | ** ** | **January 31,**             | ** ** | **January 31,**            | ** ** |
| ** **                                                                                                                       | ** ** | **2011**                         | ** ** | **2010**                        | ** ** | **2011** | ** ** | **2010** | ** ** |
| ***Basic:***                                                                                                                     |       |                             |       |                            |       |   |   |   |   |
| *Numerator:*                                                                                                                     |       |                             |       |                            |       |   |   |   |   |
| Net income attributable to OmniVision   Technologies, Inc.                                                                       |       | $                                | 44,718     |                            | $          | 4,950 |   | $ | 90,523 |   | $ | 3,178 |   |
|                                                                                                                             |       |                             |       |                            |       |   |   |   |   |
| *Denominator:*                                                                                                                   |       |                             |       |                            |       |   |   |   |   |
| Weighted average common shares for net income per   share attributable to OmniVision Technologies, Inc. common stockholders |       | 56,174                           |       | 51,273                          |       | 54,541 |   | 50,870 |   |
|                                                                                                                             |       |                             |       |                            |       |   |   |   |   |
| Basic net income per share attributable to   OmniVision Technologies, Inc. common stockholders                              |       | $                                | 0.80       |                            | $          | 0.10 |   | $ | 1.66 |   | $ | 0.06 |   |
|                                                                                                                             |       |                             |       |                            |       |   |   |   |   |
| ***Diluted:***                                                                                                                   |       |                             |       |                            |       |   |   |   |   |
| *Numerator:*                                                                                                                     |       |                             |       |                            |       |   |   |   |   |
| Net income attributable to OmniVision   Technologies. Inc.                                                                       |       | $                                | 44,718     |                            | $          | 4,950 |   | $ | 90,523 |   | $ | 3,178 |   |
|                                                                                                                             |       |                             |       |                            |       |   |   |   |   |
| *Denominator:*                                                                                                                   |       |                             |       |                            |       |   |   |   |   |
| Denominator for basic net income per share   attributable to OmniVision Technologies, Inc. common stockholders              |       | 56,174                           |       | 51,273                          |       | 54,541 |   | 50,870 |   |
| Weighted average effect of dilutive securities:                                                                                  |       |                             |       |                            |       |   |   |   |   |
| Stock options, restricted stock units and employee   stock purchase plan shares                                                  |       | 3,762                            |       | 1,281                           |       | 3,664 |   | 1,137 |   |
| Weighted average common shares for diluted net   income per share                                                                |       | 59,936                           |       | 52,554                          |       | 58,205 |   | 52,007 |   |
|                                                                                                                             |       |                             |       |                            |       |   |   |   |   |
| Diluted net income per share attributable to   OmniVision Technologies, Inc. common stockholders                            |       | $                                | 0.75       |                            | $          | 0.09 |   | $ | 1.56 |   | $ | 0.06 |   |

 

**Note 9 — ****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.

 

16

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Table of Contents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Three and Nine Months Ended January 31, 2011 and 2010**

**(unaudited)**

 

***Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis***

 

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 the date indicated (in thousands):

 
| ** **                                                               | ** ** | **January 31, 2011** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                               | ** ** | **Total**                      | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Money market funds                                                       |       | $                              | 10,828     |   | $ | 10,828 |   | $ | — |   | $ | — |   |
| Debt securities issued by U.S. government and U.S.   government agencies |       | 133,538                        |       | — |   | 133,538 |   | — |   |
| Corporate debt securities/commercial paper                               |       | 31,928                         |       | — |   | 31,928 |   | — |   |
| Equity investment in Tong Hsing                                          |       | 5,114                          |       | 5,114 |   | — |   | — |   |
| Total assets                                                             |       | $                              | 181,408    |   | $ | 15,942 |   | $ | 165,466 |   | $ | — |   |
| Interest rate swaps                                                      |       | $                              | (3,947     | ) | $ | — |   | $ | (3,947 | ) | $ | — |   |
| Total liabilities                                                        |       | $                              | (3,947     | ) | $ | — |   | $ | (3,947 | ) | $ | — |   |

 

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 the date indicated (in thousands):

 
| ** **             | ** ** | **January 31, 2011** | ** ** |
|------------------------|------------|--------------------------------|------------|
| ** **             | ** ** | **Total**                      | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Cash equivalents       |       | $                              | 54,326     |   | $ | 10,828 |   | $ | 43,498 |   | $ | — |   |
| Short-term investments |       | 121,968                        |       | — |   | 121,968 |   | — |   |
|                   |       |                           |       |   |   |   |   |   |   |
| Long-term investments  |       | 5,114                          |       | 5,114 |   | — |   | — |   |
| Total assets           |       | $                              | 181,408    |   | $ | 15,942 |   | $ | 165,466 |   | $ | — |   |
| Interest rate swaps    |       | $                              | (3,947     | ) | $ | — |   | $ | (3,947 | ) | $ | — |   |
| Total liabilities      |       | $                              | (3,947     | ) | $ | — |   | $ | (3,947 | ) | $ | — |   |

 

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 the date indicated (in thousands):

 
| ** **                                                               | ** ** | **April 30, 2010** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                               | ** ** | **Total**                    | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Money market funds                                                       |       | $                            | 41,211     |   | $ | 41,211 |   | $ | — |   | $ | — |   |
| Debt securities issued by U.S. government and U.S.   government agencies |       | 85,290                       |       | — |   | 85,290 |   | — |   |
| Corporate debt securities/commercial paper                               |       | 11,980                       |       | — |   | 11,980 |   | — |   |
| Equity investment in Tong Hsing                                          |       | 3,471                        |       | 3,471 |   | — |   | — |   |
| Total assets                                                             |       | $                            | 141,952    |   | $ | 44,682 |   | $ | 97,270 |   | $ | — |   |
| Interest rate swaps                                                      |       | $                            | (3,687     | ) | $ | — |   | $ | (3,687 | ) | $ | — |   |
| Total liabilities                                                        |       | $                            | (3,687     | ) | $ | — |   | $ | (3,687 | ) | $ | — |   |

 

17

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**OMNIVISION TECHNOLOGIES, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Three and Nine Months Ended January 31, 2011 and 2010**

**(unaudited)**

 

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 Consolidated Balance Sheets as of the date indicated (in thousands):

 
| ** **             | ** ** | **April 30, 2010** | ** ** |
|------------------------|------------|------------------------------|------------|
| ** **             | ** ** | **Total**                    | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Cash equivalents       |       | $                            | 41,211     |   | $ | 41,211 |   | $ | — |   | $ | — |   |
| Short-term investments |       | 97,270                       |       | — |   | 97,270 |   | — |   |
| Long-term investments  |       | 3,471                        |       | 3,471 |   | — |   | — |   |
| Total assets           |       | $                            | 141,952    |   | $ | 44,682 |   | $ | 97,270 |   | $ | — |   |
| Interest rate swaps    |       | $                            | (3,687     | ) | $ | — |   | $ | (3,687 | ) | $ | — |   |
| Total liabilities      |       | $                            | (3,687     | ) | $ | — |   | $ | (3,687 | ) | $ | — |   |

 

Certificates of deposit recorded as cash equivalents and short-term investments are not measured at fair value on a recurring basis and as such are not included in the tables above. The following table sets forth the carrying value of certificates of deposit recorded as cash equivalents and short-term investments for the dates presented (in thousands):

 
| ** **                                                   | ** ** | **January 31,** | ** ** | **April 30,** | ** ** |
|--------------------------------------------------------------|------------|----------------------|------------|--------------------|------------|
| ** **                                                   | ** ** | **2011**             | ** ** | **2010**           | ** ** |
| Certificates of deposit recorded as cash   equivalents       |       | $                    | 16,437     |               | $          | 9,419 |   |
| Certificates of deposit recorded as short-term   investments |       | $                    | 1,502      |               | $          | 2,285 |   |

 

For the Company’s interest rate swaps, the Company obtains fair value quotes from the issuing bank and assesses the quotes for reasonableness by comparing them to the present values of expected cash flows. The present value approach is based on observable market interest rate curves that are commensurate with the terms of the interest rate swaps. The carrying value represents the fair value of the swaps, as adjusted for any non-performance risk associated with the Company.

 

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 Mortgage Loan, Term Loan and Construction Loan approximate book values as the underlying interest rates are based on risk-adjusted market rates.

 

***Assets Measured and Recorded at Fair Value on a Non-Recurring Basis***

 

The following table presents the Company’s financial assets that were measured and recorded at fair value on a non-recurring basis during the three and nine months ended January 31, 2011, and the gain recorded on the assets during the same period (in thousands):

 
| ** **               | ** ** | **Carrying**         | ** ** | ** **                                                          | ** ** | ** **       | ** ** | ** **       | ** ** | **Gain for**              | ** ** | **Gain for**    | ** ** |
|--------------------------|------------|----------------------|------------|---------------------------------------------------------------------|------------|------------------|------------|------------------|------------|--------------------------------|------------|----------------------|------------|
| ** **               | ** ** | **Value**            | ** ** | ** **                                                          | ** ** | ** **       | ** ** | ** **       | ** ** | **Three Months**          | ** ** | **Nine Months** | ** ** |
| ** **               | ** ** | **January 31,** | ** ** | **Fair Value Measured and Recorded Using** | ** ** | **Ended**        | ** ** | **Ended**        | ** ** |
| ** **               | ** ** | **2011**             | ** ** | **Level 1**                                                    | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **January 31, 2011** | ** ** |
| Equity investment in SOI |       | $                    | —     |                                                                | $          | —           |       | $                | —     |                           | $          | —               |       | $ | — |   | $ | 1,648 |   |
| Total gain               |       |                 |       |                                                                |       |             |       |             |       |                           |       | $                    | 1,648      |   |
|                          |            |                      |            |                                                                     |            |                  |            |                  |            |                                |            |                      |            |  |  |  |  |  |  |

 

The Company did not have any assets or liabilities that were measured at fair value on a non-recurring basis during the three and nine months ended January 31, 2010. For the Company’s equity investment in SOI, the authoritative guidance for deconsolidation required the Company to record its retained interest in SOI at fair value in June 2010, when the Company no longer held the majority representation on SOI’s board. The Company classified the fair value measurement as Level 3 as the Company used unobservable inputs for the valuation methodologies that were significant to the fair value measurements. The Company determined the fair value of its retained interest in SOI by using the market and income approaches. The market approach included the use of financial metrics from comparable public companies. The selection of comparable companies required management judgment and was based on a number

 

18

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Table of Contents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Three and Nine Months Ended January 31, 2011 and 2010**

**(unaudited)**

 

of factors, including comparable companies’ sizes, industries, and other relevant factors. The income approach included the use of a discounted cash flow model that required significant estimates for SOI, including revenues, costs, risk adjusted discount rates and other relevant projections. In the three months ended January 31, 2011, the Company sold its remaining 43.7% interest in SOI for net proceeds of $3.8 million (See Note 5.)

 

**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 periods indicated, respectively:

 
| ** **    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **    | ** ** | **January 31,**             | ** ** | **January 31,**            | ** ** |
| ** **    | ** ** | **2011**                         | ** ** | **2010**                        | ** ** | **2011** | ** ** | **2010** | ** ** |
| OEMs and VARs |       | 80.2                             | %          | 54.9                            | %          | 74.8 | % | 53.1 | % |
| Distributors  |       | 19.8                             |       | 45.1                            |       | 25.2 |   | 46.9 |   |
| 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** | ** ** | **Nine Months Ended** | ** ** |
|---------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **    | ** ** | **January 31,**             | ** ** | **January 31,**            | ** ** |
| ** **    | ** ** | **2011**                         | ** ** | **2010**                        | ** ** | **2011** | ** ** | **2010** | ** ** |
| China         |       | $                                | 166,706    |                            | $          | 130,388 |   | $ | 460,578 |   | $ | 372,831 |   |
| South Korea   |       | 55,116                           |       | 615                             |       | 134,457 |   | 1,458 |   |
| Malaysia      |       | 19,793                           |       | 6,621                           |       | 53,894 |   | 17,757 |   |
| Taiwan        |       | 11,035                           |       | 13,645                          |       | 24,009 |   | 39,462 |   |
| United States |       | 6,686                            |       | 837                             |       | 8,648 |   | 2,388 |   |
| All other     |       | 6,341                            |       | 4,829                           |       | 16,622 |   | 11,943 |   |
| Total         |       | $                                | 265,677    |                            | $          | 156,935 |   | $ | 698,208 |   | $ | 445,839 |   |

 

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

 
| ** **    | ** ** | **January 31,** | ** ** | **April 30,** | ** ** |
|---------------|------------|----------------------|------------|--------------------|------------|
| ** **    | ** ** | **2011**             | ** ** | **2010**           | ** ** |
| Taiwan        |       | $                    | 123,793    |               | $          | 92,092 |   |
| China         |       | 39,847               |       | 64,558             |       |
| United States |       | 56,447               |       | 59,602             |       |
| All other     |       | 361                  |       | 928                |       |
| Total         |       | $                    | 220,448    |               | $          | 217,180 |   |

 

19

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Table of Contents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Three and Nine Months Ended January 31, 2011 and 2010**

**(unaudited)**

 

**Note 11 — Supplemental Financial Information**

 

***Additional Paid-in Capital***

 

The following table shows the amounts recorded to “Additional paid-in capital” for the nine months ended January 31, 2011 (in thousands):

 
| ** **                                                                   | ** ** | **Additional** | ** ** |
|------------------------------------------------------------------------------|------------|----------------|------------|
| ** **                                                                   | ** ** | **Paid-in**    | ** ** |
| ** **                                                                   | ** ** | **Capital**    | ** ** |
| Balance at May 1, 2010                                                  |       | $              | 441,077    |   |
| Exercise of common stock options                                             |       | 52,192         |       |
| Employee stock purchase plan                                                 |       | 5,372          |       |
| Employee stock-based compensation                                            |       | 15,094         |       |
| Withholding tax deduction on restricted stock   units                        |       | (2,261         | )          |
| Tax effect from stock-based compensation                                     |       | 1,777          |       |
| Write-off of employee stock-based compensation   related deferred tax assets |       | (1,154         | )          |
| Balance at January 31, 2011                                             |       | $              | 512,097    |   |

 

***Comprehensive Income***

 

Comprehensive income 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 for all periods presented (in thousands):

 
| ** **                                                                   | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                   | ** ** | **January 31,**             | ** ** | **January 31,**            | ** ** |
| ** **                                                                   | ** ** | **2011**                         | ** ** | **2010**                        | ** ** | **2011** | ** ** | **2010** | ** ** |
| Net income                                                                   |       | $                                | 44,718     |                            | $          | 4,807 |   | $ | 90,491 |   | $ | 2,979 |   |
| Translation gains (losses)                                                   |       | 95                               |       | 106                             |       | (123 | ) | 231 |   |
| Net unrealized gains on available-for-sale   securities, net of income taxes |       | 88                               |       | 4                               |       | 907 |   | 12 |   |
| Comprehensive income                                                         |       | 44,901                           |       | 4,917                           |       | 91,275 |   | 3,222 |   |
| Comprehensive loss attributable to noncontrolling   interest                 |       | —                           |       | (85                             | )          | (102 | ) | (81 | ) |
| Comprehensive income attributable to OmniVision   Technologies, Inc.    |       | $                                | 44,901     |                            | $          | 5,002 |   | $ | 91,377 |   | $ | 3,303 |   |

 

**Note 12 — Income Taxes**

 

The Company reported the following operating results for the periods presented:

 
| ** **                                | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                | ** ** | **January 31,**             | ** ** | **January 31,**            | ** ** |
| ** **                                | ** ** | **2011**                         | ** ** | **2010**                        | ** ** | **2011** | ** ** | **2010** | ** ** |
| Income before income taxes                |       | $                                | 42,110     |                            | $          | 5,274 |   | $ | 91,754 |   | $ | 5,595 |   |
| Provision for (benefit from) income taxes |       | $                                | (2,608     | )                               | $          | 467 |   | $ | 1,263 |   | $ | 2,616 |   |
| Effective income tax rate                 |       | (6.2                             | )%         | 8.9                             | %          | 1.4 | % | 46.8 | % |

 

The Company’s effective income tax rate reflects the impact of a significant amount of the Company’s earnings being taxed in foreign jurisdictions at rates below the U.S. statutory tax rate.

 

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which was signed into law on December 17, 2010, retroactively extended the U.S. Federal Research and Development tax credit (“Federal R&D Credit”) from January 1, 2010 to December 31, 2011. This enacted tax law change resulted in a discrete tax benefit in the three months ended January 31, 2011, as well as a decrease in the estimated annual effective income tax rate.

 

20

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Table of Contents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Three and Nine Months Ended January 31, 2011 and 2010**

**(unaudited)**

 

The Company’s quarterly income taxes reflect an estimate of the corresponding fiscal year’s annual effective tax rate and include, when applicable, adjustments from discrete tax items. The discrete adjustments to the Company’s provision for income taxes for the three months ended January 31, 2011 included favorable adjustments for differences between the Company’s finalized tax returns and the provision for income taxes recorded for fiscal 2010, the tax benefit from the retroactively extended Federal R&D Credit, the tax benefit realized by the Company as a result of the employees’ disqualifying disposition of incentive stock awards and a reduction of unrecognized tax benefits due to the lapse of applicable statute of limitations. These favorable adjustments to the Company’s provision for income taxes for the three months ended January 31, 2011 were partially offset by an unfavorable impact from foreign exchange losses associated with the Company’s unrecognized tax benefits and the income tax expenses accrued for certain non-U.S. earnings that were previously considered to be indefinitely reinvested.

 

During the three months ended January 31, 2011, the Company reduced unrecognized tax benefits by approximately $10.3 million due to the lapse of applicable statute of limitations. It is reasonably possible that the balance of gross unrecognized tax benefits will decrease by $3.2 million within the next twelve months due to the lapse of applicable statute of limitations in multiple tax jurisdictions that the Company operated in. During the three months ended January 31, 2011, the Company accrued an additional $409,000 of interest related to the Company’s unrecognized tax benefits.

 

The Company is under tax examination in a foreign jurisdiction for the fiscal years ended April 30, 2004 through April 30, 2009, which represent all of the years for which tax returns have been filed with that jurisdiction and the statute of limitations has not expired.

 

**Note 13 — 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. The Company may use the land solely for the purposes of industrial use and/or scientific research. As of January 31, 2011, the construction of a research facility on the land was complete, in accordance with the Purchase Agreement. The Company obtained a Construction Loan to finance the construction. (See Note 7.)

 

During the three months ended October 31, 2008, the Company formed Shanghai OmniVision Semiconductor Technology Co. Ltd, a wholly-owned subsidiary in Shanghai, China, for the purpose of expanding its testing capabilities. As of January 31, 2011, the Company had contributed $1.5 million, as required under the terms of its $10.0 million capital commitment. The Company is required to contribute the remaining $8.5 million by October 2011, which represents a one-year extension from the original due date of 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. Du1978Plaintiffs generally allege that the 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

 

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**OMNIVISION TECHNOLOGIES, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Three and Nine Months Ended January 31, 2011 and 2010**

**(unaudited)**

 

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*. 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.

 

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 and the other defendants will receive complete dismissals from the case. On October 5, 2009, the Court entered an order granting final approval of the settlement. Certain objectors have filed appeals. Plaintiffs have filed motions to dismiss the appeals. 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 and the motion to dismiss with prejudice, filed by all of the underwriter defendants, which included the suit against the Company.  The plaintiff timely appealed the Court’s Order to the United States Court of Appeals for the Ninth Circuit. On December 3, 2010, the Ninth Circuit entered its opinion and order in this matter. The Court affirmed the dismissal of the suits against the 30 moving issuer defendants on the grounds that the demand letters sent to those issuers were inadequate under Delaware law, and converted the dismissals from without prejudice to with prejudice. The Court also reversed the dismissal of the suits against the remaining 24 issuer defendants, including the Company, but is allowing those issuer defendants, including the Company, to challenge the adequacy of the demand letters that the plaintiff sent to the issuers before filing suit. On January 24, 2011, the underwriter defendants filed a motion to stay the Ninth Circuit’s mandate pending its filing of a petition for a writ of certiorari in the United States Supreme Court. On January 25, 2011, the Ninth Circuit granted the motion and entered an Order staying the mandate for ninety days. On January 26, 2011, plaintiff also filed a motion to join the underwriters’ motion to stay the Ninth Circuit’s mandate on the grounds that plaintiff also will be filing a petition for a writ of certiorari in the United States Supreme Court. The petitions for a writ of certiorari have not yet been filed with the United States Supreme Court. 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. On April 19, 2010, the court stayed the case pending reexamination of all of the asserted patents, as the U.S. Patent and Trademark Office has granted reexamination requests for all of the asserted claims of the asserted patents. On October 22, 2010, the U.S. Patent and Trademark Office issued an Action

 

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**OMNIVISION TECHNOLOGIES, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Three and Nine Months Ended January 31, 2011 and 2010**

**(unaudited)**

 

Closing Prosecution of the *inter partes* reexamination of U.S. Patent No. 6,818,877 and confirmed the four claims submitted for *inter partes* reexamination by co-defendants Micron Technology, Inc. and Aptina Imaging Corporation.  On December 13, 2010, the Court lifted the stay as to U.S. Patent No. 6,818,877. On February 7, 2011, the Court issued a *Markman* order with respect to U.S. Patent No. 6,818,877, and granted summary judgment of invalidity for indefiniteness for all of the asserted claims of U.S. Patent No. 6,818,877. On February 22, 2011, Panavision filed its Final Infringement Contentions, conceding that OmniVision’s products do not infringe U.S. Patent No. 6,818,877 because every claim contains what the Court has held to be an indefinite term.

 

As to the two remaining asserted patents, on November 29, 2010, the U.S. Patent and Trademark Office issued an Action Closing Prosecution of the *inter partes* reexamination of U.S. Patent No. 7,057,150 and rejected all of the claims submitted for *inter partes* reexamination; on January 5, 2011, the U.S. Patent and Trademark Office issued an Action Closing Prosecution of the *inter partes* reexamination of U.S. Patent No. 6,663,029 and rejected all of the claims submitted for *inter partes* reexamination. As a result, all of the asserted claims of the asserted patents are held to be invalid by the Court or the U.S. Patent and Trademark Office. At this time, the Company cannot estimate any possible loss or predict whether this matter will result in any material expense to the Company.

 

On December 6, 2010, Ziptronix, Inc. (“Ziptronix”) filed a complaint alleging patent infringement against the Company in the District Court for the Northern District of California. The case is entitled *Ziptronix, Inc. v. OmniVision Technologies, Inc., Taiwan Semiconductor Manufacturing Company Ltd., and TSMC North America Corp., Case No. CV10-05525*. In its complaint, Ziptronix asserts that the Company has made, used, offered to sell, sold and/or imported into the United States image sensors that infringe U.S. Patent Nos. 7,387,944 (“Method for Low Temperature Bonding and Bonded Structure”), 7,335,572 (“Method for Low Temperature Bonding and Bonded Structure”), 7,553,744 (“Method for Low Temperature Bonding and Bonded Structure”), 7,037,755 (“Three Dimensional Device Integration Method and Integrated Device”), 6,864,585 (“Three Dimensional Device Integration Method and Integrated Device”), and 7,807,549 (“Method for Low Temperature Bonding and Bonded Structure”). The complaint seeks unspecified monetary damages, enhanced damages, interest, fees, expenses, costs, and injunctive relief against the Company. On February 15, 2011, the Company filed a motion to dismiss Ziptronix’s allegations of willful infringement, contributory infringement, and induced infringement for failure to state a claim under the applicable pleading standards. The Company expects to vigorously defend itself against Ziptronix’s allegations. At this time, the Company cannot estimate any possible loss or predict whether this matter will result in any material expense to it.

 

**Note 14 — Related Party Transactions**

 

In May 2006, the Company consummated a loan agreement with one of its employees. The loan agreement was approved by the Company’s board of directors in fiscal 2004. Under the terms of the agreement, as amended, the Company extended to the employee a $1.0 million loan with a nominal imputed interest rate and a maturity date of May 12, 2011. The loan was secured by a deed of trust. The loan was repaid in full during the three months ended January 31, 2011.

 

The following table presents the amounts paid for services provided by related parties for the periods indicated (in thousands):

 
| ** **  | ** ** | ** **                                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------|------------|-------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| **Related** | ** ** | ** **                                      | ** ** | **January 31,**             | ** ** | **January 31,**            | ** ** |
| **Party**   | ** ** | **Services**                                    | ** ** | **2011**                         | ** ** | **2010**                        | ** ** | **2011** | ** ** | **2010** | ** ** |
| VisEra      |       | Color   filter and other manufacturing services |       | $                                | 29,642     |                            | $          | 21,086 |   | $ | 80,035 |   | $ | 51,621 |   |
|             |            |                                                 |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |

 

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**OMNIVISION TECHNOLOGIES, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Three and Nine Months Ended January 31, 2011 and 2010**

**(unaudited)**

 

The following table summarizes the transactions that the Company’s equity method investees, SOI and VisEra, engaged with related parties for the periods indicated (in thousands):

 
| ** **                            | ** ** | **Three Months Ended   January 31,** | ** ** | **Nine Months Ended   January 31,** | ** ** |
|---------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                            | ** ** | **2011**                                            | ** ** | **2010**                                           | ** ** | **2011** | ** ** | **2010** | ** ** |
| ***SOI   transactions with:***        | ** ** | ** **                                          | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| ImPac:                                |       |                                                |       |                                               |       |   |   |   |   |
| Purchases of   manufacturing services |       | $                                                   | —     |                                               | $          | 65 |   | $ | — |   | $ | 305 |   |
| Balance payable at period end, net    |       | —                                              |       | —                                             |       | — |   | — |   |
| PTC:                                  |       |                                                |       |                                               |       |   |   |   |   |
| Purchases of wafers                   |       | 65                                                  |       | 230                                                |       | 1,346 |   | 502 |   |
| Rent and other services               |       | 17                                                  |       | 23                                                 |       | 67 |   | 64 |   |
| Balance payable at period end, net    |       | —                                              |       | 89                                                 |       | — |   | 89 |   |
| VisEra:                               |       |                                                |       |                                               |       |   |   |   |   |
| Purchases of   manufacturing services |       | 8                                                   |       | 30                                                 |       | 201 |   | 132 |   |
| Balance payable at period end         |       | —                                              |       | —                                             |       | — |   | — |   |
|                                  |       |                                                |       |                                               |       |   |   |   |   |
| ***VisEra   transactions with:***     |       |                                                |       |                                               |       |   |   |   |   |
| TSMC:                                 |       |                                                |       |                                               |       |   |   |   |   |
| Sales to TSMC                         |       | 291                                                 |       | 429                                                |       | 1,544 |   | 1,001 |   |
| Purchase manufacturing   services     |       | 8                                                   |       | 7                                                  |       | 163 |   | 23 |   |
| Balance payable at period end, net    |       | 4                                                   |       | —                                             |       | 4 |   | — |   |
| Balance receivable at period end, net |       | 168                                                 |       | 255                                                |       | 168 |   | 255 |   |
| SOI(1):                               |       |                                                |       |                                               |       |   |   |   |   |
| Sales to SOI                          |       | $                                                   | 8          |                                               | $          | 30 |   | $ | 201 |   | $ | 132 |   |

 

----

| (1) |   | In   the three months ended January 31, 2011, the Company sold its ownership   interest in SOI. (See Note 5.) |
|-----|--------|--------------------------------------------------------------------------------------------------------------------|

 

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

 

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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 effect of supply constraints, the continued importance of the mobile phone market to our business, the continued concentration of manufacturers in the mobile phone market,  continued price competition and the consequent reduction in the average selling prices of our products, anticipated benefits of our joint ventures and alliances, the ability of our new products to mitigate declines in our average selling prices, 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, the continued improvement of general global and domestic economic conditions 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 in Part II under the caption “Item 1A. Risk Factors,” beginning on page 46 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, the OmniVision logo, OmniPixel and TrueFocus are registered trademarks of OmniVision Technologies, Inc., CameraChip, CameraCube, OmniBSI, OmniBSI-2, 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 CameraChipTM 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 have also integrated our CameraChip image sensors with wafer-level optics, which we refer to as CameraCubeTM 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 February 2008, we announced the introduction of our OmniPixel3-HSTM architecture. It is our most advanced generation of front side illumination, or FSI, OmniPixel® architecture. With OmniPixel3-HS, light is captured on the front side of the chip, and it forms the basis of our 1.75 μm FSI imaging pixel.

 

In May 2008, we announced a new approach to CMOS image sensor design we call OmniBSITM 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 imaging pixel. We believe we are the first image sensor company to announce a viable process for the mass production of BSI sensors.

 

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

 

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 imaging 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 imaging 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.  Although currently our customers primarily use our Camera Cube devices as secondary cameras in mobile handsets, going forward we anticipate that they will be used as the primary camera in mobile handsets.

 

In February 2010, we announced the introduction of our new OmniBSI-2TM architecture built on the advanced 300 mm copper process at Taiwan Semiconductor Manufacturing Company Limited, or TSMC. The OmniBSI-2 architecture represents our second-generation BSI technology and enables us to design imagining pixels as small as 1.1 μm in dimension.

 

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 February 2010, we introduced the OV5647, a 1/4-inch 5-megapixel raw image sensor with 1.4 μm OmniBSI pixels. The OV5647 is a cost-effective, high-performance mobile imaging solution, offering the performance and size benefits of BSI technology while allowing mobile phone designs to utilize existing baseband or applications processors for image processing functions. The OV5647 also delivers 720p HD video at 60 FPS and 1080p HD video at 30 FPS.

 

In April 2010, we introduced the OV10630 which expanded our portfolio of security products. This system-on-a-chip, or SOC, sensor captures HD-quality color video in any environment, including low-light scenes or high-contrast lighting conditions, by combining 720p HD video with advanced low-light sensitivity and color high dynamic range, or HDR, in a 1/2.7 inch optical format. Using our proprietary new HDR processing technology, the OV10630 delivers 110dB dynamic range in black and white, and 100dB or more in color, providing clear, fully-processed YUV color HDR video output. By integrating a full image processing pipeline, the OV10630 accelerates time-to-market and reduces the system bill of materials.

 

In May 2010, we introduced the OV2720, the world’s first 1/6-inch, native 1080p HD CMOS image sensor designed for notebook, netbook, webcam and video conferencing applications. Based on OmniVision’s 1.4 μm OmniBSI technology, the new 1080p sensor captures videoconference quality HD video in a form factor that meets the module size and height requirements of advanced thin notebook designs.

 

In June 2010, we announced the OV5640, a one-quarter inch 5-megapixel system-on-chip sensor built on our 1.4 μm OmniBSI technology. The device offers a cost-optimized, complete camera solution with excellent imaging pixel performance for 5-megapixel photography and 720p or 1080p HD video for camera phones.  The sensor’s embedded autofocus control with voice coil motor driver offers further cost savings to the end customer.

 

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

 

In June 2010, we also announced the high-speed OV7735 VGA sensor providing one of the thinnest VGA camera solutions available at less than 3-mm in height. The OV7735 is designed for portable applications, including digital video cameras, portable media players, as well as gaming devices and webcams.

 

In August 2010, we introduced the OV7727, an advanced VGA sensor for the high-end ultra-thin notebook market. The 1/13-inch OV7727 is the first VGA sensor built with our OmniBSI technology. It combines high performance and sensitivity with an ultra-compact form factor, enabling camera integration with sub-2 mm liquid crystal displays for next-generation notebooks, netbooks and tablet computers.

 

In August 2010, we also introduced the OV9740, a 1/6.5-inch SOC CMOS image sensor designed for video applications in portable media players, home entertainment devices and notebooks. Because all image quality tuning and processing is done on-chip, the OV9740 enables customers to simplify product development and accelerate time-to-market. The OV9740 combines our 1.75- μm OmniBSI imaging pixel architecture and our proprietary high-end image signal processor to deliver 720p native HD video.

 

In September 2010, we introduced two new SOC CMOS image sensors, the OV2643 and OV2659. Both sensors are designed to address the increased demand for 2-megapixel resolution cameras in the mid- to low-end feature phone segment. The two new SOC sensors with advanced image signal processing offer quality and functionality comparable to many high-performance digital still cameras, including 720p native HD video at 30 FPS, excellent sensitivity and high quality image capture.

 

In November 2010, we introduced the OV8820, a 1/3.2-inch 8-megapixel RAW CMOS image sensor based on our 1.4-μm OmniBSI pixel architecture. The sensor delivers high frame rate 1080p/30 and 720p/60 HD video with electronic image stabilization and full horizontal field of view designed specifically to meet the demands of the smart phone markets. The OV8820 also offers advanced video capabilities designed for video-centric camera phones.

 

Also in November 2010, we announced the initiation of mass production of the ultra-compact, high-performance OV6930. With a packaged footprint of only 1.8 x 1.8 mm, the OV6930 is designed for applications favoring a small profile and is well suited to serve a broad range of medical endoscopy applications.

 

In January 2011, we introduced the OV10810, a 10-megapixel CMOS image sensor built on our highly optimized 1.4-μm OmniBSI pixel architecture. The 1/2.5-inch OV10810 is designed to offer complete convergence between high-resolution still photography and full HD video by combining 10-megapixel burst photography at 30 FPS with full 1080p HD video in a native 16:9 aspect ratio. The OV10810 is designed for digital still and video camera hybrids and high-end smart phones.

 

***Capital Resources***

 

As of January 31, 2011, we held approximately $375.4 million in cash and cash equivalents and approximately $123.5 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 current instability in the global financial markets.

 

***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.

 

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

 

Beginning with the second half of our fiscal 2009, general domestic and global economic conditions were negatively impacted by several factors. These economic conditions resulted in our facing one of the most challenging periods in our history.

 

During the latter part of fiscal 2010 and throughout fiscal 2011, we have seen indications that suggest that certain major economies are returning to positive growth. Our quarterly sales have improved throughout fiscal 2011 as compared to fiscal 2010 and fiscal 2009. We believe that demand for our products will continue to remain strong for the remainder of fiscal 2011. 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, results of operations and cash flows could be 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 digital still camera, or 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 two billion image sensors, including approximately 194 million in the three months ended January 31, 2011. We believe that these quantities demonstrate the continuing capabilities of our production system, including our sources of offshore fabrication.

 

We 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 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 Taiwan Semiconductor Manufacturing Company Limited, or 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 Technologies Company, Ltd., or VisEra, our joint venture with TSMC, and our investments in three 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.

 

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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.

 

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, due to the global economic downturn, we experienced weaker than normal conditions in all of our markets in the third and fourth quarters of fiscal 2009. With the return to profitability in our business since the second fiscal quarter of 2010, we believe the historical seasonal cycle to our business has returned. In addition to being stronger than our first and fourth fiscal quarters, historically our gross revenues in our second and third fiscal quarters have typically been comparable. However, an increase during fiscal 2010 in end-customer demand 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 were to repeat itself in future years, it could result in the quarter-to-quarter fluctuation of our revenues differing from our historical seasonal cycles.

 

We believe that the market opportunity represented by mobile phones remains very large, although the opportunities presented could be deferred because of the uncertainty surrounding the sustainability of the current global economic recovery. 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. 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, notebooks and webcams, security and surveillance systems, digital still and video cameras, entertainment devices, automotive and medical imaging systems 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. We introduced our CameraCube products in February 2009. Depending on the adoption rate and unit volume, we believe these products may also 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 

 

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|------------------|------------|-----------------------------------------------------------------------------------------------------------------------|

 

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 may decline.

 

Recently, the entire semiconductor industry, including us, has experienced supply constraints. Due to the lack of availability of products, supply constraints have forced companies in the industry to be unable to meet the product demands of their customers and to take certain actions such as allocating available products among their customers or, in some cases, increasing the prices of their products. This results in harm to customer relations, the loss of sales to customers and, in some cases, the loss of future business with those customers. We have faced, and continue to face, these same challenges as we seek to meet our customers’ increasing demand for more of our products. Despite these challenges, through careful strategic planning relating to our products and the technologies that we deliver to market, we have been able to achieve revenue growth and unit growth. However, if our customers’ demand remains at current levels or continues to increase, we will experience even greater challenges related to supply constraints and may be unable to achieve future growth, which could result in our revenues, gross margins and other financial results being materially and adversely affected.

 

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 of certain products and build inventories in excess of demand for other products. We carefully consider the risk that our inventories may be in excess of 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 Condensed Consolidated Balance Sheets as “Deferred revenues, less cost of revenues.”

 

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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.

 

***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, 2010. There have been no material changes in any of our critical accounting policies since April 30, 2010.

 

**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** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                 | ** ** | **January 31,**             | ** ** | **January 31,**            | ** ** |
| ** **                                                 | ** ** | **2011**                         | ** ** | **2010**                        | ** ** | **2011** | ** ** | **2010** | ** ** |
| Revenues                                                   |       | 100.0                            | %          | 100.0                           | %          | 100.0 | % | 100.0 | % |
| Cost of revenues                                           |       | 70.2                             |       | 75.4                            |       | 71.5 |   | 76.2 |   |
| Gross margin                                               |       | 29.8                             |       | 24.6                            |       | 28.5 |   | 23.8 |   |
|                                                       |       |                             |       |                            |       |   |   |   |   |
| Operating expenses:                                        |       |                             |       |                            |       |   |   |   |   |
| Research, development and related                          |       | 8.7                              |       | 13.0                            |       | 9.2 |   | 12.9 |   |
| Selling, general and administrative                        |       | 5.8                              |       | 10.0                            |       | 6.4 |   | 10.3 |   |
| Total operating expenses                                   |       | 14.5                             |       | 23.0                            |       | 15.6 |   | 23.2 |   |
|                                                       |       |                             |       |                            |       |   |   |   |   |
| Income from operations                                     |       | 15.3                             |       | 1.6                             |       | 12.9 |   | 0.6 |   |
| Interest expense, net                                      |       | (0.1                             | )          | (0.1                            | )          | (0.1 | ) | (0.1 | ) |
| Other income, net                                          |       | 0.7                              |       | 1.9                             |       | 0.3 |   | 0.8 |   |
| Income before income taxes                                 |       | 15.9                             |       | 3.4                             |       | 13.1 |   | 1.3 |   |
|                                                       |       |                             |       |                            |       |   |   |   |   |
| Provision for (benefit from) income taxes                  |       | (0.9                             | )          | 0.3                             |       | 0.1 |   | 0.6 |   |
| Net income                                                 |       | 16.8                             |       | 3.1                             |       | 13.0 |   | 0.7 |   |
| Net loss attributable to noncontrolling interest           |       | —                           |       | (0.1                            | )          | — |   | — |   |
| Net income attributable to OmniVision   Technologies, Inc. |       | 16.8                             | %          | 3.2                             | %          | 13.0 | % | 0.7 | % |

 

*Three Months Ended January 31, 2011 as Compared to Three Months Ended January 31, 2010*

 

**Revenues**

 

We derive substantially all of our revenues from the sale of our image-sensor products that are used 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 January 31, 2011 increased by 69.3% to $265.7 million from $156.9 million for the three months ended January 31, 2010. The increase in revenues was primarily due to a 46.6% increase in unit sales of our image-sensor products, reflecting a continuing recovery in product demand from the prior year period when the economic downturn had negatively affected such demand, and a 15.3% increase in our ASPs as a result of a product mix shift in our higher megapixel products from the prior year period.

 

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|------------------|------------|-----------------------------------------------------------------------------------------------------------------------|

 

***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 significantly higher in the three months ended January 31, 2011 than in the prior-year period due to increased orders from our OEM and VAR customers. 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 January 31, 2011 and 2010:

 
| ** **    | ** ** | **Three Months Ended** | ** ** |
|---------------|------------|----------------------------------|------------|
| ** **    | ** ** | **January 31,**             | ** ** |
| ** **    | ** ** | **2011**                         | ** ** | **2010** | ** ** |
| OEMs and VARs |       | 80.2                             | %          | 54.9 | % |
| Distributors  |       | 19.8                             |       | 45.1 |   |
| Total         |       | 100.0                            | %          | 100.0 | % |

 

*OEMs and VARs.*   In the three months ended January 31, 2011, one OEM customer accounted for approximately 17.6% of our revenues. In the three months ended January 31, 2010, one OEM customer accounted for approximately 11.0% of our revenues. For the three months ended January 31, 2011 and 2010, no other OEM or VAR customer accounted for 10% or more of our revenues.

 

*Distributors.*   In the three months ended January 31, 2011, one distributor customer accounted for approximately 11.1% of our revenues. In the three months ended January 31, 2010, one distributor customer accounted for approximately 24.6% of our revenues. For the three months ended January 31, 2011 and 2010, 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 January 31, 2011 and 2010:

 
| ** **     | ** ** | **Three Months Ended** | ** ** |
|----------------|------------|----------------------------------|------------|
| ** **     | ** ** | **January 31,**             | ** ** |
| ** **     | ** ** | **2011**                         | ** ** | **2010** | ** ** |
| Domestic sales |       | 2.5                              | %          | 0.5 | % |
| Foreign sales  |       | 97.5                             |       | 99.5 |   |
| 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. Our revenues, as reported on a geographical basis, reflect the country or region in which our customers issue their purchase orders.

 

**Gross Profit**

 

Our gross margin in the three months ended January 31, 2011 increased to 29.8% from 24.6% for the three months ended January 31, 2010. The year-over-year increase in gross margin reflected a favorable product mix shift to our OmniBSI-based 5-megapixel and 8-megapixel products. We also recorded an increase in the sales of previously written-down products in the three months ended January 31, 2011, which totaled $5.6 million, as compared to $2.4 million during the same period in the prior fiscal year. In addition, the increase in gross margin reflected a decrease in the write-down of inventories which totaled approximately $2.9 million during the three months ended January 31, 2011, as compared to $3.4 million in the similar prior year period. We recorded approximately $0.5 million in stock-based 

 

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compensation expense to cost of revenues during the three months ended January 31, 2011, as compared to $0.8 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. Research, development and related expenses may fluctuate significantly as the number of new designs we release to the foundry can fluctuate from period to period. Research, development and related expenses for the three months ended January 31, 2011 increased to approximately $23.1 million from approximately $20.4 million for the three months ended January 31, 2010. As a percentage of revenues, research, development and related expenses for the three months ended January 31, 2011 and 2010 represented 8.7% and 13.0%, respectively.

 

The increase in research, development and related expenses of approximately $2.7 million, or 13.2%, for the three months ended January 31, 2011 from the similar period in the prior year resulted from: a $2.6 million increase in salary and payroll-related expenses resulting from a headcount increase and a company-wide annual salary increase; a $541,000 increase in office and facilities expenses; and a $465,000 increase in non-recurring engineering expenses related to new product development.  These increases were partially offset by a $0.9 million decrease in depreciation and amortization expenses and a $244,000 decrease in stock-based compensation expense. We anticipate that research, development and related expenses will increase slightly for the three months ended April 30, 2011 due to an anticipated increase in mask-design releases from third quarter levels.

 

**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 January 31, 2011 decreased to approximately $15.4 million from $15.6 million for the three months ended January 31, 2010. As a percentage of revenues, selling, general and administrative expenses for the three months ended January 31, 2011 and 2010 represented 5.8% and 10.0%, respectively.

 

The decrease in selling, general and administrative expenses of approximately $143,000, or 0.9%, for the three months ended January 31, 2011 from the similar period in the prior year resulted primarily from: a $0.7 million decrease in stock-based compensation expenses; a $372,000 decrease in commission expenses paid primarily to distributors and sales representatives; a $371,000 decrease in legal expenses related to patent defense; and a $180,000 decrease in other taxes. These decreases were partially offset by a $0.9 million increase in compensation and personnel-related expenses, a $173,000 increase in travel expenses and a $166,000 increase in bad debt expenses. We anticipate that our selling, general and administrative expenses will remain consistent for the three months ended April 30, 2011, as compared to the third quarter.

 

**Interest 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 expense, net, increased to $318,000 for the three months ended January 31, 2011 from $145,000 in the prior year period. The $173,000 increase in interest expense, net, resulted from a $180,000 increase in interest expense and a $6,000 increase in interest income. The increase in interest expense was primarily associated with an increase in long-term borrowings for the three months ended January 31, 2011 as compared to the similar period in the prior year. The increase in interest income was the result of high cash balance with same interest rates on interest-bearing accounts as in the same period in the prior year.

 

**Other Income, Net**

 

Other income, net, for the three months ended January 31, 2011 totaled $1.8 million, as compared to $2.9 million in the prior year. Other income, net, for the three months ended January 31, 2011 included a $1.2 million gain on the interest rate swap agreements related to the mortgage on our complex of four buildings located in Santa Clara, 

 

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|------------------|------------|-----------------------------------------------------------------------------------------------------------------------|

 

California, or Santa Clara Property; a $26,000 gain that represented our portion of the net income recorded by Silicon Optronics, Inc, or SOI, and a $0.7 million gain that represented our portion of the net income recorded by China WLCSP Limited, or WLCSP, partially offset by a $72,000 loss on the sale of SOI. Other income, net, for the three months ended January 31, 2010 included a $2.2 million gain that represented the difference between the 996,250 shares of common stock of Tong Hsing Electronic Industries, Limited, or Tong Hsing, that we received in connection with Tong Hsing’s acquisition of ImPac Technology Co., Ltd., or ImPac, and the carrying value of our investment in ImPac, and a $0.6 million gain that represented our portion of the net income recorded by China WLCSP Limited, or WLCSP, which we account for under the equity method of accounting, and a $194,000 gain 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, and a $211,000 loss that represented our portion of the net loss recorded by ImPac, prior to its acquisition by Tong Hsing.

 

**Provision for (Benefit From) Income Taxes**

 

We generated approximately $42.1 million and $5.3 million in income before income taxes for the three months ended January 31, 2011 and 2010, respectively. We recorded a benefit from income taxes of approximately $2.6 million and a provision for income taxes of approximately $467,000 for the three months ended January 31, 2011 and 2010, respectively, resulting in effective tax rates of (6.2)% and 8.9% for the respective periods. Our effective tax rate reflects the impact of a significant amount of our earnings being taxed in foreign jurisdictions at rates below the U.S. statutory tax rate.

 

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which was signed into law on December 17, 2010, retroactively extended the U.S. Federal Research and Development tax credit (“Federal R&D Credit”) from January 1, 2010 to December 31, 2011.  This enacted tax law change resulted in a discrete tax benefit in the three months ended January 31, 2011, as well as a decrease in the estimated annual effective income tax rate.

 

Our quarterly income taxes reflect an estimate of the corresponding fiscal year’s annual effective tax rate and include, when applicable, adjustments from discrete tax items. The discrete adjustments to our provision for income taxes for the three months ended January 31, 2011 included favorable adjustments for differences between our finalized tax returns and the provision for income taxes recorded for fiscal 2010, the tax benefit from the retroactively extended Federal R&D Credit, the tax benefit that we realized from our employees’ disqualifying disposition of incentive stock awards and a reduction of unrecognized tax benefits due to the lapse of applicable statute of limitations. These favorable adjustments to our provision for income taxes for the three months ended January 31, 2011 were partially offset by an unfavorable impact from foreign exchange losses associated with our unrecognized tax benefits and the income tax expenses accrued for certain non-U.S. earnings that were previously considered to be indefinitely reinvested.

 

During the three months ended January 31, 2011, we reduced unrecognized tax benefits by approximately $10.3 million due to the lapse of applicable statute of limitations. It is reasonably possible that the balance of gross unrecognized tax benefits will decrease by $3.2 million within the next twelve months due to the lapse of applicable statute of limitations in multiple jurisdictions in which we operated. During the three months ended January 31, 2011, we accrued an additional $409,000 of interest related to our unrecognized tax benefits.

 

We are under tax examination in a foreign jurisdiction for the fiscal years ended April 30, 2004 through April 30, 2009, which represent all of the years for which tax returns have been filed with that jurisdiction and the statute of limitations has not expired.

 

**Net Loss Attributable to Noncontrolling Interest**

 

Net loss attributable to noncontrolling interest represented the ownership interest in SOI that we did not own. The net loss attributable to noncontrolling interest was zero for the three months ended January 31, 2011, following the deconsolidation of SOI in June 2010. (See Note 5 — *“Long-term Investments”* to our condensed consolidated financial statements.) The net loss attributable to noncontrolling interest was $143,000 for the three months ended January 31, 2010, which represented the 56.2% interest that we did not own in the net loss of SOI.

 

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*Nine Months Ended January 31, 2011 as Compared to Nine Months Ended January 31, 2010*

 

**Revenues**

 

Revenues for the nine months ended January 31, 2011 increased by 56.6% to approximately $698.2 million from $445.8 million for the nine months ended January 31, 2010. The increase in revenues was due to a 45.6% increase in the unit sales of our image-sensor products, reflecting a continuing recovery in product demand from the prior year period, when the economic downturn had negatively affected such demand. This unit increase was combined with a 7.6% increase in our ASPs as a result of a product mix shift in our higher megapixel products from the prior year period.

 

***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 nine months ended January 31, 2011 and 2010:

 
| ** **    | ** ** | **Nine Months Ended** | ** ** |
|---------------|------------|---------------------------------|------------|
| ** **    | ** ** | **January 31,**            | ** ** |
| ** **    | ** ** | **2011**                        | ** ** | **2010** | ** ** |
| OEMs and VARs |       | 74.8                            | %          | 53.1 | % |
| Distributors  |       | 25.2                            |       | 46.9 |   |
| Total         |       | 100.0                           | %          | 100.0 | % |

 

*OEMs and VARs.*   In the nine months ended January 31, 2011, two OEM customers accounted for approximately 15.5% and 10.3% of our revenues, respectively. In the nine months ended January 31, 2010, one OEM customer accounted for approximately 11.6% of our revenues. For the nine months ended January 31, 2011 and 2010, no other OEM or VAR customer accounted for 10% or more of our revenues.

 

*Distributors.*   In the nine months ended January 31, 2011, one distributor customer accounted for approximately 13.8% of our revenues. In the nine months ended January 31, 2010, one distributor customer accounted for approximately 26.8% of our revenues. For the nine months ended January 31, 2011 and 2010, 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 nine months ended January 31, 2011 and 2010:

 
| ** **     | ** ** | **Nine Months Ended** | ** ** |
|----------------|------------|---------------------------------|------------|
| ** **     | ** ** | **January 31,**            | ** ** |
| ** **     | ** ** | **2011**                        | ** ** | **2010** | ** ** |
| Domestic sales |       | 1.2                             | %          | 0.5 | % |
| Foreign sales  |       | 98.8                            |       | 99.5 |   |
| 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 nine months ended January 31, 2011 increased to 28.5% from 23.8% for the nine months ended January 31, 2010. The year-over-year increase in gross margin reflected a favorable product mix shift to our OmniBSI-based 5-megapixel and 8 megapixel products, and a decrease in the write-down of inventories which totaled approximately $13.3 million during the nine months ended January 31, 2011, as compared to $13.5 million in the similar prior year period.  In the nine months ended January 31, 2011, we recorded sales from previously written down

 

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|------------------|------------|-----------------------------------------------------------------------------------------------------------------------|

 

products which totaled $10.1 million, as compared to $8.7 million during the similar period in the prior fiscal year.  We recorded approximately $1.5 million in stock-based compensation expense to cost of revenues during the nine months ended January 31, 2011, as compared to $2.2 million in the nine months ended January 31, 2010.

 

**Research, Development and Related Expenses**

 

Research, development and related expenses for the nine months ended January 31, 2011 increased to approximately $64.2 million from approximately $57.7 million for the nine months ended January 31, 2010. As a percentage of revenues, research, development and related expenses for the nine months ended January 31, 2011 and 2010 represented 9.2% and 12.9%, respectively.

 

The increase in research, development and related expenses of approximately $6.5 million, or 11.3%, for the nine months ended January 31, 2011 from the similar prior year period resulted primarily from a $6.3 million increase in salary and payroll-related expenses, a $2.0 million increase in non-recurring engineering expenses related to new product development; a $1.3 million increase in patent-related expenses and a $213,000 increase in office and facilities expenses;. These increases were partially offset by a $3.2 million decrease in depreciation and amortization expenses, and a $346,000 decrease in stock-based compensation expense.

 

**Selling, General and Administrative****Expenses**

 

Selling, general and administrative expenses for the nine months ended January 31, 2011 decreased to approximately $44.5 million from $46.0 million for the nine months ended January 31, 2010. As a percentage of revenues, selling, general and administrative expenses for the nine months ended January 31, 2011 and 2010 represented 6.4% and 10.3%, respectively.

 

The decrease in selling, general and administrative expenses of approximately $1.4 million, or 3.1%, for the nine months ended January 31, 2011 from the similar period in the prior year resulted primarily from: a $2.1 million decrease in stock-based compensation expense; a $1.2 million decrease in legal expenses related to patent defense; and a $0.9 million decrease in commissions paid primarily to distributors and sales representatives. These decreases were partially offset by a $1.6 million increase in compensation and personnel-related expenses, a $0.6 million increase in office and facility expenses, a $393,000 increase in bad debt expenses and a $337,000 increase in travel expenses.

 

**Interest Expense, Net**

 

Interest expense, net, for the nine months ended January 31, 2011 increased to approximately $1.0 million from $0.6 million for the nine months ended January 31, 2010. The increase in interest expense, net, for the nine months ended January 31, 2011 as compared to the corresponding period in the prior year was the result of a $112,000 reduction in interest income and a $248,000 increase in interest expense associated with long-term borrowings.

 

**Other Income, Net**

 

Other income, net, for the nine months ended January 31, 2011 totaled $2.8 million, as compared to $3.7 million in the prior year. Other income, net, for the nine months ended January 31, 2011 included a $1.6 million gain that represented the difference between the fair value of our ownership interest in SOI and the carrying value of SOI’s net assets and noncontrolling interest before the deconsolidation; a $2.1 million gain that represented our portion of the net income recorded by WLCSP, partially offset by a $260,000 loss on the interest rate swap agreements related to the mortgage on the Santa Clara Property; a $241,000 loss that represented our portion of the net loss recorded by SOI and a $72,000 loss on the sale of SOI. In the three months ended January 31, 2011, we sold our remaining 43.7% interest in SOI. Consequently, as of January 31, 2011, our ownership in SOI was zero percent. Other income, net, for the nine months ended January 31, 2010 included a $2.2 million gain that represented the difference between 996,250 shares of common stock of Tong Hsing that we received in connection with its acquisition of ImPac and the carrying value of our investment in ImPac, a $1.3 million gain, representing our portion of the net income recorded by WLCSP, a $0.8 million gain on interest rate swap agreements related to the mortgage on the Santa Clara Property, partially offset by a $0.8 million loss that represented our portion of the net loss recorded by ImPac, prior to its acquisition by Tong Hsing.

 

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|------------------|------------|-----------------------------------------------------------------------------------------------------------------------|

 

**Provision for (Benefit From) Income Taxes**

 

We generated approximately $91.8 million and $5.6 million in income before income taxes for the nine months ended January 31, 2011 and 2010, respectively. We recorded a provision for income taxes of approximately $1.3 million and $2.6 million for the nine months ended January 31, 2011 and 2010, respectively, resulting in effective tax rates of 1.4% and 46.8% for the respective periods.

 

Our quarterly income taxes reflect an estimate of the corresponding fiscal year’s annual effective tax rate and include, when applicable, adjustments from discrete tax items. The discrete adjustments to our provision for income taxes for the nine months ended January 31, 2011 included favorable adjustments for differences between our finalized tax returns and the provision for income taxes recorded for fiscal 2010, the tax benefit from the retroactively extended Federal R&D Credit, the tax benefit that we realized from our employees’ disqualifying disposition of incentive stock awards and a reduction of unrecognized tax benefits due to the lapse of applicable statute of limitations. These favorable adjustments to our provision for income taxes for the nine months ended January 31, 2011 were partially offset by unfavorable impact from foreign exchange losses associated with our unrecognized tax benefits, the tax expense associated with the sale of our investment in SOI and the income tax expenses accrued for certain non-U.S. earnings that were previously considered to be indefinitely reinvested.

 

During the nine months ended January 31, 2011, we reduced unrecognized tax benefits by approximately $10.6 million due to the lapse of applicable statute of limitations. It is reasonably possible that the balance of gross unrecognized tax benefits will decrease by $3.2 million within the next twelve months due to the lapse of applicable statute of limitations in multiple jurisdictions in which we operated. During the nine months ended January 31, 2011, we accrued an additional $1.3 million of interest related to our unrecognized tax benefits.

 

We are under tax examination in a foreign jurisdiction for the fiscal years ended April 30, 2004 through April 30, 2009, which represent all of the years for which tax returns have been filed with that jurisdiction and the statute of limitations has not expired.

 

**Net Loss Attributable to Noncontrolling Interest**

 

Net loss attributable to noncontrolling interest for the nine months ended January 31, 2011 was $32,000, which represented the 56.3% ownership interest that we did not own in the net loss of SOI, as recorded by SOI from the beginning of our fiscal year through June 2010 when we deconsolidated the entity. (See Note 5 — *“Long-term Investments”* to our condensed consolidated financial statements.) Net loss attributable to noncontrolling interest was $199,000 for the nine months ended January 31, 2010, which represented the 56.2% ownership interest that we did not own in the net loss of SOI.

 

**Liquidity and Capital Resources**

 

Our principal sources of liquidity at January 31, 2011 consisted of cash, cash equivalents and short-term investments totaling $498.9 million.

 

***Liquidity***

 

Our working capital increased to $593.6 million as of January 31, 2011, as compared to $433.3 million as of April 30, 2010. Our working capital increased as a result of: a $141.4 million increase in cash and cash equivalents primarily due to cash provided by operating activities; a $44.8 million increase in accounts receivable, net, resulting from a revenue increase of $108.5 million for the three months ended January 31, 2011 from the three months ended April 30, 2010; a $23.9 million increase in short-term investments; a $8.2 million increase in refundable and deferred income taxes and a $3.3 million decrease in accrued expenses and other current liabilities. These increases in working capital were partially offset by: a $40.4 million decrease in inventories; a $12.8 million increase in accounts payable resulting from an increase in production activities; a $6.0 million increase in deferred revenues, less cost of revenues and a $2.1 million decrease in prepaid expenses and other current assets.

 

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 January 31, 2011, the principal amounts outstanding under the Mortgage Loan and Term Loan were $25.4 million and $4.8 million, respectively.

 

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|------------------|------------|-----------------------------------------------------------------------------------------------------------------------|

 

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 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 based on the exchange rate in effect at the time of the loan origination, or the Construction Loan. As of January 31, 2011, we had borrowed approximately $17.5 million under the Construction Loan and the principal amount outstanding under the Construction Loan was $16.7 million.

 

***Cash Flows from Operating Activities***

 

For the nine months ended January 31, 2011, net cash provided by operating activities totaled approximately $124.0 million as compared to $65.4 million for the corresponding period in the prior year. The principal components of the current year amount were: net income of approximately $90.5 million for the nine months ended January 31, 2011; adjustments for non-cash charges of $15.1 million in stock-based compensation, $14.6 million in depreciation and amortization, $13.3 million in write-down of inventories, $9.8 million in gains on equity investments, net, $1.8 million in the tax effect from stock-based compensation, $1.0 million in the excess tax benefit from stock-based compensation and $260,000 in losses on interest rate swaps; a $24.3 million decrease in inventory due to the increase in sales activity for the three months ended January 31, 2011; a $15.3 million increase in accounts payable also resulting from the increase in quarterly sales activity; a $8.2 million increase in deferred tax liabilities; a $5.7 million increase in deferred revenues, less cost of revenues and a $3.5 million decrease in prepaid expenses and other current assets. These increases were partially offset by: a $44.9 million increase in accounts receivable, net; a $6.0 million decrease in income taxes payable; a $4.3 million increase in refundable and deferred income taxes and a $2.6 million decrease in accrued expenses and other current liabilities. The $44.9 million increase in accounts receivable, net, reflects the increased level of revenues during the three months ended January 31, 2011, as days of sales outstanding decreased only slightly, to 41 days as of January 31, 2011 from 42 days as of April 30, 2010. 

 

For the nine months ended January 31, 2010, net cash provided by operating activities totaled approximately $65.4 million. The principal components of the current year amount were: a net income of approximately $3.0 million for the nine months ended January 31, 2010; adjustments for non-cash charges of $18.2 million in stock-based compensation, $17.4 million in depreciation and amortization, $13.5 million in write-down of inventories, $5.2 million in gains on equity investments and $0.8 million in gains on interest rate swaps; a $52.8 million increase in accounts payable; a $3.6 million increase in deferred revenues, less cost of revenues; a $1.4 million increase in accrued expenses and other current liabilities; and a $1.2 million decrease in prepaid expenses and other current assets. These increases were partially offset by: a $23.7 million increase in accounts receivable, net; a $14.0 million increase in inventories; a $2.6 million increase in refundable and deferred income taxes and a $122,000 decrease in deferred tax liabilities. The $23.7 million increase in accounts receivable, net, reflects the increased level of revenues during the nine months ended January 31, 2010, partially offset by faster collection, as reflected in days of sales outstanding which declined to 40 days as of January 31, 2010 from 44 days as of April 30, 2009. The $14.0 million increase in inventories resulted from the need to support an increased level of revenues during the nine months ended January 31, 2010. The $3.6 million increase in deferred revenues, less cost of revenues, was due to an increase in sales to distributors during the nine months ended January 31, 2010.

 

***Cash Flows From Investing Activities***

 

For the nine months ended January 31, 2011, our cash used in investing activities totaled $38.3 million as compared to cash used in investing activities of approximately $61.8 million for the corresponding period in the prior year, primarily due to $128.2 million in net proceeds from sales or maturities of short-term investments, $3.8 million in net proceeds from the sale of SOI, partially offset by $155.3 million in purchases of short-term investment, $5.0 million in purchases of intangible and other assets, $2.8 million due to the deconsolidation of SOI, $7.1 million in purchases of property, plant and equipment and $282,000 in purchases of long-term investments. For the nine months ended January 31, 2010, our cash used in investing activities totaled $61.8 million due to $51.5 million in net purchases of short-term investments and $10.2 million in purchases of property, plant and equipment.

 

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|------------------|------------|-----------------------------------------------------------------------------------------------------------------------|

 

***Cash Flows From Financing Activities***

 

For the nine months ended January 31, 2011, net cash provided by financing activities totaled approximately $55.1 million, as compared to $13.0 million during the corresponding period in the prior year. This increase was due to $57.6 million in proceeds from the exercise of stock options and employee purchases through our employee stock purchase plan and $1.0 million in excess tax benefits from stock-based compensation, partially offset by $3.4 million used to repay long-term borrowings. For the nine months ended January 31, 2010, net cash provided by financing activities totaled approximately $13.0 million due to $9.5 million in borrowings and $6.2 million in proceeds from the exercise of stock options and employee purchases through our employee stock purchase plan, partially offset by $2.7 million used to repay long-term borrowings.

 

***Capital Commitments and Resources***

 

We completed the construction of a research facility for OTC during the three months ended October 31, 2010. Over the next year, we expect to draw down the remaining $3.0 million of available funding under the Construction Loan to pay amounts due our construction contractors.

 

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 in OTC, we expect our capital requirements totaling approximately $45.0 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.

 

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.

 

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

 

**Contractual Obligations and Commercial Commitments**

 

The following table summarizes our contractual obligations and commercial commitments as of January 31, 2011 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                                           |       | $                                         | 7,955      |   | $ | 4,439 |   | $ | 3,515 |   | $ | 1 |   | $ | — |   |
| Debt obligations(1)                                        |       | 46,896                                    |       | 4,312 |   | 7,410 |   | 10,214 |   | 24,960 |   |
| Noncancelable orders(2)                                    |       | 164,463                                   |       | 164,463 |   | — |   | — |   | — |   |
| Total contractual obligations                              |       | 219,314                                   |       | 173,214 |   | 10,925 |   | 10,215 |   | 24,960 |   |
|                                                       |       |                                      |       |   |   |   |   |   |   |   |   |
| Other Commercial Commitments:                              |       |                                      |       |   |   |   |   |   |   |   |   |
| OST(3)                                                     |       | 8,500                                     |       | 8,500 |   | — |   | — |   | — |   |
| Total commercial commitments                               |       | 8,500                                     |       | 8,500 |   | — |   | — |   | — |   |
| Total contractual obligations and commercial   commitments |       | $                                         | 227,814    |   | $ | 181,714 |   | $ | 10,925 |   | $ | 10,215 |   | $ | 24,960 |   |

 

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(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 January 31, 2011, we borrowed approximately $17.5 million under the Construction Loan. See Note 7 —*“Borrowing Arrangements”* to our condensed consolidated financial statements.

 

(2)   Noncancelable orders represent outstanding purchase orders that we have placed with our suppliers at period-ends. The lead time for delivery is long, typically 12 to 14 weeks, and suppliers must prepare unique materials for us at the beginning of the fabrication process. Accordingly, we are precluded from cancelling our orders once placed and the production process has begun.

 

(3)   During the three months ended October 31, 2008, we formed OST, a 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 16, 2011, which represents a one-year extension from the original due date of October 16, 2010. See Note 13 — *“Commitments and Contingencies”* to our condensed consolidated financial statements.

 

As of January 31, 2011, the long-term income taxes payable, including estimated interest and penalties, was $84.3 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 audits, 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 January 31, 2011 presented above.

 

**Off-Balance Sheet Arrangements**

 

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

 

**Recent Accounting Pronouncements**

 

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

 

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|------------------|------------|-----------------------------------------------------------------------------------------------------------------------|

 

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.

 

In December 2010, the FASB issued additional guidance for entities with reporting units that have carrying amounts equal to zero or are negative. These entities are required to assess whether it is more likely than not that the reporting units’ goodwill is impaired. If it is determined that it is more likely than not that the goodwill of one or more of its reporting units is impaired, then Step 2 of the goodwill impairment test for those reporting unit(s) should be performed. The effective date for this guidance is for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. 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 OEMs, 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 January 31, 2011, 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. Transaction gains and losses resulting from transactions denominated in currencies other than the respective functional currencies are included in “Other income, net” for the periods presented. The amounts of transaction gains and losses for the three and nine months ended January 31, 2011 and 2010 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, high-grade corporate securities and government bonds maturing approximately 18 months or less from the date of purchase. The Company also invests in variable rate demand notes, which have a final maturity date of up to thirty-three years but whose interest rate is reset at varying intervals typically between one and seven days.

 

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.

 

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 the total available amount of $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

 

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balance sheet date and record the associated non-cash cost or benefit as part of “Other income, net,” a hypothetical 10% change in LIBOR would not have a material effect on our interest expense for the three and nine months ended January 31, 2011.

 

In August 2009, in order to finance costs associated with the construction of a research center for OTC, we entered into the Construction Loan with a bank in China. The Construction Loan provides for a fixed asset loan in the principal amount of approximately $20.5 million based on the exchange rate in effect at the time of the loan origination. As of January 31, 2011, we borrowed approximately $17.5 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 January 31, 2011. 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 2011, 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 nine months ended January 31, 2011.

 

**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 January 31, 2011, 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 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*. 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.

 

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 and the other defendants will receive complete dismissals from the case. On October 5, 2009, the Court entered an order granting final approval of the settlement. Certain objectors have filed appeals. Plaintiffs have filed motions to dismiss the appeals. 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 stockholder of ours filed a complaint against certain of our underwriters for our 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. We are 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 and the motion to dismiss with prejudice, filed by all of the underwriter defendants, which included the suit against us. The plaintiff timely appealed the Court’s Order to the United States Court of Appeals for the Ninth Circuit. On December 3, 2010, the Ninth Circuit entered its opinion and order in this matter. The Court affirmed the dismissal of the suits against the 30 moving issuer defendants on the grounds that the demand letters sent to those issuers were inadequate under Delaware law, and converted the dismissals from without prejudice to with prejudice. The Court also reversed the dismissal of the suits against the remaining 24 issuer defendants, including us, but is allowing those issuer defendants, including us, to challenge the adequacy of the demand letters that the plaintiff sent to the issuers before filing suit. On January 24, 2011, the underwriter defendants filed a motion to stay the Ninth Circuit’s mandate pending its filing of a petition for a writ of certiorari in the United States Supreme Court. On January 25, 2011, the Ninth Circuit granted the motion and entered an Order staying the mandate for ninety days. On January 26, 2011, plaintiff also filed a motion to join the underwriters’ motion to stay the Ninth Circuit’s mandate on the grounds that plaintiff also will be filing a petition for a writ of certiorari in the United States Supreme Court. The petitions for a writ of certiorari have not yet been filed with the United States Supreme Court. 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

 

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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. On April 19, 2010, the court stayed the case pending reexamination of all of the asserted patents, as the U.S. Patent and Trademark Office has granted reexamination requests for all of the asserted claims of the asserted patents. On October 22, 2010, the U.S. Patent and Trademark Office issued an Action Closing Prosecution of the *inter partes* reexamination of U.S. Patent No. 6,818,877 and confirmed the four claims submitted for *inter partes* reexamination by co-defendants Micron Technology, Inc. and Aptina Imaging Corporation. On December 13, 2010, the Court lifted the stay as to U.S. Patent No. 6,818,877. On February 7, 2011, the Court issued a *Markman* order with respect to U.S. Patent No. 6,818,877, and granted summary judgment of invalidity for indefiniteness for all of the asserted claims of U.S. Patent No. 6,818,877. On February 22, 2011, Panavision filed its Final Infringement Contentions, conceding that our products do not infringe U.S. Patent No. 6,818,877 because every claim contains what the Court has held to be an indefinite term.

 

As to the two remaining asserted patents, on November 29, 2010, the U.S. Patent and Trademark Office issued an Action Closing Prosecution of the *inter partes* reexamination of U.S. Patent No. 7,057,150 and rejected all of the claims submitted for *inter partes* reexamination; on January 5, 2011, the U.S. Patent and Trademark Office issued an Action Closing Prosecution of the *inter partes* reexamination of U.S. Patent No. 6,663,029 and rejected all of the claims submitted for *inter partes* reexamination. As a result, all of the asserted claims of the asserted patents are held to be invalid by the Court or the U.S. Patent and Trademark Office. At this time, we cannot estimate any possible loss or predict whether this matter will result in any material expense to us.

 

On December 6, 2010, Ziptronix, Inc., or Ziptronix, filed a complaint alleging patent infringement against us in the District Court for the Northern District of California. The case is entitled *Ziptronix, Inc. v. OmniVision Technologies, Inc., Taiwan Semiconductor Manufacturing Company Ltd., and TSMC North America Corp., Case No. CV10-05525*.  In its complaint, Ziptronix asserts that we have made, used, offered to sell, sold and/or imported into the United States image sensors that infringe U.S. Patent Nos. 7,387,944 (“Method for Low Temperature Bonding and Bonded Structure”), 7,335,572 (“Method for Low Temperature Bonding and Bonded Structure”), 7,553,744 (“Method for Low Temperature Bonding and Bonded Structure”), 7,037,755 (“Three Dimensional Device Integration Method and Integrated Device”), 6,864,585 (“Three Dimensional Device Integration Method and Integrated Device”), and 7,807,549 (“Method for Low Temperature Bonding and Bonded Structure”). The complaint seeks unspecified monetary damages, enhanced damages, interest, fees, expenses, costs, and injunctive relief against us. On February 15, 2011, we filed a motion to dismiss Ziptronix’s allegations of willful infringement, contributory infringement, and induced infringement for failure to state a claim under the applicable pleading standards. We expect to vigorously defend ourselves against Ziptronix’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 2010 Annual Report on Form 10-K filed with the SEC on June 30, 2010. 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***

 

***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 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 that 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.

 

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***For the majority of our revenues, we depend 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, or, if applicable, their key end user customers, could result in our failure to achieve anticipated revenue for a particular period. In addition, if we are unable to retain one or more of our largest OEM, VAR or distributor customers, if we are unable to maintain our current level of revenues from one or more of these significant customers, or if our OEM, VAR or distributor customers are unable to retain one or more of their key end user customers, our business and results of operation would be impaired and our stock price could decrease, potentially significantly. Such a delay, cancellation or reduction of purchase orders or our inability to retain a key customer or several of our smaller customers could be caused by, among other things, failure to meet our customers’ demand for our products.  This has become even more challenging as our customers’ demand has continued to increase.  In fiscal 2010, approximately 60.0% of our revenues came from sales to our top five customers. In addition, in the nine months ended January 31, 2011, approximately 50.0% of our revenues came from sales to our top five customers, including two OEM customers that accounted for approximately 15.5% and 10.3% of our revenues, respectively, and one distributor customer that accounted for approximately 13.8% 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.

 

***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 ASPs 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 from time-to-time, historically we have increased and are likely to 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 60% and 68% of our revenues in fiscal 2010 and the nine months ended January 31, 2011, 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 the remainder of fiscal 2011 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 continue to believe the market for mobile phones is also relatively concentrated and the top five producers account for approximately 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,

 

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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.

 

We also expect that image sensors will become of greater importance in the notebook and webcam, entertainment, 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 could adversely affect our ability to grow our business and improve 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 imaging 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, OmniBSI and OmniBSI-2 technologies;

·                  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 imaging 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 success has been, and will continue to be, 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

 

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sensors in their products, our market share or revenues could decrease. Furthermore, to the extent that our competitors secure design wins, our ability to grow our business in the future will be impaired.

 

***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, Powerchip Technology Corporation, or PTC, 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 PTC pursuant to which we and PTC have agreed to jointly develop certain imaging pixel-related process technology and for PTC to process certain of our CMOS image sensors at PTC’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.

 

If our unit sales continue to increase during the remainder of fiscal 2011 as they did in fiscal 2010, the size of the orders we place with our foundries will increase as well. 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, may subordinate our request to the requests of other larger companies or may increase the prices they charge us.  Recently, the entire semiconductor industry, including us, has experienced supply constraints.  Due to the lack of availability of products, supply constraints have forced companies in the industry to be unable to meet customers’ product demands and to take certain actions such as allocating available products among their customers or, in some cases, increasing the prices of their products.  These actions result in harm to customer relations, the loss of sales to customers and, in some cases, the loss of future business with those customers. We have faced, and continue to face, these same challenges as we seek to meet our customers’ increasing demand for more of our products. If our customers’ demand remains at current levels or continues to increase or if for any reason our foundries are unable to provide a sufficient number of products to us on a timely basis and at acceptable yields and cost, we will experience even greater challenges related to supply constraints and may be unable to achieve future growth, which could result in our revenues, gross margins and other financial results being materially and adversely affected.

 

The current global economic conditions could materially affect our foundries and cause them to be unable to provide necessary services to us. If TSMC, PTC, 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.

 

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***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 former equity investee, for substantially all of our ceramic chip packages. In December 2009, Tong Hsing acquired ImPac and assumed control of its operations. We rely on XinTec, an investee company, 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 Tong Hsing, to perform the necessary wafer probe tests and prepare good die for use in chip-on-board packaging, a delivery format referred to as reconstructed wafer. If the current global economic conditions do not continue to improve or remain stable, these service providers’ ability to continue to fulfill our packaging, color filter processing and related requirements could be adversely affected. 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.

 

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 and cash flows.

 

***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. In addition, external factors that are outside of our control can make it difficult to accurately make such forecasts. For example, the domestic and global economic conditions that existed during fiscal 2009 and fiscal 2010 made it extremely challenging to accurately predict customer demand because demand demonstrated increased volatility.  Although customer demand for our products has steadily increased during fiscal 2011, there is no guarantee that such demand will continue to increase or remain at current levels.  If customer demand continues to be volatile, 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 place noncancelable orders with our manufacturers 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, which could damage our reputation, impair our relationships with our customers, cause us to lose one or more customers and impair 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 of 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.

 

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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.

 

***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 and cash flows 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.

 

***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 and term loans that totaled $30.2 million as of January 31, 2011. 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. We record their fair value changes in our Consolidated Statements of Income, in “Other income, net.” The associated impact on our quarterly

 

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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 and cash flows from period to period.***

 

Many of the products using our image sensors, such as mobile phones, notebooks 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 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. 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. In addition, our gross revenues in our second and third fiscal quarters have typically been comparable. However, an increase during fiscal 2010 in end-customer demand 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.

 

***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 could 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 of both our design technology and the particular foundry’s manufacturing process technology. These risks increase with our introduction of more advanced and novel products and technology, as well as with increased customer demand that requires these new products to be produced more quickly and in greater quantities than our historical volume. 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.

 

***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 the 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.

 

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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.

 

***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.

 

***Recent domestic and worldwide economic conditions adversely affected and could have future adverse effects on our business, results of operations, financial condition and cash flows.***

 

Beginning with the second half of our fiscal 2009, general domestic and global economic conditions were negatively impacted by several factors. These economic conditions resulted in our facing one of the most challenging periods in our history.

 

Although during the latter part of fiscal 2010 and throughout fiscal 2011, we have seen indications that suggest that certain major economies are returning to positive growth, it is uncertain whether such resumption of growth will be sustained. If the economic recovery slows down or even dissipates, our business, financial condition, results of operations and cash flows could be materially and adversely affected.

 

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***We may be required to record a significant charge to earnings if our goodwill, 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 January 31, 2011, our goodwill totaled approximately $1.1 million, our intangible assets totaled approximately $6.3 million and our long-term investments totaled approximately $101.7 million.

 

***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 January 31, 2011, we held cash and cash equivalents totaling $375.4 million, and short-term investments totaling $123.5 million. These assets are managed on our behalf by unrelated third parties in accordance with a cash

 

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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 January 31, 2011, we did not hold any illiquid investments and we have not realized any losses. However, ongoing uncertainties in global capital markets associated with a repricing of risk have caused disruptions in the orderly function of markets which are ordinarily characterized by 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 these types of securities at short notice, such liquidation could result in losses of principal, which would have a negative impact on our results of operations and cash flows.

 

***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. 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;

·                  implications of the ongoing general labor disputes in China;

·                  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 acquire, or invest 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;

 

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·                  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.

 

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

 

In October 2003, together with TSMC, we formed VisEra, a joint venture in Taiwan, for the purposes of providing manufacturing services. Since its formation, TSMC and we have expanded the scope of VisEra’s activities through the provision of additional funding.

 

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 December 2009, Tong Hsing acquired ImPac in a stock-for-stock exchange and we now hold shares in Tong Hsing.

 

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 a joint venture with one of our foundry partners, and we hold equity interests in two other companies from which we purchase certain manufacturing services. For the investments that we account for under the equity method, we record as part of income or expense our share of the increase or decrease in the

 

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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 resulted in the past, and could result in the future, in deconsolidation or consolidation of such entities, as the case may be, which could result in changes in our reported results.

 

***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 2010 and the nine months ended January 31, 2011, approximately 48.5% and 25.2%, respectively, of our revenues came from sales through distributors. We expect that revenues from sales through distributors will vary

 

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from year to year, but 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;

·                  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 and cash flows.

 

***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 2010 and the nine months ended January 31, 2011. 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.

 

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***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 have made and 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.

 

***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

 

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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.

 

***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 March 7, 2011, 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 March 7, 2011 was $33.26 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.

 

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**ITEM 6.   EXHIBITS**

 
| **Exhibit   Number** | ** ** | **Description** |
|----------------------|------------|-----------------|
|                 | 31.1       |            | Certification   of Chief Executive Officer pursuant to Exchange Act   Rules 13a-14(a) and 15d-14(a), as adopted pursuant to   Section 302 of the Sarbanes-Oxley Act of 2002. |
|                 | 31.2       |            | Certification   of Chief Financial Officer pursuant to Exchange Act   Rules 13a-14(a) and 15d-14(a), as adopted pursuant to   Section 302 of the Sarbanes-Oxley Act of 2002. |
|                 | 32         |            | Certifications   of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.   Section 1350, as adopted pursuant to Section 906 of the   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: March 11, 2011 |       |                                     |
|                       |       |                                     |
|                       | ** ** | By:                                      | **/s/ SHAW HONG** |
|                       |       |                                     | **Shaw Hong** |
|                       |       |                                     | *Chief Executive Officer, President and Director* |
| ** **                 | ** ** | ** **                               | *(Principal Executive Officer)* |
|                       |       |                                     |
|                       |       |                                     |
| Dated: March 11, 2011 |       |                                     |
| ** **                 | ** ** | ** **                               |
|                       | ** ** | By:                                      | **/s/ ANSON CHAN** |
|                       |       |                                     | **Anson Chan** |
|                       |       |                                     | *Chief Financial Officer* |
| ** **                 | ** ** | ** **                               | *(Principal Financial and Accounting Officer)* |

 

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**Exhibit Index**

 
| **Exhibit   Number** | ** ** | **Description** |
|----------------------|------------|-----------------|
|                 | 31.1       |            | Certification   of Chief Executive Officer pursuant to Exchange Act   Rules 13a-14(a) and 15d-14(a), as adopted pursuant to   Section 302 of the Sarbanes-Oxley Act of 2002. |
|                 | 31.2       |            | Certification   of Chief Financial Officer pursuant to Exchange Act   Rules 13a-14(a) and 15d-14(a), as adopted pursuant to   Section 302 of the Sarbanes-Oxley Act of 2002. |
|                 | 32         |            | Certifications   of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.   Section 1350, as adopted pursuant to Section 906 of the   Sarbanes-Oxley Act of 2002. |

 

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