<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
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 NO. 0-25298
OAK TECHNOLOGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0161486
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
139 KIFER COURT
SUNNYVALE, CALIFORNIA 94086
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(408) 737-0888
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES X NO .
--- ---
As of September 30, 1996, there were outstanding 40,357,343 shares of the
Registrant's Common Stock, par value $0.001 per share.
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Part I - Financial Information Page
- ------------------------------- ----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1996
and June 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Income for the
Three Months ended September 30, 1996 and 1995 . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the
Three Months Ended September 30, 1996 and 1995 . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . 9
Part II - Other Information
- ---------------------------
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 20
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
- ----------
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
- -------------
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1996 1996
-------------- ------------
<S> <C> <C>
Current assets: (Unaudited)
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . $ 46,851 $ 44,934
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . 69,508 68,350
Accounts receivable, net of allowance for doubtful accounts of
$914 and $916, respectively . . . . . . . . . . . . . . . . . . . 15,264 20,172
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,527 14,763
Current portion of foundry deposits. . . . . . . . . . . . . . . . . . 12,001 4,595
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . 15,316 13,889
Prepaid expenses and other current assets. . . . . . . . . . . . . . . 3,275 3,809
--------- ---------
Total current assets . . . . . . . . . . . . . . . . . . . . . . 172,742 170,512
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . 18,360 18,212
Foundry deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,760 52,000
Investment in joint venture . . . . . . . . . . . . . . . . . . . . . . . 13,696 13,696
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,705 1,888
--------- ---------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 237,263 $ 256,308
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt. . . . . . . . . . $ 5,652 $ 22,062
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,059 7,887
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,634 4,824
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,378 1,053
--------- ---------
Total current liabilities . . . . . . . . . . . . . . . . . . . . 17,723 35,826
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,821 2,858
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . 6,435 6,435
Deferred rent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 349 362
--------- ---------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . 27,328 45,481
--------- ---------
Stockholders' equity:
Convertible preferred stock, $0.001 par value; 2,000,000 shares
authorized; none issued and outstanding as of September 30, 1996 and
June 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Common stock, $0.001 par value; 60,000,000 shares authorized;
40,357,343 and 40,196,796 shares issued and outstanding as of
September 30, 1996 and June 30, 1996, respectively . . . . . . . . . . 40 40
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 156,512 155,751
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . 53,383 55,036
--------- ---------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . 209,935 210,827
--------- ---------
Total liabilities and stockholders' equity . . . . . . . . . . . $ 237,263 $ 256,308
--------- ---------
--------- ---------
See accompanying notes to consolidated financial statements.
3
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(Unaudited)
Three Months Ended
September 30,
-------------------
1996 1995
-------- --------
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . $ 18,926 $ 56,472
Cost of revenues . . . . . . . . . . . . . . . . . . . . . . 10,216 25,136
-------- --------
Gross profit. . . . . . . . . . . . . . . . . . . . . . . 8,710 31,336
Research and development expenses. . . . . . . . . . . . . . 8,094 5,905
Selling, general and administrative expenses . . . . . . . . 4,293 3,739
-------- --------
Operating income (loss) . . . . . . . . . . . . . . . . . (3,677) 21,692
Nonoperating income. . . . . . . . . . . . . . . . . . . . . 1,134 363
-------- --------
Income (loss) before income taxes . . . . . . . . . . . . (2,543) 22,055
Income taxes (benefit) . . . . . . . . . . . . . . . . . . . (890) 8,822
-------- --------
Net income (loss) . . . . . . . . . . . . . . . . . . . . $ (1,653) $ 13,233
-------- --------
-------- --------
Net income (loss) per share . . . . . . . . . . . . . . . . $ (0.04) $ 0.31
-------- --------
-------- --------
Shares used in computing net income (loss) per share . . . . 40,297 42,682
-------- --------
-------- --------
See accompanying notes to consolidated financial statements.
4
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three Months Ended
September 30,
1996 1995
-------- --------
Cash flows from operating activities:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,653) $ 13,233
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . 1,273 549
Inventory related adjustments. . . . . . . . . . . . . . . . . . (1,990) -
Equity in (income) or loss of unconsolidated affiliates. . . . . 119 (756)
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . (1,146) 135
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . 4,908 (18,255)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . 4,726 (1,264)
Foundry deposits. . . . . . . . . . . . . . . . . . . . . . . 934 -
Prepaid expenses and other current assets . . . . . . . . . . 534 (696)
Accounts payable and accrued expenses . . . . . . . . . . . . (2,018) 1,031
Income taxes payable, deferred revenue and other liabilities 312 5,077
-------- --------
Net cash provided by (used in) operating activities. . . . 5,999 (946)
-------- --------
Cash flows from investing activities:
Purchases of short-term investments. . . . . . . . . . . . . . . (11,340) (33,037)
Proceeds from matured short-term investments . . . . . . . . . . 10,182 4,938
Additions to property and equipment, net . . . . . . . . . . . . (1,336) (3,029)
Investment in foundry deposits . . . . . . . . . . . . . . . . . - (2,000)
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . (21) 203
-------- --------
Net cash used in investing activities . . . . . . . . . . . (2,515) (32,925)
-------- --------
Cash flows from financing activities:
Issuance of debt . . . . . . . . . . . . . . . . . . . . . . . . . 10,362 3,640
Repayment of debt . . . . . . . . . . . . . . . . . . . . . . . . . (12,409) (3,049)
Issuance of common stock, net . . . . . . . . . . . . . . . . . . . 480 583
-------- --------
Net cash provided by (used in) financing activities . . . . (1,567) 1,174
-------- --------
Net increase (decrease) in cash and cash equivalents . . . . . . . . 1,917 (32,697)
Cash and cash equivalents, beginning of period . . . . . . . . . . . . 44,934 125,136
-------- --------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . $ 46,851 $ 92,439
-------- --------
-------- --------
Supplemental information:
Cash paid during the period:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 107 $ 101
-------- --------
-------- --------
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20 $ 3,156
-------- --------
-------- --------
Noncash investing and financing activities:
Cash benefit related to stock plans . . . . . . . . . . . . . . . . $ 281 $ -
-------- --------
-------- --------
Adjustment to foundry commitments . . . . . . . . . . . . . . . . . $(14,400) $ -
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PREPARATION
The accompanying unaudited consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission (the "Commission"). In the opinion of management, the consolidated
financial statements reflect all adjustments (consisting only of normal
recurring adjustments) considered necessary for a fair presentation of the
consolidated financial position, operating results and cash flows for those
periods presented. The results of operations for the interim periods presented
are not necessarily indicative of the results that may be expected for the full
fiscal year or in any future period. This quarterly report on Form 10-Q should
be read in conjunction with the audited consolidated financial statements and
notes thereto for the year ended June 30, 1996, included in the Oak Technology,
Inc. (the "Company") 1996 Annual Report on Form 10-K filed with the Commission.
2. EQUITY AND NET INCOME PER SHARE
Net income per share has been computed using the weighted average number of
shares of common stock and dilutive common equivalent shares from stock options
and warrants outstanding (using the treasury stock method). All periods
presented reflect a two for one stock split that was approved by the Company's
board of directors and effected as of March 28, 1996.
In July 1996, the Company offered option holders under the 1994 Stock
Option Plan, other than Directors and Officers, the opportunity to have
outstanding options repriced to the fair market value of the Company's common
stock as of August 1, 1996. Vesting schedules for repriced options remain
unchanged; however, repriced options cannot be exercised before April 30, 1997.
On August 1, 1996, the Company canceled and reissued 1,800,370 options pursuant
to this repricing at a price of $6.50 per share.
3. BALANCE SHEET COMPONENTS
INVENTORIES
Inventories are stated at the lower of cost (first in, first out) or market
and consisted of the following (in thousands):
September 30, June 30,
1996 1996
------------- --------
Purchased parts and work in process. . . . . . . . . . $ 7,028 $ 5,888
Finished goods . . . . . . . . . . . . . . . . . . . . 3,499 8,875
-------- --------
$ 10,527 $ 14,763
-------- --------
-------- --------
6
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
4. FOUNDRY AGREEMENTS AND INVESTMENT IN JOINT VENTURE
In June and November 1995, the Company entered into agreements with Taiwan
Semiconductor Manufacturing Company ("TSMC") and Chartered Semiconductor
Manufacturing Ptd. Ltd. ("Chartered") to obtain certain additional wafer
capacity through the year 2001. The agreements called for the Company to
deposit funds with the suppliers as either a portion of the price of the
additional wafers in advance of their delivery or as a non-interest bearing
deposit to secure the availability of additional wafers.
In September and October 1996, respectively, the Company amended its
previous agreements with Chartered and TSMC. The amendments resulted in a
reduction and deferral of the Company's future wafer purchase commitments and
the elimination of required future cash deposits of approximately $73 million
under the original foundry arrangements which includes $14.4 million that was
accrued as of June 30, 1996. The Company's September 30, 1996 consolidated
balance sheet includes the impact of these amendments. The execution of these
agreements reduced the Company's wafer purchase commitments during the remainder
of calendar 1996 and resulted in a favorable manufacturing cost adjustment
recorded to costs of sales of $1.5 million during the quarter ended September
30, 1996.
Deposits paid under the amended agreements are recorded at cost and total
approximately $44.2 million as of September 30, 1996. Pursuant to the terms of
the amended agreements, this entire amount represents deposits to be used as a
portion of the price to be paid for future wafers. If the Company is not able
to use, assign, or sell the additional wafer quantities, all or a portion of
certain deposits may be forfeited which would result in a charge to cost of
sales. Under the amended agreements, required future cash deposits of
approximately $36 million due under the original agreement with Chartered could
be reinstated if certain conditions are not met. The Company currently believes
the terms and conditions of the agreement as amended will be met and that these
commitments will not be reinstated although no assurance can be given in this
regard.
In October 1995, the Company entered into a series of agreements with
United Microelectronics Corporation to form, along with other investors, a
separate Taiwanese company for the purpose of building and managing a
semiconductor manufacturing facility in the Science Based Industrial Park in
Hsin Chu City, Taiwan, Republic of China. The Company has agreed to invest
approximately $60 million for a 10% equity position in the venture. In January
1996, the Company made an initial payment of $13.7 million under this agreement.
Cash payments due under these agreements are approximately $30.0 million in
fiscal 1997 and $15.0 million in fiscal 1998.
7
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
5. CONTINGENCIES
The Company and various of its current and former officers and Directors
are parties to several lawsuits which purport to be class actions filed on
behalf of all persons who purchased or acquired the Company's stock (excluding
the defendants and parties related to them) for the period July 22, 1995 through
May 22, 1996. The first is a state court proceeding designated as IN RE OAK
TECHNOLOGY SECURITIES LITIGATION, in Santa Clara County Superior Court in Santa
Clara, California, which consolidates five putative class actions filed in Santa
Clara County Superior Court from June 6, 1996 through July 12, 1996. This
lawsuit also names as defendants several of the Company's venture capital fund
investors, two of its investment bankers and two securities analysts. The
plaintiffs allege violations of California securities laws and statutory deceit
provisions as well as breach of fiduciary duty and abuse of control.
The Company and various of its current and former officers and Directors
are also parties to the following putative class actions pending in the U.S.
District Court for the Northern District of California (i) BRUNO V. OAK
TECHNOLOGY, INC., ET AL., (filed July 9, 1996); (ii) ZAND V. TA-LIN HSU, ET
AL., (filed Sept. 4, 1996); (iii) RASKIN V. OAK TECHNOLOGY, INC., ET AL.,
(filed Aug. 22, 1996); and (iv) CORNELLE V. DAVID S. TSANG, ET AL., (filed
Sept. 5, 1996). These actions allege certain violations of federal
securities law and are brought on behalf of purchasers of the Company's stock
for varying periods of time from July 22, 1995 through May 22, 1996. The
court has designated these actions as related actions. Motions to appoint
lead plaintiffs have been filed with the court.
Additionally, various of the Company's current and former officers and
Directors are defendants in three consolidated derivative actions pending in
Santa Clara County Superior Court in Santa Clara, California, entitled IN RE OAK
TECHNOLOGY DERIVATIVE ACTION. This lawsuit asserts a claim for breach of
fiduciary duty and a claim under California securities law based upon the
officers' and Directors' trading in securities of the Company.
In all of the putative state and federal class actions, the plaintiffs are
seeking monetary damages and equitable relief. In the derivative action, the
plaintiffs are also seeking an accounting for the defendants' sales of Company
stock and the payment of monetary damages to the Company. All of these actions
are in the early stages of proceedings and the Company is currently
investigating the allegations. Based on its current information, the Company
believes the suits to be without merit and will defend its position vigorously.
No provision for any liability that may result upon adjudication has been made
in the Company's Consolidated Financial Statements.
In connection with these legal proceedings, the Company has incurred, and
expects to continue to incur, substantial legal and other expenses. Shareholder
suits of this kind are highly complex and can extend for a protracted period of
time, which can substantially increase the cost of such litigation and divert
the attention of the Company's management.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
EXCEPT FOR THE HISTORICAL FINANCIAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS QUARTERLY REPORT ON FORM 10-Q MAY BE CONSIDERED
"FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES ACT OF
1934, AS AMENDED. SUCH STATEMENTS INCLUDE DECLARATIONS REGARDING THE INTENT,
BELIEF OR CURRENT EXPECTATIONS OF THE COMPANY AND ITS MANAGEMENT. PROSPECTIVE
INVESTORS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT
GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE A NUMBER OF RISKS AND
UNCERTAINTIES; ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE INDICATED BY
SUCH FORWARD-LOOKING STATEMENTS. AMONG THE IMPORTANT FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH
FORWARD-LOOKING STATEMENTS ARE: (i) VARIABILITY IN THE COMPANY'S QUARTERLY
OPERATING RESULTS, (ii) GENERAL CONDITIONS IN THE SEMICONDUCTOR INDUSTRY,
(iii) RISKS RELATED TO PENDING LEGAL PROCEEDINGS, (iv) DEVELOPMENT BY
COMPETITORS OF NEW OR SUPERIOR PRODUCTS OR ENTRY INTO THE COMPANY'S MARKETS
OF NEW COMPETITORS, (v) THE COMPANY'S ABILITY TO DEVELOP AND INTRODUCE NEW
PRODUCTS AT COMPETITIVE PRICE AND PERFORMANCE LEVELS, (vi) WILLINGNESS OF
PROSPECTIVE CUSTOMERS TO DESIGN THE COMPANY'S PRODUCTS INTO THEIR PRODUCTS,
(vii) AVAILABILITY OF ADEQUATE FOUNDRY CAPACITY AND ACCESS TO PROCESS
TECHNOLOGIES, (viii) THE COMPANY'S ABILITY TO PROTECT ITS PROPRIETARY
INFORMATION AND OBTAIN ADEQUATE LICENSES OF THIRD PARTY TECHNOLOGY ON
ACCEPTABLE TERMS, (ix) RISKS RELATED TO USE OF INDEPENDENT MANUFACTURERS AND
THIRD PARTY ASSEMBLY AND TEST VENDORS, (x) DEPENDENCE ON KEY PERSONNEL, (xi)
RELIANCE ON A LIMITED NUMBER OF LARGE CUSTOMERS, (xii) DEPENDENCE ON SALES OF
CD-ROM CONTROLLER PRODUCTS, (xiii) RISKS RELATED TO INTERNATIONAL BUSINESS
OPERATIONS, (xiv) VOLATILITY IN THE COMPANY'S STOCK PRICE, (xv) MANAGEMENT OF
CHANGING OPERATIONS, (xvi) RISKS RELATED TO PRODUCT DEFECTS, AND (xvii) OTHER
RISKS IDENTIFIED FROM TIME TO TIME IN THE COMPANY'S REPORTS AND REGISTRATION
STATEMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING THE
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JUNE 30, 1996.
The Company designs, develops and markets high performance multimedia
semiconductors and related software to original equipment manufacturers that
serve the multimedia PC, digital video consumer electronics and digital office
equipment markets. The Company develops semiconductor products based on five
core technologies: optical storage, MPEG imaging, video/graphics,
audio/communications and digital imaging. The Company's products typically
consist of hardware, firmware and software to provide a complete solution for
customers.
The Company contracts with independent foundries to manufacture all of its
products, enabling the Company to focus on its design strengths, minimize fixed
costs and capital expenditures and gain access to advanced manufacturing
facilities. Except as described in Note 4 of Notes to Consolidated Financial
Statements, the foundries generally are not obligated to supply products to the
Company for any specific period, in any specific quantity or at a specific
price.
9
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1995
NET REVENUES. The Company's net revenues in the comparison periods were
primarily derived from product sales. Net revenues decreased 67% to $18.9
million in the three months ended September 30, 1996 from $56.5 million in the
comparable period of fiscal 1996. This decrease was primarily attributable to a
decrease in unit sales and overall average selling prices ("ASPs") of CD-ROM
controllers. The decrease in unit sales resulted from the Company receiving
substantially fewer orders for its CD-ROM controller products than in the
comparable period of fiscal 1996. The Company believes the decline in orders
for such products was primarily the result of customer decisions to reduce
inventory, an overall slowdown in the PC market, a shift in the CD-ROM industry
from 4x speed drives to 6x and 8x speed drives and increased competition in the
CD-ROM drive and controller market. International sales, principally to Taiwan,
Japan, Korea and Singapore, accounted for approximately 92% and 99% of the
Company's net revenues in the three months ended September 30, 1996 and 1995,
respectively. The Company expects that international sales will continue to
represent a substantial majority of its net revenues for the foreseeable future.
GROSS MARGIN. Cost of revenues includes the cost of wafer fabrication,
assembly and testing performed by third-party vendors and direct and indirect
costs associated with the procurement, scheduling and quality assurance
functions performed by the Company. The Company's gross margin decreased to
46.0% in the three month period ended September 30, 1996 as compared to 55.5%
during the comparable period in the prior year. This decrease in gross margin
is primarily the result of a decrease in average selling prices of the Company's
CD-ROM controller products partially offset by a favorable manufacturing cost
adjustment of $1.5 million. Excluding the effect of this favorable adjustment,
gross margin would have been 38.1% in the three month period ended September 30,
1996. The Company's overall gross margin is subject to change due to various
factors, including, among others, competitive product pricing, yields, wafer
costs, assembly and test costs and product mix. The Company expects that ASPs
for its existing products will continue to decline over time and that ASPs for
each new product will decline significantly over the life of the product. A
decline in ASPs that is not offset by a reduction in production costs or by
sales of new products with higher gross margins would decrease the Company's
overall gross margin and could materially and adversely affect the Company's
operating results.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development costs are
expensed as incurred. Research and development expenses increased 37% to $8.1
million in the three months ended September 30, 1996 from $5.9 million in the
comparable period in the prior year. This increase was principally the result
of the hiring of additional personnel and associated expenses. Research and
development expenses increased as a percentage of net revenues to 42.8% during
the three months ended September 30, 1996 from 10.5% in the comparable period in
the prior year due primarily to the significant decrease in the Company's net
revenues in the current period compared to the comparable period of fiscal 1996.
The Company will continue to invest substantial resources in research and
development in an effort to maintain its technological leadership in the CD-ROM
controller market and diversify its product development in its other core
technologies: video/graphics, MPEG imaging, audio/communication and digital
imaging.
10
<PAGE>
As a result, the Company expects to incur higher absolute research and
development expenses in the remainder of fiscal 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 15% to $4.3 million in the three months ended
September 30, 1996 from $3.7 million in the comparable three months in fiscal
1996. This increase was primarily the result of the hiring of additional
personnel and associated expenses. Selling, general and administrative expenses
increased as a percentage of net revenues to 22.7% in the three months ended
September 30, 1996 from 6.6% during the comparable period in fiscal 1996, due
primarily to significant decrease in the Company's net revenues in the
comparison periods. As a result of the continuing efforts to develop the
Company's support infrastructure, the Company expects to incur higher absolute
administrative expenses in the remainder of fiscal 1997.
NONOPERATING INCOME. During the three months ended September 30, 1996,
nonoperating income increased to $1.1 million from $0.4 million during the
comparable three months in fiscal 1996. This increase was primarily the result
of a nonrecurring foreign currency transaction losses recorded in the first
quarter of fiscal 1996 which arose from the change in the exchange rate between
the Japanese Yen and the U.S. Dollar during such quarter.
INCOME TAXES. The overall effective tax rate for the three months ended
September 30, 1996 was 35.0%. The effective tax rate for the comparable period
of the prior fiscal year was approximately 40.0%. The decrease in the effective
tax rate from the comparable period of the prior year is primarily attributable
to the effect of the reinstituted research and development tax credit on fiscal
1997 results as well as a geographical shift in the sources of taxable income
from the comparable quarter of fiscal 1996.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The following factors should be carefully considered in evaluating the
Company and its business.
The Company's operating results are subject to quarterly and other
fluctuations due to a variety of factors, including the gain or loss of
significant customers, increased competitive pressures, the timing of new
product announcements and introductions by the Company or its competitors and
market acceptance of new or enhanced versions of the Company's and its
customers' products. Other factors include the availability of foundry
capacity, fluctuations in manufacturing yields, availability and cost of raw
materials, changes in the mix of products sold, the cyclical nature of the
semiconductor industry, the market for PCs and the markets addressed by the
Company's products, seasonal customer demand, the Company's ability to diversify
its product offerings, the competitiveness of the Company's customers, the
timing of significant orders, significant increases in expenses associated with
the expansion of operations, and changes in pricing policies by the Company, its
competitors or its suppliers, including decreases in ASPs of the Company's
products. In addition, the Company's quarterly operating results could be
materially adversely affected by legal expenses incurred in connection with, or
any adverse judgment in, the Company's ongoing shareholder legal proceedings.
The Company's operating results could also be adversely affected by economic
conditions generally in various geographic areas where the Company or its
customers do business, or by order cancellations or rescheduling. These factors
are
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difficult to forecast, and these or other factors could materially affect the
Company's quarterly or annual operating results. There can be no assurance
as to the level of sales or earnings that may be attained by the Company in
any given period in the future.
The Company currently places noncancelable orders to purchase its products
from independent foundries on an approximately three month rolling basis and is
currently committed with two of its foundries for certain minimum amounts of
capacity for the next several years, while its customers generally place
purchase orders with the Company less than four weeks prior to delivery that may
be canceled without significant penalty. Consequently, if anticipated sales and
shipments in any quarter are canceled or do not occur as quickly as expected,
expense and inventory levels could be disproportionately high and the Company's
business, financial condition and results of operations for that quarter or for
the year would be materially adversely affected.
The semiconductor industry has historically been characterized by rapid
technological change, cyclical market patterns, significant price erosion,
periods of over-capacity and production shortages, variations in manufacturing
costs and yields and significant expenditures for capital equipment and product
development. In addition, the industry has experienced significant economic
downturns at various times, characterized by diminished product demand and
accelerated erosion of product prices. The Company may experience substantial
period-to-period fluctuations in operating results due to general semiconductor
industry conditions.
The Company and various of its current and former officers and Directors
are parties to certain legal proceedings. See Note 5 of Notes to Consolidated
Financial Statements. All of these actions are in the early stages of
proceedings and the Company is currently investigating the allegations. Based
on its current information, the Company believes the suits to be without merit
and will defend its position vigorously. No provision for any liability that
may result upon adjudication has been made in the Company's Consolidated
Financial Statements. In connection with these legal proceedings, the Company
has incurred, and expects to continue to incur, substantial legal and other
expenses. Shareholder suits of this kind are highly complex and can extend for
a protracted period of time, which can substantially increase the cost of such
litigation and divert the attention of the Company's management.
The markets in which the Company competes are intensely competitive and
are characterized by rapid technological change, declining ASPs and rapid
product obsolescence. The Company expects competition to increase in the
future from existing competitors and from other companies that may enter the
Company's existing or future markets with solutions that may be less costly
or provide higher performance or additional features. The Company's existing
and potential competitors include many large domestic and international
companies that have substantially greater financial, manufacturing,
technical, marketing, distribution and other resources, broader product lines
and longer standing relationships with customers than the Company. The
Company's competitors also include a number of emerging companies. Certain
of the Company's principal competitors maintain their own semiconductor
foundries and may therefore benefit from certain capacity, cost and
technological advantages. The Company believes that its ability to compete
successfully depends on a number of factors, both within and outside of its
control, including the price, quality and performance of the Company's and
its customers' products, the timing and success of new product introductions
by the Company, its customers and its competitors, the emergence of new PC
standards, the development of technical innovations, the ability to obtain
adequate foundry capacity and sources of raw materials, the
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efficiency of production, the rate at which the Company's customers design
the Company's products into their products, the market acceptance of the
products of the Company's customers, the number and nature of the Company's
competitors in a given market, the assertion of intellectual property rights
and general market and economic conditions. There can be no assurance that
the Company will be able to compete successfully in the future.
The willingness of prospective customers to design the Company's products
into their products depends to a significant extent upon the ability of the
Company to price its products at a level that is cost effective for such
customers. The markets for most of the applications for the Company's products,
particularly the PC market and the digital video consumer electronics market,
are characterized by intense price competition. As the markets for the
Company's products mature and competition increases, the Company anticipates
that ASPs on its products will decline. If the Company is unable to reduce its
costs sufficiently to offset declines in ASPs or is unable to successfully
introduce new higher performance products with higher ASPs, the Company's
operating results will be materially adversely affected. If the Company
experiences yield or other production problems or shortages of supply that
increase its manufacturing costs, or fails to reduce its manufacturing costs,
the result would be a material adverse effect on the Company's business,
financial condition and operating results.
The markets for the Company's products are characterized by evolving
industry standards, rapid technological change and product obsolescence. The
Company's performance is highly dependent upon the successful development and
timely introduction of new products at competitive price and performance levels.
Currently, the Company's financial performance is dependent upon the Company's
level of success in the CD-ROM controller market. In an effort to diversify its
product and market base, the company has invested substantial resources in
optical storage as well as a number of other core technologies: video/graphics,
MPEG imaging, audio/communication and digital imaging. There can be no
assurance that products currently under development in these new core
technologies and optical storage or any other new products will be successfully
developed or will achieve market acceptance thereby affecting the Company's
ability to achieve diversification of its product and market bases. The failure
of the Company to introduce new products successfully or the failure of new
products to achieve market acceptance would have a material adverse effect on
the Company's business, financial condition and results of operations. The
success of new product introductions is dependent on several factors, including
recognition of market requirements, product cost, timely completion and
introduction of new product designs, securing sufficient foundry capacity for
volume manufacturing of wafers, quality of new products and achievement of
acceptable manufacturing yields from the Company's contract manufacturers.
Due to the design complexity of its products, the Company has experienced delays
in completing development and introduction of new products, and there can be no
assurance that the Company will not encounter such delays in the development and
introduction of future products. There can be no assurance that the Company
will successfully identify new product opportunities and develop and bring new
products to market in a timely manner, that the Company's products will be
selected for design into the products of its targeted customers or that products
or technologies developed by others will not render the Company's products or
technologies obsolete or noncompetitive. The failure of the Company's new
product development efforts or the failure of the Company to achieve market
acceptance of its new products would have a material adverse effect on the
Company's business, financial condition and operating results.
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The Company's ability to compete is affected by its ability to protect its
proprietary information. The Company considers its technology to be proprietary
and relies on a combination of patents, trademarks, copyrights, trade secret
laws, confidentiality procedures and licensing arrangements to protect its
intellectual property rights. The Company currently has one patent granted,
eight patents pending and ten patents in preparation in the United States and
intends to seek international patents and additional United States patents on
its technology. There can be no assurance that additional patents will issue
from any of the Company's pending applications or applications in preparation,
or be issued in all countries where the Company's products may be sold, or that
any claims allowed from pending applications or applications in preparation will
be of sufficient scope or strength to provide meaningful protection or any
commercial advantage to the Company. Additionally, competitors of the Company
may be able to design around the Company's patents. The laws of certain foreign
countries in which the Company's products are or may be manufactured or sold,
including various countries in Asia, may not protect the Company's products or
intellectual property rights to the same extent as do the laws of the United
States and thus make the possibility of piracy of the Company's technology and
products more likely. There can be no assurance that the steps taken by the
Company to protect its proprietary information will be adequate to prevent
misappropriation of its technology or that the Company's competitors will not
independently develop technologies that are substantially equivalent or superior
to the Company's technology.
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights or positions, which have resulted in
significant and often protracted and expensive litigation. Although there is
currently no pending intellectual property litigation against the Company, the
Company or its foundries may from time to time be notified of claims that the
Company may be infringing patents or other intellectual property rights owned by
third parties. If it is necessary or desirable, the Company may seek licenses
under such patents or other intellectual property rights. However, there can be
no assurance that licenses will be offered or that the terms of any offered
licenses will be acceptable to the Company. The failure to obtain a license
from a third party for technology used by the Company could cause the Company to
incur substantial liabilities and to suspend the manufacture of products or the
use by the Company's foundries of processes requiring the technology.
Furthermore, the Company may initiate claims or litigation against third parties
for infringement of the Company's proprietary rights or to establish the
validity of the Company's proprietary rights. Litigation by or against the
Company could result in significant expense to the Company and divert the
efforts of the Company's technical and management personnel, whether or not such
litigation results in a favorable determination for the Company. In the event
of an adverse result in any such litigation, the Company could be required to
pay substantial damages, cease the manufacture, use and sale of infringing
products, expend significant resources to develop non-infringing technology,
discontinue the use of certain processes or obtain licenses to the infringing
technology. There can be no assurance that the Company would be successful in
such development or that such licenses would be available on reasonable terms,
or at all, and any such development or license could require expenditures by the
Company of substantial time and other resources. Patent disputes in the
semiconductor industry have often been settled through cross-licensing
arrangements. Because the Company has a limited portfolio of patents, the
Company may not be able to settle an alleged patent infringement claim through a
cross-licensing arrangement. If a successful claim is made against the Company
or its customers and a license is not made available to the Company on
commercially reasonable terms or if the Company is required to pay substantial
damages or awards, the Company's business, financial condition and operating
results would be materially adversely affected.
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The Company generally enters into confidentiality agreements with its
employees and confidentiality and license agreements with its customers and
potential customers, and limits access to and distribution of the source and
object code of its software and other proprietary information. Under some
circumstances, the Company grants licenses that give its customers limited
access to the source code of the Company's software which increases the
likelihood of misappropriation or misuse of the Company's technology.
Accordingly, despite precautions taken by the Company, it may be possible for
unauthorized third parties to copy certain portions of the Company's technology
or to obtain and use information that the Company regards as proprietary. There
can be no assurance that the steps taken by the Company will be adequate to
prevent misappropriation of its technology or to provide an adequate remedy in
the event of a breach or misappropriation by others.
Certain technology used in the Company's products is licensed from third
parties. There can be no assurance that such licenses will be available on
terms acceptable to the Company, if at all. The inability of the Company to
enter such license arrangements on acceptable terms could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company contracts with independent foundries to manufacture all of its
products, enabling the Company to focus on its design strengths, minimize fixed
costs and capital expenditures and gain access to advanced manufacturing
facilities. The Company is dependent on its foundries to allocate to the
Company a portion of their foundry capacity sufficient to meet the Company's
needs to produce products of acceptable quality and with acceptable
manufacturing yields and to deliver products to the Company in a timely manner.
These foundries fabricate products for other companies and some manufacture
products of their own design. The loss of any of these foundries as a supplier,
the inability of the Company in a period of increased demand for its products to
expand the foundry capacity of its current suppliers or qualify other wafer
manufacturers for additional foundry capacity, any inability to obtain timely
and adequate deliveries from the Company's current or future suppliers or any
other circumstances that would require the Company to seek alternative sources
of supply could delay shipments of the Company's products, which could damage
relationships with its current and prospective customers, provide an advantage
to the Company's competitors and have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's reliance on independent manufacturers and third party
assembly and testing vendors involves a number of additional risks, including
the unavailability of, or interruption in access to, certain process
technologies and reduced control over delivery schedules, quality assurance and
costs. In addition, as a result of the Company's dependence on foreign
subcontractors, the Company is subject to the risks of conducting business
internationally, including foreign government regulation and general political
risks, such as political and economic instability, potential hostilities,
changes in diplomatic and trade relationships, currency fluctuations, unexpected
changes in, or imposition of, regulatory requirements, tariffs, import and
export restrictions, and other barriers and restrictions, potentially adverse
tax consequences, the burdens of complying with a variety of foreign laws and
other factors beyond the Company's control.
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The manufacture of semiconductors is a highly complex and precise process.
Minute levels of contaminants in the manufacturing environment, defects in the
masks used to print circuits on a wafer, difficulties in the fabrication process
or other factors can cause a substantial percentage of wafers to be rejected or
a significant number of die on each wafer to be nonfunctional. Many of these
problems are difficult to diagnose and time consuming or expensive to remedy.
The Company's products are particularly complex and difficult to manufacture.
There can be no assurance that the Company's foundries will not experience
irregularities or adverse yield fluctuations in their manufacturing processes.
Any yield or other production problems or shortages of supply experienced by the
Company or its foundries could have a material adverse effect on the Company's
business, financial condition and results of operations.
Sales of the Company's CD-ROM controller products comprised 77% and 92% of
the Company's net revenues in the three months ended September 30, 1996 and
1995, respectively. Sales of CD-ROM controller products are expected to
continue to account for a substantial portion of the Company's total revenues
for the foreseeable future. The Company expects that as the market for CD-ROM
controller products matures, sales of such products will not continue to grow at
historical rates, and there can be no assurance that the Company will be able to
sustain the current level of such product sales. In addition, there can be no
assurance that the market for CD-ROM controller products in general, or the
Company's CD-ROM controller products in particular, will support the Company's
planned operations in the future. Any decrease in the overall level of sales
of, or the prices for, the Company's CD-ROM controller products, due to
introductions of products by present or future competitors, a decline in demand
for CD-ROM controller products, product obsolescence or any other reason would
have a material adverse effect on the Company's business, financial condition
and results of operations.
International sales, principally to Taiwan, Japan, Korea and Singapore,
accounted for approximately 92% and 99% of the Company's net revenues in the
three months ended September 30, 1996 and 1995, respectively. A substantial
portion of the Company's international revenues in the comparison periods were
derived from Japanese, Taiwanese and Korean manufacturers of CD-ROM drives.
Accordingly, the Company is subject to the risks of conducting business outside
of the United States. These risks include unexpected changes in, or impositions
of, legislative or regulatory requirements, delays resulting from difficulty in
obtaining export licenses for certain technology, tariffs, quotas and other
trade barriers and restrictions, longer payment cycles, greater difficulty in
accounts receivable collection, potentially adverse tax rates, the burdens of
complying with a variety of foreign laws and other factors beyond the Company's
control. The Company is also subject to general geopolitical risks in
connection with its international operations, such as political, social and
economic instability, potential hostilities and changes in diplomatic and trade
relationships. There can be no assurance that such factors will not adversely
affect the Company's operations in the future or require the Company to modify
its current business practices. In addition, the laws of certain foreign
countries in which the Company's products are or may be developed, manufactured
or sold, including various countries in Asia, may not protect the Company's
products or intellectual property rights to the same extent as do the laws of
the United States and thus make the possibility of piracy of the Company's
technology and products more likely. Most of the Company's foreign sales are
negotiated in U.S. dollars; however, invoicing is often done in local currency.
As a result, the Company may be subject to the risks of currency fluctuations.
There can be no assurance that one or more of the foregoing factors will not
have a material adverse effect on the Company's business, financial condition or
results of operations or require the Company to modify its current business
practices.
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A limited number of customers historically has accounted for a substantial
portion of the Company's net revenues. In the three months ended September 30,
1996 and 1995, sales to the Company's top ten customers accounted for
approximately 79% and 87%, respectively, of the Company's net revenues. The
Company expects that sales to a limited number of customers will continue to
account for a substantial portion of its net revenues for the foreseeable
future. The Company has experienced significant changes from year to year in
the composition of its major customer base and believes this pattern will
continue. The Company does not have long-term purchase agreements with any of
its customers. Customers generally purchase the Company's products pursuant to
cancelable short-term purchase orders. The loss of, or significant reduction in
purchases by, current major customers would have a material adverse effect on
the Company's business, financial condition and results of operations. There
can be no assurances that the Company's current customers will continue to place
orders or that existing orders will not be canceled. If sales to current
customers cease or are reduced, there can be no assurance that the Company will
be able to continue to obtain the orders from new customers necessary to offset
any such losses or reductions.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its cash requirements from
cash generated from operations, the sale of equity securities, bank lines of
credit and long-term and short-term debt. The Company's principal sources of
liquidity as of September 30, 1996 consisted of approximately $116.4 million in
cash, cash equivalents and short-term investments, approximately $40.0 million
in lines of credit with two Japanese financial institutions, of which $38.1
million was available as of September 30, 1996 and approximately $10.1 million
in lines of letters of credit with Taiwanese financial institutions, of which
approximately $6.0 million was available as of September 30, 1996.
During the three months ended September 30, 1996, operating activities
provided net cash of approximately $6.0 million. This cash resulted primarily
from the decrease of accounts receivable of $4.9 million and the decrease in
gross inventories of $5.3 million partially offset by a decrease in accounts
payable and accrued expenses of $2.0 million and a net loss of $1.7 million
recorded during the period. Investing and financing activities utilized
approximately $4.1 million consisting primarily of purchases of property and
equipment of $1.3 million, purchases of short-term investments of $1.2 million
and a net repayment of debt of $2.1 million.
The Company believes that its existing cash, cash equivalents, short-term
investments and credit facilities will be sufficient to provide adequate working
capital and to fund necessary purchases of property and equipment through at
least the next twelve months. Capital expenditures for the remainder of fiscal
1997 are anticipated to be approximately $7.0 million. The Company may also
utilize cash to acquire or invest in complementary businesses or products or to
obtain the right to use complementary technologies. From time to time, in the
ordinary course of business, the Company evaluates potential acquisitions of
such businesses, products or technologies. However, the Company has no present
understandings, commitments or agreements with respect to any material
acquisition of other businesses, products or technologies.
In June and November 1995, the Company entered into agreements with Taiwan
Semiconductor Manufacturing Company ("TSMC") and Chartered Semiconductor
Manufacturing
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Ptd. Ltd. ("Chartered") to obtain certain additional wafer capacity through
the year 2001. The agreements called for the Company to deposit funds with
the suppliers as either a portion of the price of the additional wafers in
advance of their delivery or as a non-interest bearing deposit to secure the
availability of additional wafers.
In September and October 1996, respectively, the Company amended its
previous agreements with Chartered and TSMC. The amendments resulted in a
reduction and deferral of the Company's future wafer purchase commitments and
the elimination of required future cash deposits of approximately $73 million
under the original foundry arrangements which includes $14.4 million that was
accrued as of June 30, 1996. The Company's September 30, 1996 consolidated
balance sheet includes the impact of these amendments.
Deposits paid under the amended agreements are recorded at cost and total
approximately $44.2 million as of September 30, 1996. Pursuant to the terms of
the amended agreements, this entire amount represents deposits to be used as a
portion of the price to be paid for future wafers. If the Company is not able
to use, assign, or sell the additional wafer quantities, all or a portion of
certain deposits may be forfeited. Under the amended agreements, required
future cash deposits of approximately $36 million due under the original
agreement with Chartered could be reinstated if certain conditions are not met.
The Company currently believes the terms and conditions of the agreement as
amended will be met and that these commitments will not be reinstated although
no assurance can be given in this regard.
In October 1995, the Company entered into a series of agreements with
United Microelectronics Corporation to form, along with other investors, a
separate Taiwanese company for the purpose of building and managing a
semiconductor manufacturing facility in the Science Based Industrial Park in
Hsin Chu City, Taiwan, Republic of China. The Company has agreed to invest
approximately $60 million for a 10% equity position in the venture. In
January 1996, the Company made an initial payment of $13.7 million under this
agreement. Cash payments due under these agreements are approximately $30.0
million in fiscal 1997 and $15.0 million in fiscal 1998.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and various of its current and former officers and Directors are
parties to several lawsuits which purport to be class actions filed on behalf of
all persons who purchased or acquired the Company's stock (excluding the
defendants and parties related to them) for the period July 22, 1995 through
May 22, 1996. The first is a state court proceeding designated as IN RE OAK
TECHNOLOGY SECURITIES LITIGATION, in Santa Clara County Superior Court in Santa
Clara, California, which consolidates five putative class actions filed in Santa
Clara County Superior Court from June 6, 1996 through July 12, 1996. This
lawsuit also names as defendants several of the Company's venture capital fund
investors, two of its investment bankers and two securities analysts. The
plaintiffs allege violations of California securities laws and statutory deceit
provisions as well as breach of fiduciary duty and abuse of control.
The Company and various of its current and former officers and Directors
are also parties to the following putative class actions pending in the U.S.
District Court for the Northern District of California (i) BRUNO V. OAK
TECHNOLOGY, INC., ET AL., (filed July 9, 1996); (ii) ZAND V. TA-LIN HSU, ET
AL., (filed Sept. 4, 1996); (iii) RASKIN V. OAK TECHNOLOGY, INC., ET AL.,
(filed Aug. 22, 1996); and (iv) CORNELLE V. DAVID S. TSANG, ET AL., (filed
Sept. 5, 1996). These actions allege certain violations of federal
securities law and are brought on behalf of purchasers of the Company's stock
for varying periods of time from July 22, 1995 through May 22, 1996. The
court has designated these actions as related actions. Motions to appoint
lead plaintiffs have been filed with the court.
Additionally, various of the Company's current and former officers and
Directors are defendants in three consolidated derivative actions pending in
Santa Clara County Superior Court in Santa Clara, California, entitled IN RE OAK
TECHNOLOGY DERIVATIVE ACTION. This lawsuit asserts a claim for breach of
fiduciary duty and a claim under California securities law based upon the
officers' and Directors' trading in securities of the Company.
In all of the putative state and federal class actions, the plaintiffs are
seeking monetary damages and equitable relief. In the derivative action, the
plaintiffs are also seeking an accounting for the defendants' sales of Company
stock and the payment of monetary damages to the Company. All of these actions
are in the early stages of proceedings and the Company is currently
investigating the allegations. Based on its current information, the Company
believes the suits to be without merit and will defend its position vigorously.
No provision for any liability that may result upon adjudication has been made
in the Company's Consolidated Financial Statements.
In connection with these legal proceedings, the Company has incurred, and
expects to continue to incur, substantial legal and other expenses. Shareholder
suits of this kind are highly complex and can extend for a protracted period of
time, which can substantially increase the cost of such litigation and divert
the attention of the Company's management.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith or incorporated by reference
herein.
Exhibit
Number Exhibit Title
------- -------------
3.01 The Company's Restated Certificate of Incorporation,
amended (1)
3.02 The Company's Restated Bylaws (2)
4.01 Form of Specimen Certificate for the Company's Common
Stock (3)
4.02 Amended and Restated Registration Rights Agreement
dated as of Oct. 15, 1993 among the Company and
various investors (3)
4.03 The Company's Restated Certificate of Incorporation, as
amended (See Exhibit 3.01)
4.04 The Company's Restated Bylaws (See Exhibit 3.02)
10.01 1988 Stock Option Plan, as amended and related
documents (3)*
10.02 1994 Stock Option Plan and related documents (3), and
amendment thereto dated February 1, 1996 (4)*
10.03 1994 Outside Directors' Stock Option Plan and related
documents (3)*
10.04 1994 Employee Stock Purchase Plan (3)*
10.05 401(k) Plan and related documents (3) and Amendment Number
One and Supplemental Participation Agreement thereto (5)*
10.06 Lease Agreement dated August 3, 1988 between John Arrillaga,
Trustee, or his Successor Trustee, UTA dated 7/20/77 (John
Arrillaga Separate Property Trust) as amended and Richard T.
Peery, Trustee, or his Successor Trustee, UTA dated 7/20/77
(Richard T. Peery Separate Property Trust) as amended, and
Justin Jacobs, Jr., dba Siri-Kifer Investments, a joint
venture, and the Company, as amended June 1, 1990, and
Consent to Alterations dated March 26, 1991 (lease agreement
for 139 Kifer Court, Sunnyvale, California) (3), and
amendments thereto dated June 15, 1995 and July 19, 1995 (5)
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10.07 Lease Agreement dated August 22, 1994 between John Arrillaga,
Trustee, or his Successor Trustee, UTA dated 7/20/77 (John
Arrillaga Separate Property Trust) as amended and Richard T.
Peery, Trustee, or his Successor Trustee, UTA dated 7/20/77
(Richard T. Peery Separate Property Trust) as amended, and
Justin Jacobs, Jr., dba Siri-Kifer Investments, a joint
venture, and the Company (lease agreement for 140 Kifer
Court, Sunnyvale, California) (3), and amendment thereto
dated June 15, 1995 (5)
10.08 Form of Indemnification Agreement, between the Company and
each of its Directors and executive officers
10.09 VCEP Agreement dated July 30, 1990 between the Company
and Advanced Micro Devices, Inc. (3)
10.10 Product License Agreement dated April 13, 1993 between
the Company and Media Chips, Inc., as amended September 16,
1993 (3)
10.11 Resolutions of the Board of Directors of the Company dated
July 27, 1994 setting forth the provisions of the Executive
Bonus Plan (3)(12)*
10.12 Employee Incentive Plan effective January 1, 1995 (3)*
10.13 Option Agreement between Oak Technology, Inc., and Taiwan
Semiconductor Manufacturing Co., Ltd. dated as of August 8,
1996**
10.14 Foundry Venture Agreement between the Company and
United Microelectronics Corporation dated as of October 2,
1995 (6)(12)
10.15 Fab Ven Foundry Capacity Agreement among the Company, Fab
Ven and United Microelectronics Corporation dated as of
October 2, 1995 (7)(12)
10.16 Written Assurances Re: Foundry Venture Agreement among
the Company, United Microelectronics Corporation and Fab Ven
dated as of October 2, 1995 (8)(12)
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10.17 Lease Agreement dated June 15, 1995 between John Arrillaga,
Trustee, or his Successor Trustee, UTA dated 7/20/77 (John
Arrillaga Separate Property Trust) as amended and Richard T.
Peery, Trustee, or his successor Trustee, UTA dated 7/20/77
(Richard T. Perry Separate Property Trust) as amended, and the
Company (lease agreement for 130 Kifer Court, Sunnyvale,
California) (9), and amendments thereto dated June 15, 1995
and August 18, 1995 (10)
10.18 Deposit Agreement dated November 8, 1995 between Chartered
Semiconductor Manufacturing Ltd. and the Company (11), and
Amendment Agreement (No. 1) thereto dated September 25, 1996
(13)**
11.01 Statement regarding computation of net income (loss) per share
27.01 Financial Data Schedule
_________________________
(1) Incorporated herein by reference to exhibit 3.01 of the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996.
(2) Incorporated herein by reference to exhibit 3.05 filed with the Company's
Registration Statement of Form S-1 (File No. 33-87518) declared
effective by the Securities and Exchange Commission in February 13, 1995
(the "February 1995 Form S-1").
(3) Incorporated herein by reference to the exhibit with the same number filed
with the February 1995 Form S-1.
(4) Incorporated herein by reference to Exhibit 10.1 filed with the Company's
Registration Statement on Form S-8 (File No. 333-4334) on May 2, 1996.
(5) Incorporated herein by reference to the exhibit with the same number filed
with the Company's Annual Report on Form 10-K for the year ended June 30,
1996.
(6) Incorporated herein by reference to Exhibit 2.1 filed with the Company's
Form 8-K dated October 2, 1995 (the "October 1995 form 8-K").
(7) Incorporated herein by reference to Exhibit 2.2 filed with the October 1995
Form 8-K.
(8) Incorporated herein by reference to Exhibit 2.3 filed with the October 1995
Form 8-K.
(9) Incorporated herein by reference to Exhibit 10.08 filed with the Company's
Annual Report on Form 10-K for the year ended June 30, 1995.
(10) Incorporated herein by reference to Exhibit 10.08 filed with the Company's
Annual Report on Form 10-K for the year ended June 30, 1996.
(11) Incorporated herein by reference to Exhibit 10.04 filed with the Company's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1995.
(12) Confidential treatment has been granted with respect to portions of this
exhibit.
(13) Incorporated herein by reference to Exhibit 10.17 filed with the Company's
Annual Report on Form 10-K for the year ended June 30, 1996.
* Indicates Management incentive plan.
** Confidential treatment requested as to portions of the exhibit.
(b) The Company did not file any reports on Form 8-K during the three
months ended September 30, 1996.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
OAK TECHNOLOGY, INC.
(Registrant)
Date: November 8, 1996
/S/ SIDNEY S. FAULKNER
----------------------
Sidney S. Faulkner
Vice President, Finance,
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
23
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibit Title
------- -------------
10.08 Form of Indemnification Agreement, between the Company and each
of its Directors and executive officers
10.13 Option Agreement between Oak Technology, Inc., and Taiwan
Semiconductor Manufacturing Co., Ltd. dated as of August 8,
1996**
11.01 Statement regarding computation of net income (loss) per share
27.01 Financial Data Schedule
______________________
** Confidential treatment requested as to portions of the exhibit.
24
<PAGE>
EXHIBIT 10.08
INDEMNITY AGREEMENT
This Indemnity Agreement, dated as of __________________________, 199__, is
made by and between Oak Technology, Inc., a Delaware corporation (the
"COMPANY"), and the "INDEMNITEE").
RECITALS
A. The Company is aware that competent and experienced persons are
increasingly reluctant to serve as directors, officers or agents of corporations
unless they are protected by comprehensive liability insurance or
indemnification, due to increased exposure to litigation costs and risks
resulting from their service to such corporations, and due to the fact that the
exposure frequently bears no reasonable relationship to the compensation of such
directors, officers and other agents.
B. The statutes and judicial decisions regarding the duties of directors
and officers are often difficult to apply, ambiguous, or conflicting, and
therefore fail to provide such directors, officers and agents with adequate,
reliable knowledge of legal risks to which they are exposed or information
regarding the proper course of action to take.
C. Plaintiffs often seek damages in such large amounts and the costs of
litigation may be so enormous (whether or not the case is meritorious), that the
defense and/or settlement of such litigation is often beyond the personal
resources of directors, officers and other agents.
D. The Company believes that is unfair for its directors, officers and
agents and the directors, officers and agents of its subsidiaries to assume the
risk of huge judgements and other expenses which may occur in cases in which the
director, officer or agent received no personal profit and in cases where the
director, officer or agent was not culpable.
E. The Company recognizes that the issues in controversy in litigation
against a director, officer or agent of a corporation such as the Company or its
subsidiaries are often related to the knowledge, motives and intent of such
director, officer or agent, that he is usually the only witness with knowledge
of the essential facts and exculpating circumstances regarding such matters, and
that the long period of time which usually elapses before the trial or other
disposition of such litigation often extends beyond the time that the director,
officer or agent can reasonably recall such matters; and may extend beyond the
normal time for retirement for such
<PAGE>
Oak Technology, Inc./
Indemnity Agreement
Page 2
director, officer or agent with the result that he, after retirement or in the
event of his death, his spouse, heirs, executors or administrators, may be faced
with limited ability and undue hardship in maintaining an adequate defense,
which may discourage such a director, officer or agent from serving in that
position.
F. Based upon their experience as business managers, the Board of
Directors of the Company (the "BOARD") has concluded that, to retain and attract
talented and experienced individuals to serve as directors, officers and agents
of the Company and its subsidiaries and to encourage such individuals to take
the business risks necessary for the success of the Company and its
subsidiaries, it is necessary for the Company to contractually indemnify its
directors, officers and agents and the directors, officers and agents of its
subsidiaries, and to assume for itself maximum liability for expenses and
damages in connection with claims against such directors, officers and agents in
connection with their service to the Company and its subsidiaries, and has
further concluded that the failure to provide such contractual indemnification
could result in great harm to the Company and its subsidiaries and the Company's
stockholders.
G. Section 145 of the General Corporation Law of Delaware, under which
the Company is organized ("SECTION 145"), empowers the Company to indemnify its
directors, officers, employees and agents by agreement and to indemnify persons
who serve, at the request of the Company, as the directors, officers, employees
or agents of other corporations or enterprises, and expressly provides that the
indemnification provided by Section 145 is not exclusive.
H. The Company desires and has requested the Indemnitee to serve or
continue to serve as a director, officer or agent of the Company and/or one or
more subsidiaries of the Company free from undue concern for claims for damages
arising out of or related to such services to the Company and/or one or more
subsidiaries of the Company.
I. Indemnitee is willing to serve, or to continue to serve, the Company
and/or one or more subsidiaries of the Company, provided that he is furnished
the indemnity provided for herein.
<PAGE>
Oak Technology, Inc./
Indemnity Agreement
Page 3
AGREEMENT
NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby
agree as follows:
1. DEFINITIONS.
(a) AGENT. For the purposes of this Agreement, "agent" of the
Company means any person who is or was a director, officer, employee or other
agent of the Company or a subsidiary of the Company; or is or was serving at the
request of, for the convenience of, or to represent the interests of the Company
or a subsidiary of the Company as a director, officer, employee or agent of
another foreign or domestic corporation, partnership, joint venture, trust or
other enterprise; or was a director, officer, employee or agent of a foreign or
domestic corporation which was a predecessor corporation of the Company or a
subsidiary of the Company, or was a director, officer, employee or agent of
another enterprise at the request of, for the convenience of, or to represent
the interests of such predecessor corporation.
(b) EXPENSES. For purposes of this Agreement, "expenses" include all
direct and indirect costs of any type or nature whatsoever (including, without
limitation, all attorneys' fees and related disbursements, other out-of-pocket
costs and reasonable compensation for time spent by the Indemnitee for which he
is not otherwise compensated by the Company or any third party) actually and
reasonably incurred by the Indemnitee in connection with either the
investigation, defense or appeal of a proceeding or establishing or enforcing a
right to indemnification under this Agreement or Section 145 or otherwise;
provided, however, that "expenses" shall not include any judgments, fines,
ERISA excise taxes or penalties, or amounts paid in settlement of a proceeding.
(c) PROCEEDING. For purposes of this Agreement, "proceeding" means
any threatened, pending, or completed action, suit or other proceeding, whether
civil, criminal, administrative, or investigative.
(d) SUBSIDIARY. For purposes of this Agreement, "subsidiary" means
any corporation of which more than 50% of the outstanding voting securities is
owned directly or indirectly by the Company, by the Company and one or more
other subsidiaries, or by one or more other subsidiaries.
<PAGE>
Oak Technology, Inc./
Indemnity Agreement
Page 4
2. AGREEMENT TO SERVE. The Indemnitee agrees to serve and/or continue to
serve as agent of the Company, at its will (or under separate agreement, if such
agreement exists), in the capacity Indemnitee currently serves as an agent of
the Company, so long as he is duly appointed or elected and qualified in
accordance with the applicable provisions of the Bylaws of the Company or any
subsidiary of the Company or until such time as he tenders his resignation in
writing; provided, however, that nothing contained in this Agreement is intended
to create any right to continued employment by Indemnitee.
3. LIABILITY INSURANCE.
(a) MAINTENANCE OF D&O INSURANCE. The Company hereby covenants and
agrees that, so long as the Indemnitee shall continue to serve as an agent of
the Company and thereafter so long as the Indemnitee shall be subject to any
possible proceeding by reason of the fact that the Indemnitee was an agent of
the Company, the Company, subject to Section 3(c), shall promptly obtain and
maintain in full force and effect directors' and officers' liability insurance
("D&O INSURANCE") in reasonable amounts from established and reputable insurers.
(b) RIGHTS AND BENEFITS. In all policies of D&O Insurance, the
Indemnitee shall be named as an insured in such a manner as to provide the
Indemnitee the same rights and benefits as are accorded to the most favorably
insured of the Company's directors, if the Indemnitee is a director; or of the
Company's officers, if the Indemnitee is not a director of the Company but is an
officer; or of the Company's key employees, if the Indemnitee is not a director
or officer but is a key employee.
(c) LIMITATION ON REQUIRED MAINTENANCE OF D&O INSURANCE.
Notwithstanding the foregoing, the Company shall have no obligation to obtain or
maintain D&O Insurance if the Company determines in good faith that such
insurance is not reasonably available, the premium costs for such insurance are
disproportionate to the amount of coverage provided, the coverage provided by
such insurance is limited by exclusions so as to provide an insufficient
benefit, or the Indemnitee is covered by similar insurance maintained by a
subsidiary of the Company.
4. MANDATORY INDEMNIFICATION. Subject to Section 9 below, the Company
shall indemnify the Indemnitee as follows:
<PAGE>
Oak Technology, Inc./
Indemnity Agreement
Page 5
(a) SUCCESSFUL DEFENSE. To the extent the Indemnitee has been
successful on the merits or otherwise in defense of any proceeding (including,
without limitation, an action by or in the right of the Company) to which the
Indemnitee was a party by reason of the fact that he is or was an Agent of the
Company at any time, against all expenses of any type whatsoever actually and
reasonably incurred by him in connection with the investigation, defense or
appeal of such proceeding.
(b) THIRD PARTY ACTIONS. If the Indemnitee is a person who was or is
a party or is threatened to be made a party to any proceeding (other than an
action by or in the right of the Company) by reason of the fact that the is or
was an agent of the Company, or by reason of anything done or not done by him in
any such capacity, the Company shall indemnify the Indemnitee against any and
all expenses and liabilities of any type whatsoever (including, but not limited
to, judgments, fines, EISA excise taxes and penalties, and amounts paid in
settlement) actually and reasonably incurred by him in connection with the
investigation, defense, settlement or appeal of such proceeding, provided the
Indemnitee acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the Company and its stockholders, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful.
(c) DERIVATIVE ACTIONS. If the Indemnitee is a person who was or is
a party or is threatened to be made a party to any proceeding by or the fact
that he is or was an agent of the Company, or by reason of anything done or not
done by him in any such capacity, the Company shall indemnify the Indemnitee
against any amounts paid in settlement of any such proceeding and all expenses
actually and reasonably incurred by him connection with the investigation,
defense, settlement, or appeal of such proceeding, provided the Indemnitee acted
in good faith and in a manner he reasonably believe to be in or not opposed to
the best interests of the Company and its stockholders. The Company shall
indemnify the Indemnitee against judgements, fines, and ERISA excise taxes and
penalties to the same extent and subject to the same conditions as described in
the immediately preceding sentence. Notwithstanding the foregoing, no
indemnification under this subsection 4(c) shall be made in respect to any
claim, issue or matter as to which such person shall have been finally adjudged
to be liable to the Company by a court of competent jurisdiction unless and only
to the extent that the court in which such proceeding was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such amounts which the court shall deem proper.
<PAGE>
Oak Technology, Inc./
Indemnity Agreement
Page 6
(d) ACTIONS WHERE INDEMNITEE IS DECEASED. If the Indemnitee is a
person who was or is a party or is threatened to be made a party to any
proceeding by reason of the fact that he is or was an agent of the Company, or
by reason of anything done or not done by him in any such capacity, and if prior
to, during the pendency of after completion of such proceeding Indemnitee
becomes deceased, the Company shall indemnify the Indemnitee's heirs, executors
and administrators against any and all expenses and liabilities of any type
whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes
and penalties, and amounts paid in settlement) actually and reasonably incurred
to the extent Indemnitee would have been entitled to indemnification pursuant to
Sections 4(a), 4(b), or 4(c) above were Indemnitee still alive.
(e) Notwithstanding the foregoing, the Company shall not be obligated
to indemnify the Indemnitee for expenses or liabilities of any type whatsoever
(including, but not limited to, judgments, fines, ERISA excise taxes and
penalties, and amounts paid in settlement) for which payment is actually made to
Indemnitee under a valid and collectible insurance policy of D&O Insurance, or
under a valid and enforceable indemnity clause, by-law or agreement.
5. PARTIAL INDEMNIFICATION. If the Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of any expenses or liabilities of any type whatsoever (including, but
not limited to, judgments, fines, ERISA excise taxes and penalties, and amounts
paid in settlement) incurred by him in the investigation, defense, settlement or
appeal of a proceeding, but not entitled, however, to indemnification for all of
the total amount hereof, the Company shall nevertheless indemnify the Indemnitee
for such total amount except as to the portion hereof to which the Indemnitee is
not entitled.
6. MANDATORY ADVANCEMENT OF EXPENSES. Subject to Section 8(a) below, the
Company shall advance all expenses incurred by the Indemnitee in connection with
the investigation, defense, settlement or appeal of any proceeding to which the
Indemnitee is a party or is threatened to be made a party by reason of the fact
that the Indemnitee is or was an agent of the Company. Indemnitee hereby
undertakes to repay such amounts advanced only if, and to the extent that, it
shall be determined ultimately that the Indemnitee is not entitled to be
indemnified by the Company as authorized hereby. The advances to be made
hereunder shall be paid by the Company to the Indemnitee within twenty (20) days
following delivery of a written request therefor by the Indemnitee to the
Company.
<PAGE>
Oak Technology, Inc./
Indemnity Agreement
Page 7
7. NOTICE AND OTHER INDEMNIFICATION PROCEDURES.
(a) Promptly after receipt by the Indemnitee of notice of the
commencement of or the threat of commencement of any proceeding, the Indemnitee
shall, if the Indemnitee believes that indemnification with respect thereto may
be sought from the Company under this Agreement, notify the Company of the
commencement or threat of commencement thereof.
(b) If, at the time of the receipt of a notice of the commencement of
a proceeding pursuant to Section 7(a) hereof, the Company has D&O Insurance in
effect, the Company shall give prompt notice of the commencement of such
proceeding to the insurers in accordance with the procedures set forth in the
respective policies. The Company shall thereafter take all necessary or
desirable action to cause such insurers to pay, on behalf of the Indemnitee, all
amounts payable as a result of such proceeding in accordance with the terms of
such policies.
(c) In the event the Company shall be obligated to pay the expenses
of any proceeding against the Indemnitee, the Company, if appropriate, shall be
entitled to assume the defense of such proceeding, with counsel approved by the
Indemnitee, upon the delivery to the Indemnitee of written notice of its
election so to do. After delivery of such notice, approval of such counsel by
the Indemnitee and the retention of such counsel by the Company, the Company
will not be liable to the Indemnitee under this Agreement for any fees of
counsel subsequently incurred by the Indemnitee with respect to the same
proceeding, provided that (i) the Indemnitee shall have the right to employ his
counsel in any such proceeding at the Indemnitee's expense; and (ii) if (A) the
employment of counsel by the Indemnitee has been previously authorized by
Company, (B) the Indemnitee shall have reasonably concluded that there may be a
conflict of interest between the Company and the Indemnitee in the conduct of
any such defense or (C) the Company shall not, in fact, have employed counsel to
assume the defense of such proceeding, the fees and expenses of Indemnitee's
counsel shall be at the expense of the Company.
8. EXCEPTIONS. Any other provision herein to the contrary
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement.
(a) CLAIMS INITIATED BY INDEMNITEE. To indemnify or advance expenses
to the Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by the Indemnitee and not by way of defense, unless (i) such
indemnification is
<PAGE>
Oak Technology, Inc./
Indemnity Agreement
Page 8
expressly required to be made by law, (ii) the proceeding was authorized by the
Board, (iii) such indemnification is provided by the Company, in its sole
discretion, pursuant to the powers vested in the Company under the General
Corporations Law of Delaware or (iv) the proceeding is brought to establish or
enforce a right to indemnification under this Agreement or any other statute or
law or otherwise as required under Section 145.
(b) LACK OF GOOD FAITH. To indemnify the Indemnitee for any expenses
incurred by the Indemnitee with respect to any proceeding instituted by the
Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
Indemnitee in such proceedings was not made in good faith or was frivolous; or
(c) UNAUTHORIZED SETTLEMENTS. To indemnify the Indemnitee under this
Agreement for any amounts paid in settlement of a proceeding unless the Company
consents to such settlement, which consent shall not be unreasonably withheld.
9. NON-EXCLUSIVITY. The provisions for indemnification and advancement
of expenses set forth in this Agreement shall not be deemed exclusive of any
other rights which the Indemnitee may have under any provision of law, the
Company's Certificate of Incorporation or Bylaws, the vote of the Company's
stockholders or disinterested directors, other agreements, or otherwise, both as
to action in his official capacity and to action in another capacity while
occupying his position as an agent of the Company, and the Indemnitee's rights
hereunder shall continue after the Indemnitee has ceased acting as an agent of
the Company and shall inure to the benefit of the heirs, executors and
administrators of the Indemnitee.
10. ENFORCEMENT. Any right to indemnification or advances granted by
this Agreement to Indemnitee shall be enforceable by or on behalf of
Indemnitee in any court of competent jurisdiction if (i) the claim for
indemnification or advances denied, in whole or in part, or (ii) no
disposition of such claim is made within ninety (90) days of request
therefor. Indemnitee, in such enforcement action, if successful in whole or
in part, shall be entitled to be paid also the expense of prosecuting his
claim. It shall be a defense to any action for which a claim for
indemnification is made under this Agreement (other than an action brought to
enforce a claim for expenses pursuant to Section 6 hereof, provided that the
required undertaking has been tendered to the Company) that Indemnitee is not
entitled to indemnification because of the limitations set forth in Section 4
and 8 hereof. Neither the failure of the Corporation (including
<PAGE>
Oak Technology, Inc./
Indemnity Agreement
Page 9
its Board of Directors or its stockholders) to have made a determination prior
to the commencement of such enforcement action that indemnification of
Indemnitee is proper in the circumstances, nor an actual determination by the
Company (including its Board of Directors or its stockholders) that such
indemnification is improper, shall be a defense to the action or create a
presumption that Indemnitee is not entitled to indemnification under this
Agreement or otherwise.
11. SUBROGATION. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
12. SURVIVAL OF RIGHTS.
(a) All agreements and obligations of the Company contained herein
shall continue during the period Indemnitee is an agent of the Company and shall
continue thereafter so long as Indemnitee shall be subject to any possible claim
or threatened, pending or completed action, suit or proceeding, whether civil,
criminal, arbitrational, administrative or investigative, by reason of the fact
that Indemnitee was serving in the capacity referred to herein.
(b) The Company shall require any successor to the Company (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company, expressly to assume
and agree to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform if no such succession had taken
place.
13. INTERPRETATION OF AGREEMENT. It is understood that the parties hereto
intend this Agreement to be interpreted and enforced so as to provide
indemnification to the Indemnitee to the fullest extent permitted by law
including those circumstances in which indemnification would otherwise be
discretionary.
14. SEVERABILITY. If any provision or provisions of this Agreement shall
be held to be invalid, illegal or unenforceable for any reason whatsoever, (i)
the validity, legality and enforceability of the remaining provisions of the
Agreement (including without limitation, all portions of any paragraphs of this
Agreement containing any such provision held to be invalid, illegal or
unenforceable, that are not themselves
<PAGE>
Oak Technology, Inc./
Indemnity Agreement
Page 10
invalid, illegal or unenforceable) shall not in any way be affected or impaired
thereby, and (ii) to the fullest extent possible, the provisions of this
Agreement (including, without limitation, all portions of any paragraph of this
Agreement containing any such provision held to be invalid, illegal or
unenforceable, that are not themselves invalid, illegal or unenforceable) shall
be construed so as to give effect to the intent manifested by the provision held
invalid, illegal or unenforceable and to give effect to Section 13 hereof.
15. MODIFICATION AND WAIVER. No supplement, modification or amendment of
this Agreement shall be binding unless executed in writing by both of the
parties hereto. No waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any other provisions hereof (whether or
not similar) nor shall such waiver constitute a continuing waiver.
16. NOTICE. All notices, requests, demands and other communications
under this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the party addressee or (ii) if mailed by
certified or registered mail with postage prepaid, on the third business day
after the mailing date. Addresses for notice to either party are as shown on the
signature page of this Agreement, or as subsequently modified by written notice.
17. GOVERNING LAW. This Agreement shall be governed exclusively by and
construed according to the laws of the State of Delaware as applied to contracts
between Delaware residents entered into and to be performed entirely within
Delaware.
18. CONSENT TO JURISDICTION. The Company and the Indemnitee each hereby
irrevocably consent to the jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be brought only in the state courts of the State of Delaware.
<PAGE>
Oak Technology, Inc./
Indemnity Agreement
Page 11
The parties hereto have entered into this Indemnity Agreement effective as
of the date first above written.
COMPANY:
OAK TECHNOLOGY, INC.
INDEMNITEE:
Address:
<PAGE>
EXHIBIT 10.13
OPTION AGREEMENT
BETWEEN
OAK TECHNOLOGY, INC.
AND
TAIWAN SEMICONDUCTOR MANUFACTURING CO., LTD.
AUGUST 8, 1996
<PAGE>
OPTION AGREEMENT
THIS AGREEMENT is made and becomes effective as of AUGUST 8, 1996 (the
"Effective Date") by Taiwan Semiconductor Co., Ltd. ("TSMC"), a company
organized under the laws of the Republic of China with its registered address
at No. 121, Park Ave. 3, Science-Based Industrial Park, Hsinchu, Taiwan, and
OAK Technology, Inc., a company organized under the laws of the R.O.C., with
its registered address at Rm. B, 7F, No. 370, Sec. 1, Fu-Hsing S. Rd. Taipei,
Taiwan, R.O.C. ("Customer").
RECITALS
WHEREAS, TSMC currently supplies Customer with wafers and Customer
wishes to increase the purchase volume of wafers from TSMC;
WHEREAS, in order to increase its output, TSMC must accelerate its ramp
up in Fab 3 and advance the start of Fab 4;
WHEREAS, as a condition to TSMC's acceleration of these facilities, TSMC
has asked Customer to make a capacity commitment and certain advance payment
under three option agreements;
[*
]
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and conditions
contained herein, the parties agree as follows:
1. [* ]
[*
]
[*] Confidential Treatment Requested
<PAGE>
[*
]
2. DEFINITIONS
(a) "Base Capacity" used in this Agreement shall mean the capacity that
TSMC agrees to provide, and of which Customer agrees to purchase 90%,
in addition to the Option Capacity, pursuant to this Agreement.
(b) "Customer Committed Capacity" used in this Agreement shall mean the
total capacity that Customer agrees to purchase from TSMC pursuant to
this Agreement, and is set forth in Exhibit B.
(c) "Option Capacity" used in this Agreement shall mean the firm
capacity commitment made by Customer pursuant to this Agreement, for
which capacity Customer agrees to pay TSMC liquidated damages at a
rate [* ] for any such unused capacity
pursuant to Section 6(a) below.
(d) "Option Fee" used in this Agreement shall mean Customer's deposit
balance, [* *] at TSMC upon the execution hereof as partial
prepayment of the Option Capacity to be purchased by Customer, and
for liquidated damages upon Customer's failure to purchase the Option
Capacity. Except for the return of the corresponding Option Fee under
assignment pursuant to Section 6(a), the Option Fee is not refundable.
(e) "TSMC Committed Capacity" used in this Agreement shall mean the
total capacity that TSMC agrees to provide to Customer pursuant to this
Agreement, and is set forth in Exhibit B.
(f) "Wafer Equivalent" used in this Agreement shall mean the number of
6" or 8" wafers based on the equivalency factor for 1995 Base Capacity.
For details of the equivalency factor, please refer to Exhibit A. Any
and all the capacity commitments referred to in this Agreement shall be
measured in Wafer Equivalent.
[*] Confidential Treatment Requested
<PAGE>
3. VOLUME COMMITMENT
(a) Customer agrees to purchase from TSMC the Customer Committed
Capacity, and TSMC agrees to provide to Customer the TSMC Committed
Capacity, as set forth in Exhibit B. In any calendar year, the orders
placed by Customer shall first apply to fulfill 90% of the Base
Capacity portion, and then the Option Capacity.
(b) Each month, Customer agrees to provide to TSMC a six-month rolling
forecast of the number of wafers that Customer will purchase, with the
volume for the first twelve weeks being frozen (i.e. Customer must
purchase all of the quantity forecast for the delivery in the first
twelve weeks of all forecast). The forecast must be based on wafers out
or deliveries expected to be made by TSMC.
(c) TSMC will use its reasonable effort to cause its fabs to be capable
of producing wafers of more advanced specifications, as set forth in
the TSMC Technology Road Map attached in Exhibit C.
4. WAFER PRICE
(a)[*
] Customer has the right to conduct price audit once
a year on wafer price for the preceding twelve months through an
internationally renown accounting firm, with a one-month prior written
notice to TSMC. In the event that the wafer prices for the Option
Capacity do not comply with this paragraph, TSMC will credit Customer
any difference between the actual wafer prices paid and the Average
Wafer Prices determined during the audits. TSMC will credit against
Customer [* ] Wafer Equivalent for the Option Capacity
purchased in the year 1996 and [* ] Wafer Equivalent for the
Option Capacity in the years 1997, 1998 and 1999.
(b) The parties shall negotiate in good faith each month the wafer prices
for the Option Capacity ordered for the following month, and of no
agreement may
[*] Confidential Treatment Requested
<PAGE>
be reached by the parties before the end of each month, the parties
agree to apply the wafer price used in that month to any orders placed
by Customer in the subsequent month, and submit the dispute to the
binding arbitration pursuant to Section 12 below to decide the wafer
price within two months upon submission. Under such circumstances,
neither party shall have the right to terminate this Agreement under
Section 7 below.
5. OTHER PURCHASE TERMS AND CONDITIONS
The Customer/TSMC Indemnity Agreement dated October 26, 1996 will apply
to all purchases of wafers by Customer from TSMC, except that the provisions
of this Agreement will supersede the above Agreement with respect to the
subject matter hereof. Within ninety (90) days upon execution hereof, both
parties agree to use their best efforts to negotiate and enter into a wafer
production agreement for the purchase of wafers hereunder.
6. FAILURE TO PURCHASE THE CUSTOMER COMMITTED CAPACITY; FIRST RIGHT OF REFUSAL
(a) Provided for the year 1996, if in any calendar year, for any reason,
Customer is not able to use or purchase all or a portion of the Customer
Committed Capacity of that year, or any other year(s) during the term
of this Agreement, Customer shall promptly notify TSMC of such in
writing and first offer TSMC such Capacity for sales to any third
parties. In addition to its right to terminate this Agreement under
Section 7(b) below, TSMC may, at its option, accept such offer, in whole
or in part, within thirty (30) days following Customer's notification.
In the event that TSMC decides not to accept such offer, Customer may
assign such unused Customer Committed Capacity for that calendar year or
this Agreement (including the right to purchase the Customer Committed
Capacity for the remaining term of this Agreement) to any third parties
acceptable to TSMC, within two months upon TSMC's written notice that it
will not accept such offer, and if Customer fails to do so, TSMC has the
right to deduct from the Option Fee [* ]
times the unused Option Capacity for the applicable year as liquidated
damages, and TSMC is entitled to sell or use any unused capacity
thereafter. Any unused
[*] Confidential Treatment Requested
<PAGE>
Customer Committed Capacity for 1996 shall be carried forward to the
year 1997 and counted as additional Option Capacity for 1997.
(b) If any portion of this Agreement or the whole Agreement is assigned
to any third parties acceptable to TSMC pursuant to this Section 6(a)
above, Customer shall cause such third parties to abide by the terms
and conditions of this Agreement, and TSMC will return to Customer the
portion of the Option Fee corresponding to the assigned Option Capacity
at the same rates as set forth in Section 4(a).
7. TERM AND TERMINATION
(a) The term of this Agreement shall commence from the Effective Date,
and continue until December 31, 1999, or the date of total consumption
of the Option Fee pursuant to this Agreement, whichever is earlier.
(b) TERMINATION FOR OTHER BREACH OR FOR BANKRUPTCY
Either party may terminate this Agreement if the other party breaches
any material provisions of this Agreement and does not cure or remedy
such breach within ninety (90) days of receiving written notice of such
breach, or becomes the subject of a voluntary or involuntary petition in
bankruptcy or any proceeding relating to insolvency, receivership or
liquidation, if such petition or proceeding is not dismissed with
prejudice within sixty (60) days after filing.
(c) EFFECT OF TERMINATION
Both parties shall remain liable to the other party for any outstanding
and matured rights and obligations at the time of termination.
8. LIMITATION OF LIABILITY
In no event shall either party be liable for any indirect, special,
incidental or consequential damages (including loss of profits and loss of
use) resulting from, arising out of or in connection with the performance or
failure to perform under this Agreement, or resulting from, arising out of
or in connection with TSMC's
<PAGE>
producing, supplying, and/or sale of the wafers, whether due to a breach
of contract, breach of warranty, tort, or negligence of TSMC, or otherwise.
9. NOTICE
All notices required or permitted to be sent by either party to the other
party under this Agreement shall be sent by registered mail postage prepaid,
or by personal delivery, or by fax. Any notice given by fax shall be
followed by a confirmation copy within ten (10) days. Unless changed by
written notice given by either party to the other, the addresses and fax
numbers of the respective parties shall be as follows:
To TSMC:
TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY, LTD.
No. 121, Park Avenue 3
Science-Based Industrial Park
Hsinchu, Taiwan
Republic of China
To Customer:
OAK Technology, Inc.
Rm. B, 7F, No. 370
Sec. 1, Fu-Hsing S. Rd.
Taipei, Taiwan
Republic of China
10. ENTIRE AGREEMENT
This Agreement, including Exhibits A-C, constitutes the entire agreement
between the parties with respect to the subject matter hereof, and
supersedes and replaces all prior or contemporaneous understanding,
agreements, dealings and negotiations, oral or written, regarding the
subject matter hereof. No modification, alteration or amendment of this
Agreement shall be effective unless in writing and signed by both parties.
No waiver of any breach or failure by either party to enforce any provision
of this Agreement shall be deemed a waiver
<PAGE>
of any other or subsequent breach, or a waiver of future enforcement of
that or any other provision.
11. GOVERNING LAW
This Agreement will be governed by and interpreted in accordance with the
laws of the Republic of China.
12. ARBITRATION
Each party will make the best efforts to resolve amicably any disputes or
claims under this Agreement among the parties. In the event that a
resolution is not reached among the parties within thirty (30) days after
written notice by any party of the dispute or claim, the dispute or claim
shall be finally settled by binding arbitration in Taipei under the Rules
of the ROC Commercial Arbitration Act by three (3) arbitrators appointed
in accordance with such rules. The arbitration proceeding shall be conducted
in English. Judgment on the award rendered by the arbitrator may be entered
in any court having jurisdiction thereof.
13. ASSIGNMENT
This Agreement shall be binding on and inure to the benefit of each party
and its successors, and except that Customer may assign this Agreement under
Section 6 above, neither party shall assign any of its rights hereunder, nor
delegate its obligations hereunder, to any third party, without the prior
written consent of the other.
14. CONFIDENTIALITY
Both parties shall keep in strict confidence the existence or contents
of this Agreement and take the best precaution possible to prevent any
unauthorized disclosure or use thereof. Both parties agree that no
disclosure of this Agreement or any matter relating thereto may be made
without the disclosing party first providing the proposed disclosure to the
other party two weeks in advance for consent. In the event disclosure is
required by laws or governmental regulations.
<PAGE>
the disclosing party shall provide the other party the opportunity to
protest, participate in preparing disclosure or make reasonable changes
thereto.
15. FOUNDRY SOURCE
Customer shall use TSMC as the primary foundry source to manufacture all of
its products provided that TSMC offers competitive pricing, delivery and
technology.
16. FORCE MAJEURE
Neither party shall be responsible for delays or failure in performance
resulting from acts beyond the reasonable control of such party. Such acts
shall include but not limited to acts of God, war, riot, labor stoppages,
governmental actions, fires, floods, and earthquakes.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first stated above.
TAIWAN SEMICONDUCTOR OAK Technology, Inc.
MANUFACTURING CO., LTD.
BY: /s/ KL FOR DON BROOKS BY: /s/ DAVID D. TSANG
--------------------- ------------------
Donald W. Brooks David Tsang
President President
<PAGE>
Exhibit A
[ * ]
[*] Confidential Treatment Requested
<PAGE>
Exhibit B
[ * ]
[*] Confidential Treatment Requested
<PAGE>
Exhibit C
[ * ]
[*] Confidential Treatment Requested
<PAGE>
EXHIBIT 11.01
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF NET INCOME (LOSS) PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended
September 30,
-----------------
1996 1995
-------- -------
Statement of operations data:
Net income (loss) . . . . . . . . . . . . . . . . . . . $(1,653) $13,233
-------- -------
-------- -------
Weighted average number of common and
dilutive common equivalent shares used
in computations:
Common stock . . . . . . . . . . . . . . . . . . . 40,297 37,588
Stock options and other common stock equivalents . - 5,094
-------- -------
Shares used in computing net income (loss) per share (1). . 40,297 42,682
-------- -------
-------- -------
Net income (loss) per share (2) . . . . . . . . . . . . . . $ (0.04) $ 0.31
-------- -------
-------- -------
(1) Shares used in computing net income per share for prior periods have been
restated to reflect the impact of a two for one stock split approved by the
Company's shareholders and effective as of March 28, 1996.
(2) The difference between the primary and fully diluted shares used in
computing net income per share is not material.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS & CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 46,851
<SECURITIES> 69,508
<RECEIVABLES> 16,178
<ALLOWANCES> 914
<INVENTORY> 10,527
<CURRENT-ASSETS> 172,742
<PP&E> 25,532
<DEPRECIATION> 7,172
<TOTAL-ASSETS> 237,263
<CURRENT-LIABILITIES> 17,723
<BONDS> 2,821
0
0
<COMMON> 40
<OTHER-SE> 209,895
<TOTAL-LIABILITY-AND-EQUITY> 237,263
<SALES> 18,926
<TOTAL-REVENUES> 18,926
<CGS> 10,216
<TOTAL-COSTS> 10,216
<OTHER-EXPENSES> 12,387
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58
<INCOME-PRETAX> (2,543)
<INCOME-TAX> (890)
<INCOME-CONTINUING> (1,653)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,653)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
