<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 DECEMBER 31, 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 December 31, 1996, there were outstanding 40,404,363 shares of the
Registrant's Common Stock, par value $0.001 per share.
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1996
and June 30, 1996 3
Consolidated Statements of Income for the
Three Months and Six Months ended
December 31, 1996 and 1995 4
Consolidated Statements of Cash Flows for the
Six Months Ended December 31, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 27
EXHIBIT INDEX 28
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1996
------------- ----------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 70,814 $ 44,934
Short-term investments............................ 64,358 68,350
Accounts receivable, net of allowance for
doubtful accounts of $631 and $916, respectively. 25,792 20,172
Inventories....................................... 11,488 14,763
Current portion of foundry deposits............... 10,460 4,595
Deferred tax asset................................ 13,893 13,889
Prepaid expenses and other current assets......... 3,245 3,809
--------- ---------
Total current assets............................. 200,050 170,512
Property and equipment, net........................ 17,779 18,212
Foundry deposits................................... 32,660 52,000
Investment in joint venture........................ 13,696 13,696
Other assets....................................... 1,552 1,888
--------- ---------
Total assets..................................... $ 265,737 $ 256,308
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term
debt............................................. $ 6,333 $ 22,062
Accounts payable.................................. 13,928 7,887
Accrued expenses.................................. 4,955 4,824
Income taxes payable.............................. 6,603 -
Deferred revenue.................................. 464 1,053
--------- ---------
Total current liabilities........................ 32,283 35,826
Long-term debt..................................... 2,781 2,858
Deferred income taxes.............................. 6,435 6,435
Deferred rent...................................... 331 362
--------- ---------
Total liabilities................................ 41,830 45,481
--------- ---------
Stockholders' equity:
Convertible preferred stock, $0.001 par value;
2,000,000 shares authorized; none issued and
outstanding as of December 31, 1996 and
June 30, 1996................................... - -
Common stock, $0.001 par value; 60,000,000 shares
authorized; 40,404,363 and 40,196,796 shares issued
and outstanding as of December 31, 1996 and
June 30, 1996, respectively...................... 40 40
Additional paid-in capital........................ 157,296 155,751
Retained earnings................................. 66,571 55,036
--------- ---------
Total stockholders' equity....................... 223,907 210,827
--------- ---------
Total liabilities and stockholders' equity....... $ 265,737 $ 256,308
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
3
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OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------ -----------------------
1996 1995 1996 1995
----------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenues...................................... $ 47,611 $ 83,735 $ 66,537 $ 140,207
Cost of revenues.................................. 15,225 38,922 25,441 64,058
--------- --------- --------- ----------
Gross profit.................................... 32,386 44,813 41,096 76,149
Research and development expenses................. 7,860 7,498 15,954 13,403
Selling, general and administrative expenses...... 5,087 5,123 9,380 8,862
In-process research and development expenses...... - 4,837 - 4,837
--------- --------- --------- ----------
Operating income................................ 19,439 27,355 15,762 49,047
Nonoperating income............................... 850 4,076 1,984 4,439
--------- --------- --------- ----------
Income before income taxes...................... 20,289 31,431 17,746 53,486
Income taxes...................................... 7,101 13,214 6,211 22,036
--------- --------- --------- ----------
Net income...................................... $ 13,188 $ 18,217 $ 11,535 $ 31,450
--------- --------- --------- ----------
--------- --------- --------- ----------
Net income per share.............................. $ 0.31 $ 0.43 $ 0.27 $ 0.74
--------- --------- --------- ----------
--------- --------- --------- ----------
Shares used in computing net income per share..... 42,701 42,694 42,399 42,680
--------- --------- --------- ----------
--------- --------- --------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
4
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OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income....................................... $ 11,535 $ 31,450
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................... 2,633 1,252
Inventory related adjustments................... (16,590) 2,071
Equity in (income) or loss of unconsolidated
affiliates..................................... 141 (1,650)
In-process research and development............. - 4,837
Deferred income taxes........................... 277 135
Changes in operating assets and liabilities:
Accounts receivable............................ (5,620) (36,143)
Inventories.................................... 16,865 (16,621)
Foundry deposits............................... 2,075 -
Prepaid expenses and other current assets...... 564 (1,706)
Accounts payable and accrued expenses.......... 6,172 19,222
Income taxes payable, deferred revenue and
other liabilities............................. 6,706 7,001
--------- ---------
Net cash provided by operating activities.. 24,758 9,848
--------- ---------
Cash flows from investing activities:
Purchases of short-term investments............. (12,183) (56,854)
Proceeds from matured short-term investments.... 16,175 14,410
Additions to property and equipment, net........ (2,030) (7,055)
Acquisition of Pixel Magic, Inc., net of cash
acquired...................................... - (5,126)
Investment in foundry deposits.................. - (40,320)
Other assets.................................... 25 (3,346)
--------- ---------
Net cash provided by (used in) investing
activities............................... 1,987 (98,291)
--------- ---------
Cash flows from financing activities:
Issuance of debt................................. 29,706 44,335
Repayment of debt................................ (31,112) (9,870)
Issuance of common stock, net.................... 541 937
--------- ---------
Net cash provided by (used in) financing
activities................................ (865) 35,402
--------- ---------
Net increase (decrease) in cash and cash
equivalents..................................... 25,880 (53,041)
Cash and cash equivalents, beginning of period.... 44,934 125,136
--------- ---------
Cash and cash equivalents, end of period.......... $ 70,814 $ 72,095
--------- ---------
--------- ---------
Supplemental information:
Cash paid during the period:
Interest........................................ $ 268 $ 289
--------- ---------
--------- ---------
Income taxes.................................... $ (1,692) $ 14,621
--------- ---------
--------- ---------
Noncash investing and financing activities:
Cash benefit related to stock plans.............. $ 1,004 $ 4,280
--------- ---------
--------- ---------
Adjustment to foundry commitments................ $ (14,400) $ -
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
5
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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 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.
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):
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996
------------ --------
<S> <C> <C>
Purchased parts and work in process $ 7,743 $ 5,888
Finished goods 3,745 8,875
------------ --------
$ 11,488 $ 14,763
------------ --------
------------ --------
</TABLE>
6
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
4. INVENTORIES AND RELATED COSTS
Margins for the quarter ended December 31, 1996 were favorably affected
by an adjustment to cost of revenues associated with the sale of CD-ROM
controller products which had been fully reserved in the fourth quarter of
fiscal 1996. This adjustment reduced cost of revenues during the quarter by
approximately $13.0 million. Significant sales of these CD-ROM controllers,
after December 31, 1996, could result in additional adjustments to cost of
revenues in future periods. However, no estimate can be made of the amount,
if any, of any potential adjustments that may be recorded in the future.
Margins for the quarter and six month period ended December 31, 1996
were also favorably affected by manufacturing cost adjustments which reduced
cost of revenues by $1.5 million and $3.0 million, respectively, related to
the outstanding foundry agreement with Taiwan Semiconductor Manufacturing
Company.
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
27, 1995 through May 22, 1996. The first, a state court proceeding
designated as IN RE OAK TECHNOLOGY SECURITIES LITIGATION, in Santa Clara
County Superior Court in Santa Clara, California, consolidates five putative
class actions. 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 four putative class action lawsuits pending in the U.S.
District Court for the Northern District of California. These actions have
been consolidated as IN RE OAK TECHNOLOGY, INC. SECURITIES LITIGATION, Case
No. C-96-20552-SW(PVT). This action alleges certain violations of federal
securities laws and is brought on behalf of purchasers of the Company's stock
for the period July 27, 1995 through May 22, 1996.
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.
7
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
5. CONTINGENCIES (CONTINUED)
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.
6. 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. 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 cost of revenues of $1.5 million during each of the quarters
ended December 31, 1996 and September 30, 1996.
Deposits paid under the amended agreements are recorded at cost and
total approximately $43.1 million as of December 31, 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 revenues. 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.
8
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
6. FOUNDRY AGREEMENTS AND INVESTMENT IN JOINT VENTURE (CONTINUED)
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 and in
January 1997, the Company made the second payment of $25.9 million due under
this agreement. The final payment of $15.0 million under this agreement is
due in fiscal 1998.
9
<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) THAT THE INFORMATION IS OF A PRELIMINARY
NATURE AND MAY BE SUBJECT TO FURTHER ADJUSTMENT, (ii) VARIABILITY IN THE
COMPANY'S QUARTERLY OPERATING RESULTS, (iii) GENERAL CONDITIONS IN THE
SEMICONDUCTOR INDUSTRY, (iv) RISKS RELATED TO PENDING LEGAL PROCEEDINGS, (v)
DEVELOPMENT BY COMPETITORS OF NEW OR SUPERIOR PRODUCTS OR ENTRY INTO THE
COMPANY'S MARKETS OF NEW COMPETITORS, (vi) THE COMPANY'S ABILITY TO DEVELOP
AND INTRODUCE NEW PRODUCTS AT COMPETITIVE PRICE AND PERFORMANCE LEVELS, (vii)
WILLINGNESS OF PROSPECTIVE CUSTOMERS TO DESIGN THE COMPANY'S PRODUCTS INTO
THEIR PRODUCTS, (viii) AVAILABILITY OF ADEQUATE FOUNDRY CAPACITY AND ACCESS
TO PROCESS TECHNOLOGIES, (ix) THE COMPANY'S ABILITY TO PROTECT ITS
PROPRIETARY INFORMATION AND OBTAIN ADEQUATE LICENSES OF THIRD PARTY
TECHNOLOGY ON ACCEPTABLE TERMS, (x) RISKS RELATED TO USE OF INDEPENDENT
MANUFACTURERS AND THIRD PARTY ASSEMBLY AND TEST VENDORS, (xi) DEPENDENCE ON
KEY PERSONNEL, (xii) RELIANCE ON A LIMITED NUMBER OF LARGE CUSTOMERS, (xiii)
DEPENDENCE ON SALES OF CD-ROM CONTROLLER PRODUCTS, (xiv) RISKS RELATED TO
INTERNATIONAL BUSINESS OPERATIONS, (xv) VOLATILITY IN THE COMPANY'S STOCK
PRICE, (xvi) MANAGEMENT OF CHANGING OPERATIONS, (xvii) RISKS RELATED TO
PRODUCT DEFECTS, (xviii) THE ABILITY TO ATTRACT AND RETAIN QUALIFIED
MANAGEMENT AND TECHNICAL PERSONNEL AND (xix) 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 6 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.
In January 1997, Donald R. Bryson, The Company's Chief Operating
Officer, resigned as an officer and Director of the Company. Mr. Bryson will
continue as an employee of the Company through April 1997, as director of
special projects. The Company is in the process of recruiting Mr. Bryson's
successor.
10
<PAGE>
THREE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1995
NET REVENUES. The Company's net revenues in the comparison periods were
primarily derived from product sales. Net revenues decreased 43% to $47.6
million in the three months ended December 31, 1996 from $83.7 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 is primarily attributable to a change in the ordering patterns of the
CD-ROM drive manufacturers, a slowdown in the growth rate of the PC market
and the continued maturation of the CD-ROM industry. In addition, the
Company has continued to experience increased competition in the CD-ROM drive
and controller market. See "Factors That May Affect Future Results" below.
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 increased to
68.0% in the three month period ended December 31, 1996 as compared to 53.5%
during the comparable period in the prior year. Margins for the three month
period ended December 31, 1996 were favorably affected by adjustments of
approximately $13.0 million to cost of revenues associated with the sale of
products which had been fully reserved in a prior period as well as
manufacturing cost adjustments of $1.5 million related to foundry agreements.
Significant sales of these products, after December 31, 1996, could result in
additional adjustments to cost of revenues in future periods. However, no
estimate can be made of the amount, if any, of any potential adjustments that
may be recorded in the future. Excluding the impact of these adjustments,
gross margin for the three month period ended December 31, 1996 would have
been approximately 37.6%. This adjusted gross margin decreased from the
comparable period in fiscal 1996 primarily as a result of a decrease in the
ASPs of the Company's CD-ROM controller products. 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 5% to $7.9
million in the three months ended December 31, 1996 from $7.5 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 16.5% during the three months ended December 31, 1996 from 9.0% 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
11
<PAGE>
core technologies: video/graphics, MPEG imaging, audio/communication and
digital imaging. 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 in the three months ended December 31, 1996 was $5.1
million which is unchanged from the comparable three months in fiscal 1996.
However, selling, general and administrative expenses increased as a
percentage of net revenues to 10.7% in the three months ended December 31,
1996 from 6.1% during the comparable period in fiscal 1996, due primarily to
a 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.
IN-PROCESS RESEARCH AND DEVELOPMENT. In November 1995, the Company
acquired Pixel Magic, a privately-held company based in Andover,
Massachusetts for $10.5 million in cash, of which $5.0 million is contingent
upon the achievement of certain performance criteria over a three-year
period. Approximately $4.8 million of the initial cash payment was allocated
to in-process research and development and was charged to operations in the
quarter ended December 31, 1995.
NONOPERATING INCOME. During the three months ended December 31, 1996,
nonoperating income decreased to $0.9 million from $4.1 million during the
comparable three months in fiscal 1996. This decrease was primarily the
result of foreign currency transaction losses recorded in the second quarter
of fiscal 1997 compared to foreign currency transaction gains recorded in the
comparable period in fiscal 1996 both attributable primarily to the Japanese
Yen. In addition, the Company recognized a gain of approximately $0.7
million during the three months ended December 31, 1995 on an equity
investment in an unconsolidated affiliate which did not recur in the current
period.
INCOME TAXES. The overall effective tax rate for the three months ended
December 31, 1996 was 35.0%. The effective tax rate for the comparable
period of the prior fiscal year was approximately 42.0%. 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.
SIX MONTHS ENDED DECEMBER 31, 1996 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1995
NET REVENUES. The Company's net revenues in the comparison periods were
primarily derived from product sales. Net revenues decreased 53% to $66.5
million in the six months ended December 31, 1996 from $140.2 million in the
comparable period of fiscal 1996. This decrease was primarily attributable
to a decrease in unit sales and overall 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 is primarily
attributable to a change in the ordering patterns of the CD-ROM drive
manufacturers, a slowdown in the growth rate of the PC market and the
continued maturation of the CD-ROM industry. In addition, the Company has
continued to experience increased competition in the CD-ROM drive and
controller market. See "Factors That May Affect Future Results" below.
12
<PAGE>
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 increased to
61.8% in the six month period ended December 31, 1996 as compared to 54.3%
during the comparable period in the prior year. Margins for the six month
period ended December 31, 1996 were favorably affected by adjustments of
approximately $13.6 million to cost of revenues associated with the sale of
products which had been fully reserved in a prior period as well as
manufacturing cost adjustments of $3.0 million related to foundry agreements.
Significant sales of these products, after December 31, 1996, could result in
additional adjustments to cost of revenues in future periods. However, no
estimate can be made of the amount of any potential adjustments that may be
recorded in the future. Excluding the impact of these adjustments, gross
margin for the six month period ended December 31, 1996 would have been
approximately 36.9%. This adjusted gross margin decreased from the
comparable period in fiscal 1996 primarily as a result of a decrease in ASPs
of the Company's CD-ROM controller products. 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 19% to
$16.0 million in the six months ended December 31, 1996 from $13.4 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 24.0% during the six months ended December 31, 1996 from 9.6% 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. 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 6% to $9.4 million in the six months ended
December 31, 1996 from $8.9 million in the comparable six 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 14.1% in the six months
ended December 31, 1996 from 6.3% during the comparable period in fiscal
1996, due primarily to a 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.
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IN-PROCESS RESEARCH AND DEVELOPMENT. In November 1995, the Company
acquired Pixel Magic, a privately-held company based in Andover,
Massachusetts for $10.5 million in cash, of which $5.0 million is contingent
upon the achievement of certain performance criteria over a three-year
period. Approximately $4.8 million of the initial cash payment was allocated
to in-process research and development and was charged to operations in the
quarter ended December 31, 1995.
NONOPERATING INCOME. During the six months ended December 31, 1996,
nonoperating income decreased to $2.0 million from $4.4 million during the
comparable six months in fiscal 1996. This decrease was primarily the result
of a gain of approximately $1.5 million recorded during the six months ended
December 31, 1995 on an equity investment in an unconsolidated affiliate
which did not recur in the current period as well as a decrease of
approximately $0.9 million in interest income resulting from a lower average
cash balance and lower interest rates during the comparison periods.
INCOME TAXES. The overall effective tax rate for the six months ended
December 31, 1996 was 35.0%. The effective tax rate for the comparable
period of the prior fiscal year was approximately 41.2%. 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 period in 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 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.
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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 unit 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
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
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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.
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 two
patents
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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 can
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.
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.
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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 continue to 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 86% and 91%
of the Company's net revenues in the three months ended December 31, 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 market for CD-ROM controller products has
begun to mature and, therefore, it is expected that sales of such products
will be influenced by the traditional seasonality associated with the PC
market and will not continue to grow at historical rates. In addition,
there can be no assurance that the Company will be able to sustain the
current level of such product sales and 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. It is anticipated that the introduction of the
digital video decoder will impact the demand for CD-ROM controller products.
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.
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International sales, principally to Taiwan, Japan, Korea and Singapore,
accounted for approximately 95% and 99% of the Company's net revenues in the
three months ended December 31, 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.
A limited number of customers historically has accounted for a
substantial portion of the Company's net revenues. In the three months ended
December 31, 1996 and 1995, sales to the Company's top ten customers
accounted for approximately 79% and 84%, 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.
The Company's future performance depends, to a significant degree, on
the continued retention and contribution of members of the Company's senior
management as well as other key personnel. In addition, the Company is in
the process of recruiting additional senior managers and technical personnel.
Competition for these persons is intense and there can be no assurance that
the Company will be able to attract and retain qualified managers and other
personnel.
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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 December 31, 1996 consisted of approximately $135.2 million
in cash, cash equivalents and short-term investments, approximately $25.0
million in lines of credit with two Japanese financial institutions, of which
$19.2 million was available as of December 31, 1996 and approximately $11.3
million in lines of letters of credit with Taiwanese financial institutions,
of which approximately $10.2 million was available as of December 31, 1996.
During the six months ended December 31, 1996, operating activities
provided net cash of approximately $24.8 million. This cash resulted
primarily from net income of $11.5 million and a significant decrease in
inventory levels. Investing and financing activities provided cash of
approximately $1.1 million consisting primarily of net proceeds from matured
short term investments of $4.0 million and proceeds from the issuance of
common stock of $0.5 million partially offset by purchases of property and
equipment of $2.0 million and a net increase in debt of $1.5 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 $6.0
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 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. 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 cost of revenues of $1.5 million during each of the quarters
ended December 31, 1996 and September 30, 1996.
Deposits paid under the amended agreements are recorded at cost and
total approximately $43.1 million as of December 31, 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
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certain deposits may be forfeited which would result in a charge to cost of
revenues. 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 and in
January 1997, the Company made the second payment of $25.9 million due under
this agreement. The final payment of $15.0 million under this agreement is
due in fiscal 1998.
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PART II - OTHER INFORMATION
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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 27, 1995 through
May 22, 1996. The first, a state court proceeding designated as IN RE OAK
TECHNOLOGY SECURITIES LITIGATION, in Santa Clara County Superior Court in Santa
Clara, California, consolidates five putative class actions. 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 four putative class action lawsuits pending in the U.S.
District Court for the Northern District of California. These actions have
been consolidated as IN RE OAK TECHNOLOGY, INC. SECURITIES LITIGATION, Case
No. C-96-20552-SW(PVT). This action alleges certain violations of federal
securities laws and is brought on behalf of purchasers of the Company's stock
for the period July 27, 1995 through May 22, 1996.
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 (14)
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 (14)**
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)
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)
25
<PAGE>
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 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 on 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.
(14) Incorporated herein by reference to the exhibit with the same number filed
with the Company's Quarterly Report on Form 10-Q for the quarter ended
September 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 December 31, 1996.
26
<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: February 7, 1997
/S/ SIDNEY S. FAULKNER
----------------------
Sidney S. Faulkner
Vice President, Finance,
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
27
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibit Title
------- -------------
11.01 Statement regarding computation of net income per share
27.01 Financial Data Schedule
28
<PAGE>
EXHIBIT 11.01
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
-------------------------- --------------------------
1996 1995 1996 1995
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Statement of operations data:
Net income........................................... $ 13,188 $ 18,217 $ 11,535 $ 31,450
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
Weighted average number of common and
dilutive common equivalent shares used
in computations:
Common stock........................................ 40,386 38,962 40,310 38,682
Stock options and other common stock equivalents.... 2,315 3,732 2,089 3,998
---------- ----------- ---------- -----------
Shares used in computing net income per share (1)..... 42,701 42,694 42,399 42,680
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
Net income per share (2).............................. $ 0.31 $ 0.43 $ 0.27 $ 0.74
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
</TABLE>
(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>
THE 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>
<CIK> 0000824225
<NAME> OAK TECHNOLOGY INC.
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 70,814
<SECURITIES> 64,358
<RECEIVABLES> 26,423
<ALLOWANCES> 631
<INVENTORY> 11,488
<CURRENT-ASSETS> 200,050
<PP&E> 26,183
<DEPRECIATION> 8,404
<TOTAL-ASSETS> 265,737
<CURRENT-LIABILITIES> 32,283
<BONDS> 2,781
0
0
<COMMON> 40
<OTHER-SE> 223,867
<TOTAL-LIABILITY-AND-EQUITY> 265,737
<SALES> 66,537
<TOTAL-REVENUES> 66,537
<CGS> 25,441
<TOTAL-COSTS> 25,441
<OTHER-EXPENSES> 25,334
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 268
<INCOME-PRETAX> 17,746
<INCOME-TAX> 6,211
<INCOME-CONTINUING> 11,535
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,535
<EPS-PRIMARY> .27
<EPS-DILUTED> .27
</TABLE>
