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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended June 30, 1997 Commission File No. 0-25298
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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 of organization) Identification No.)
139 KIFER COURT 94086
SUNNYVALE, CALIFORNIA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 737-0888
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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 past 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference to Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $393,381,158 as of August 29, 1997, based upon the
closing price of the Registrant's Common Stock on the Nasdaq National Market
reported for August 29, 1997. Shares of Common Stock held by each executive
officer and Director and by each person who beneficially owns more than 5% of
the outstanding Common Stock have been excluded in that such persons may under
certain circumstances be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination of affiliate
status for any other purpose.
41,732,212 shares of the Registrant's $.001 par value Common Stock were
outstanding at August 29, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents (or portions thereof) are incorporated by reference into
the Parts of this Form 10-K noted:
Part III incorporates by reference from the definitive proxy statement for the
Registrant's 1997 Annual Meeting of Stockholders to be filed with the Commission
pursuant to Regulation 14A not later than 120 days after the end of the fiscal
year covered by this Form.
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PART I
ITEM 1. BUSINESS
EXCEPT FOR THE HISTORICAL FINANCIAL INFORMATION CONTAINED HEREIN, THE
MATTERS DISCUSSED IN THIS ANNUAL REPORT ON FORM 10-K 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. 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 THE ENTRY OF NEW COMPETITORS INTO THE COMPANY'S MARKETS, (vi) THE
COMPANY'S ABILITY TO DIVERSIFY ITS PRODUCT AND MARKET BASE BY DEVELOPING AND
INTRODUCING NEW PRODUCTS WITHIN DESIGNATED MARKET WINDOWS 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) ABILITY OF THE
COMPANY TO MAINTAIN ADEQUATE PRICE LEVELS AND MARGINS WITH RESPECT TO ITS
PRODUCTS, (xvi) MANAGEMENT OF CHANGING OPERATIONS RELATED TO THE COMPANY'S
ATTEMPT TO DIVERSIFY ITS PRODUCT AND MARKET BASE, (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.
GENERAL
Oak Technology, Inc. (the "Company") designs, develops and markets high-
performance integrated semiconductors and related software solutions to original
equipment manufacturers (OEMs) worldwide that serve the PC, consumer electronics
and digital office equipment markets. The Company provides semiconductor
products for these markets by leveraging its expertise in 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 was incorporated in California on July 2, 1987 and
reincorporated in Delaware on February 8, 1995. The Company's principal
executive offices are located at 139 Kifer Court, Sunnyvale, California 94086
and its telephone number is (408) 737-0888. The Company has wholly owned
subsidiaries in Japan (Oak Technology K.K.), Taiwan (Oak Technology Taiwan) and
Andover, Massachusetts (Pixel Magic, Inc.). Except where otherwise indicated,
references to the "Company" refer to Oak Technology, Inc., a Delaware
corporation, its California predecessor and their subsidiaries.
BUSINESS STRATEGY
The Company's objective is to be a leading supplier of high-performance,
integrated semiconductors and related software that address segments of the PC,
consumer electronics, and digital office equipment markets. The Company's
strategy for achieving this objective includes the following elements:
MAINTAIN AND LEVERAGE LEADERSHIP POSITION IN CD-ROM MARKET AND EXPAND INTO
ADDITIONAL OPTICAL STORAGE MARKET SEGMENTS
The Company pioneered the IDE/ATAPI CD-ROM controller chip in 1993 and is
one of the industry's largest merchant suppliers of CD-ROM controllers. The
Company has established customer relationships with many of the leading CD-ROM
drive manufacturers and, through these relationships, seeks to obtain input
directly from its customers regarding the optimal features for its next
generation of optical storage controllers. Based on such input, the Company has
invested substantial resources in developing and introducing to market CD-ROM
controllers with advanced features and higher levels of integration. During the
fiscal year ended June 30, 1997 ("fiscal 1997"), the Company began to expand
into additional optical storage market segments with the introduction of
optical storage semiconductors for use in CD-Recordable (CD-R) and CD-ReWritable
(CD-RW) drives. The Company is seeking to leverage its current leadership
position in the CD-ROM and CD-R/RW controller markets by pursuing the
development of additional optical storage semiconductors for use in such
emerging markets as DVD-ROM drives and DVD players.
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DIVERSIFY PRODUCT OFFERINGS AND GEOGRAPHIC MARKETS
The Company's revenue during the last three fiscal years has consisted
primarily of sales of CD-ROM controllers to CD-ROM drive manufacturers in Asia.
In addition to introducing optical storage products for the CD-R/RW markets,
during fiscal 1997, the Company increased its presence in both the consumer
electronics market with its MPEG-1 product and the introduction of its MPEG-2
product and in the emerging digital office equipment market with the
introduction of the PM-44 and PM-35 through its Pixel Magic subsidiary. In
addition, in fiscal 1997, the Company announced new audio/communications and
video/graphics products. If these new products are successfully designed-in,
brought to production, and the Company's customers are successful with their
products utilizing the Company's products, the Company's overall business should
become diversified among a broader spectrum of customers, geographic regions,
and markets.
USE THE COMPANY'S FIVE CORE TECHNOLOGIES TO DEVELOP INTEGRATED PRODUCTS
The Company uses its five core technologies - optical storage, MPEG
imaging, video/graphics, audio/communications and digital imaging - to develop
products for three market segments: PC, consumer electronics, and digital office
equipment. In these market segments, the Company has seen an increased demand
for multiple functionalities to be contained in a single product. The Company
believes leading-edge technology in multiple areas is required for the
development of integrated, high-performance, low-cost solutions for these
markets. The Company has several integrated products under development which
leverage a combination of its core technologies.
PROVIDE COMPREHENSIVE SOLUTIONS
The Company's multimedia semiconductor products are subsystems that include
both hardware and software to provide a complete solution for customers. The
Company has committed substantial resources to the development of its software
technology and believes that this technology provides it with a significant
competitive advantage. The Company maintains software compatibility for each
successive generation of its products. As a result, its firmware and device
drivers are easily upgraded to include support for the enhanced features of the
Company's next-generation semiconductor products. The Company's device drivers
are designed to simplify installation and end-user operation, enabling its
customers to offer products with "plug and play" capabilities.
ACCELERATE CUSTOMERS' TIME TO MARKET
Being early to market is critical to capturing market share and profits.
The Company builds relationships with key customers and seeks to provide them
with early access to the Company's product technologies, thereby assisting
customers in reaching their markets quickly. By providing integrated hardware
and software as well as engineering reference boards complete with device
drivers and firmware, the Company can assist a customer in shortening the design
time required prior to volume production. Furthermore, by providing a
comprehensive hardware and software solution, the Company enables its customers
to concentrate on system differentiation.
PRODUCTS
The Company offers or has introduced products based on five core
technologies: optical storage, MPEG imaging, video/graphics,
audio/communications, and digital imaging.
OPTICAL STORAGE
The Company began shipping its proprietary interface CD-ROM controller, the
OTI-012, in January 1993. In October 1993, the Company began production
shipments of an IDE/ATAPI CD-ROM controller, the OTI-011C followed by the OTI-
011D. Today, the Company is supplying the industry's fastest controller in
production volume, the OTI-912, supporting transfer rates up to 40X. Recently
the Company introduced the OTI-9220, the first device to integrate four major
CD-ROM functions for a single-chip solution. The Company has also expanded into
new optical storage market segments with its CD-R/W and CD-R products.
- OTI-910 IDE/ATAPI CD-ROM CONTROLLER. The OTI-910 provides a
significantly faster data throughput than the OTI-011 by transferring data
across the IDE interface in ATAPI Mode 3. The OTI-910 also supports multi-block
transfer across the IDE bus, which allows the controller to increase data
transfer rates as well as system performance. In addition, the OTI-910 provides
Direct Memory Access (DMA) support. The Company has experienced and will
continue to experience a sharp decline in sales of this product as the Company's
customers require optical storage controllers with faster transfer rates and
higher performance and advance features such as those exhibited in the Company's
OTI-911 and OTI-912 products.
- OTI-911 IDE/ATAPI CD-ROM CONTROLLER. Based upon the OTI-011 and
OTI-910, this controller allows for increased disc speed and reduces CPU
utilization. In addition, the firmware for this controller takes advantage of
improvements made in device drivers included in the latest versions of Microsoft
Windows 95, NT, and IBM OS/2. This firmware increases performance and lowers
system cost by supporting lower speed DRAM. Sales of the
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OTI-911 have begun to decline and the Company expects that sales will continue
to decline as the Company's customers require optical storage controllers with
faster transfer rates, higher perfomance and advance features such as exhibited
by the Company's OTI-912 product.
- OTI-912 IDE/ATAPI CD-ROM CONTROLLER. This high-performance block decoder
supports a transfer rate of 40X enabling 16X pure constant angular velocity
("CAV") CD-ROM drives. These CAV drives provide higher average transfer rates
and faster seek times, and their constant speed produces less motor stress. The
chip also includes an industry first known as "nX-to-1X" audio playback, which
allows the device to read audio data at an 8X rate, buffer the data, and play
the data back at a 1X rate.
- OTI-9220 IDE/ATAPI FOUR-IN-ONE CD-ROM CONTROLLER. The OTI-9220 combines
four major functions of a CD-ROM drive (CD-DSP, servo, block decoder, and 1Mb of
DRAM) to deliver an industry-first single-chip solution. Manufacturers of CD-
ROM drives for notebook computers and desktop systems will now be able to
utilize an "all-in-one" solution combining proven discrete components from a
single source while also reducing system cost, size, and power requirements.
- OTI-975 CD-RECORDABLE, REWRITABLE CONTROLLER. The OTI-975 is a high-
performance block decoder/encoder device for IDE CD-R/RW subsystems. The OTI-
975's read functions include CD data de-scrambling, real-time error correction
and data transfer to the host interface. The OTI-975's write functions include
block encoding, data scrambling, C3 error correction byte generation and data
transfer from the host interface.
MPEG IMAGING
The Company believes compression/decompression technology will be required
in many of its future multimedia products targeted for the PC and consumer
electronics markets. The Company currently offers two imaging decompression
products: an integrated MPEG-1 audio/video decoder with CD-ROM interface, and an
MPEG-2 video/Dolby Digital audio decoder. In addition, the Company has
developed a software DVD environment with its Interactive DVD Browser-TM-.
- OTI-207 MPEG-1 AUDIO/VIDEO DECODER. The OTI-207 is a single chip MPEG-1
audio and video decoder with an integrated CD-ROM controller. Targeted for use
in Video CD players, it reduces the design complexity and implementation cost
compared to non-integrated solutions.
- TROIKA-TM- MPEG-2 VIDEO/DOLBY DIGITAL AUDIO DECODER. The Troika
integrated circuit is a single-chip solution for DVD and DVD-PC systems that
require MPEG decompression. The Troika chip provides real-time MPEG-2 and MPEG-1
video decompression, incorporated with Dolby Digital (AC-3), and Linear PCM
(LPCM) audio decompression. Sub-picture decoding, DCC, Closed Caption, DSI, PCI,
and HLI parsing are provided for graphical interface to full-motion video, and
OSD and Digest functions are provided for user-interface graphics. Full-motion
video editing formats such as letterbox, pan & scan, and unaided 3:2 pull-down
are supported by Troika.
- INTERACTIVE DVD BROWSER-TM-. The Interactive DVD Browser (IDB-TM-)
software product provides a complete DVD environment for the PC. It is fully
compliant with Windows 95 ActiveMovie 1.0. The Interactive DVD Browser is
capable of supporting software, hardware, and hybrid DVD implementations on the
PC.
VIDEO/GRAPHICS
Video/graphics accelerators complement the CPU by relieving it of the
graphics processing tasks that it would otherwise be required to perform. The
Company's graphics controllers deliver powerful video/graphics acceleration
capabilities to consumer and business PCs. The Company's most recent
introduction to this market, the Warp-TM- 5 integrated circuit, is a 64-bit 3D
graphics accelerator that sets a new benchmark in image quality for 3D game
applications. The Company currently offers the following video/graphics
accelerators:
- EON-TM- OTI-64217. The Eon integrated circuit is a 64-bit
video/graphics accelerator with an integrated 170Mhz RAMDAC and supports both
EDO memory as well as higher performance SGRAM memory. The device's single-
clocked, pipelined GrafixPump-TM- architecture provides maximum performance
from display memory and features acceleration for the Microsoft Direct3DTM
specification. Its integrated VMI-compliant (VESA Multimedia Interface) bus
provides an interface to industry-standard multimedia components.
- OTI-64017. The OTI-64017 is based upon the OTI-64217 but does not
include the 64217's external bus interfaces to other multimedia devices. The
OTI-64017 is ideally suited for business PCs and entry-level consumer PCs which
require high-performance 2D graphics with support for DirectX applications.
To date, the Company has failed to achieve any design wins with either the
OTI-64217 or the OTI-64017 product and consequently, has made extremely limited
sales of these products. As 2D graphic accelerators are rapidly becoming
obsolete due to the availability and competitive pricing of high performance 3D
graphics accelerators, the Company does not expect any significant sales from
these products.
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- WARP 5 (Windows Accelerator and Rendering Processor). Utilizing several
innovative industry-first techniques, the WARP 5 integrated circuit sets a new
benchmark in image quality, delivering flight simulator-like 3D graphics to
mainstream PCs. A highly integrated solution, the WARP 5 integrated circuit is a
full-featured 3D graphics accelerator that combines a high-performance 2D GUI
accelerator, VGA, dual-clock generator, and RAMDAC functions on a single chip.
The WARP 5 chip is fully pin-compatible with Oak's OTI-64217 Eon 2D GUI
accelerator.
AUDIO/COMMUNICATIONS
The growth of multimedia PCs and the ability to connect to the Internet
have increased the need for audio and communication capabilities on the PC as
standard features. The Company offers the following audio/ communications
products:
- TELAUDIA3D-TM- OTI-611. The TelAudia integrated circuit is a
programmable DSP (digital signal processor) audio accelerator with an integrated
PCI bus master interface. Audio features provided by downloadable microcode
include: wavetable synthesis, multichannel digital and MPEG-decoded audio
mixing, hardware acceleration for Microsoft DirectSound-TM- 2D, and true head-
related transfer function (HRTF) 3D sound. The TelAudia chip also provides
complete PC communication capabilities with hardware support for a Host Signal
Processing (HSP)-based V.34 fax/modem. It includes transmit and receive buffers
for the modem, in addition to the modem codec and DAA interfaces.
- AUDIA3D-TM- OTI-610. The Audia3D integrated circuit is an audio-only
version of the TelAudia chip.
DIGITAL IMAGING
With the Company's acquisition of Pixel Magic in 1995, the Company now
offers compression/ decompression and image processing technology for digital
office equipment products, such as scanners, printers, fax machines, and
multifunction peripherals. The Company currently offers the following digital
imaging products:
- PM-1V (OTI-95C71). The PM-1V is a high speed bi-tonal image processor
which provides single-pass compression or decompression of image data in G3 and
G4 formats.
- PM-2M. The PM-2m is a high-speed bi-tonal image processor with
multitasking capability. It provides single pass compression or decompression,
scaling and rotation of image data in G3, G4 and JBIG formats.
- PM-2MC. This is a compression-only version of the PM-2m.
- PM-44. The PM-44 is a programmable high-speed image processing device
specifically designed for use in imaging applications. Based on a single
instruction, multiple data path (SIMD) architecture, the PM-44 is designed to
handle image data of any pixel depth. Programmable via downloadable microcode,
the PM-44 can execute scanner, printer, copier and fax imaging algorithms. A
library of imaging algorithms and a development kit for custom algorithm
creation are available.
- PM-35. The PM-35 is a fixed function JPEG (Joint Photographic Experts
Group) compression and decompression processor designed to sustain a data rate
of up to 70Mbytes/second. It is suited for peripheral-based applications such
as color copiers, scanners, and multifunction peripherals.
SOFTWARE TECHNOLOGY
The Company's products typically include software in addition to
semiconductors. The Company typically provides related software with its
hardware as part of its comprehensive solutions. Substantial engineering
resources have been committed to the development of the Company's software.
The Company's software technology consists of its firmware, device drivers,
BIOS and end-user oriented installation and control software. The Company
maintains software compatibility for each successive generation of its products.
As a result, its firmware and device drivers are more easily upgraded to include
support for the enhanced features of next-generation products.
Software is a key factor in the performance of the Company's products.
Through close cooperation between the Company's software and hardware engineers,
new products are designed to allow the software and hardware to complement each
other. Specific hardware functions are often added to designs to allow the
software engineers to develop software to optimize these functions and therefore
increase overall performance. For example, the Company's CD-ROM firmware
provides low CPU utilization, which improves the overall performance of the CD-
ROM drive.
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MANUFACTURING AND DESIGN METHODOLOGY
MANUFACTURING
The Company contracts with independent foundries to manufacture all of
its semiconductor 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's primary suppliers under
such arrangements during fiscal 1997 were Taiwan Semiconductor Manufacturing
Company ("TSMC") and LG Semicon Co. Ltd. in Korea. The Company also uses
wafer fabrication facilities at United Integrated Circuits Corporation
("UICC"),United Microelectronics Corporation, Chartered Semiconductor
Manufacturing Pte. Ltd. ("Chartered"), Rohm, NEC, and Sony. Except as
described in the paragraphs below, 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, except as may be provided in a particular
purchase order.
In June and November 1995, the Company entered into agreements with TSMC
and Chartered to obtain certain additional wafer capacity through the year 2001
(see Note 7 of Notes to Consolidated Financial Statements). The agreements call
for the Company to commit to certain future wafer purchases and 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. The price of such wafers will be determined
in the future periods in which specific orders are actually placed. If the
Company is not able to use, assign, or sell the additional wafer quantities, all
or a portion of the deposits may be forfeited.
In October 1996, the Company amended its previous agreement with TSMC
resulting in a reduction of approximately $73 million of the Company's future
wafer purchases required under the original agreement. Under the amended
agreement, no additional prepayment is required; however, the Company must
utilize the entire amount of the prepayment paid to date through a certain
committed amount of wafer purchases in the calendar years 1997, 1998, and
1999 or the prepayment will be forfeited.
In September 1996 and April 1997, the Company amended its agreement with
Chartered. The amendments resulted in a reduction of the Company's future wafer
purchase commitments and the elimination of required future cash deposits under
the original agreement of approximately $36 million. Under the amended
agreement, the required future cash deposits of approximately $36 million 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.
The Company recorded $3.0 million in cost of sales during fiscal 1996
associated with manufacturing cost adjustments related to its wafer foundry
agreements as a result of lower forecasted capacity usage during the calendar
year ending December 31, 1996. The execution of these amendments reduced the
Company's wafer purchase commitments during the remainder of calendar 1996 and
thereafter and resulted in a favorable manufacturing cost adjustment recorded to
cost of revenues of $3.0 million. The remaining deposits and prepayments under
the amended foundry agreements described above are recorded at cost and total
approximately $34.2 million as of June 30, 1997. The Company currently
anticipates being able to utilize and fully recover the value of all foundry
prepayments and deposits under the terms of the amended agreements.
Additionally, 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, UICC, 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. In January 1997, the Company made a second payment of $25.9 million
under this agreement. Cash payments due under these agreements in fiscal 1998
are approximately $15.0 million. As an investor in this venture, the Company
will have rights to a portion of the total wafer capacity for the manufacture of
its proprietary products. However, there can be no assurance that a market will
develop for the shares representing the Company's equity investment at any time
in the future.
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. Most of the Company's
devices are currently fabricated using complementary metal oxide semiconductor
("CMOS") process technology with 0.5 micron and 0.35 micron feature sizes. The
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Company expects to design products for .25 micron feature sizes in the future.
All of the Company's semiconductor products are assembled and tested by
independent subcontractors.
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. Substantially all of the Company's
agreements with its offshore wafer fabrication and assembly facilities provide
for pricing and payment in U.S. dollars.
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, time consuming and expensive to remedy, all
of which can affect the Company's time to market with a particular product. 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.
DESIGN METHODOLOGY
The Company's products compete in markets that are characterized by
rapidly-developing technology and evolving industry standards. The Company
addresses these issues with a design environment based on workstations,
dedicated product simulators, system simulation with hardware and software
modeling, and use of a high level design description language in order to
define, develop and deliver new and enhanced products more rapidly. The
Company's engineering and design capabilities are significant to its future
performance, and the Company has invested regularly in new advanced equipment
and software tools in an effort to keep these tools updated with the latest
technology. The Company's library of core cells is key to its ability to reduce
the time needed to design new products. Examples of core cells include a VGA
core, a graphics co-processor engine and related graphics functions, a 32-bit
RISC engine, host bus interface technology, a .5 and .35 micron memory compiler
and a .5 and .35 micron I/O library. Design methodology, including equipment
and software tools, is a critical factor with respect to the Company's ability
to successfully develop technology and products, and there can be no assurance
that the Company will be able to obtain the equipment, software tools and other
resources needed to develop technically advanced products in a timely manner.
MARKETING AND CUSTOMERS
From its inception, the Company has been committed to a worldwide marketing
strategy. The Company utilizes a direct sales force in the United States, Japan
and Taiwan and a worldwide network of manufacturers' representatives and
distributors in North America, Europe and Asia. While customers around the
world have many needs in common, each region has its own requirements. In order
to support customers in key geographic markets, the Company has established
sales and support offices in Japan and Taiwan, in addition to its corporate
headquarters in Sunnyvale, California. The Company believes that sales and
technical support personnel based in the Company's regional offices understand
the technical needs, business philosophy and culture of their respective
customers. On-site personnel are trained to respond to customer needs
efficiently and effectively. Additionally, two general managers of the Company
are located in the Company's Asian subsidiaries in Taipei, Taiwan and Tokyo,
Japan to manage local operations and maintain relationships with their Asian
customers.
Sales of the Company's products are made pursuant to purchase orders and
the Company has no long-term sales agreements with any of its customers.
Purchase orders are subject to price renegotiations and to changes in quantities
of products and delivery schedules in order to reflect changes in the customers'
requirements. In addition, in certain circumstances, orders may be canceled at
the discretion of the buyer without penalty. The Company's business, consistent
with that of others in the semiconductor industry, is generally characterized by
short lead time orders. The Company's actual shipments depend on the
manufacturing capacity of the Company's foundries. Therefore, as foundry
capacity tightens, as it has recently, the Company may not be able to meet the
customer's requested delivery date or the Company may have to put its customers
on allocation. Accordingly, due to its dependence on third party manufacturing
capacity, the Company believes that backlog at any particular date may not be
indicative of actual net revenues for any future period.
Sales of the Company's CD-ROM controller products comprised 84%, 91% and
74% of the Company's net revenues in fiscal 1997, 1996 and 1995, respectively.
Sales of CD-ROM controller products are expected to continue to account for a
substantial majority of the Company's total revenues for the foreseeable future.
The
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<PAGE>
Company expects that as the market for CD-ROM controller products matures or
becomes obsolete due to the introduction of DVD-ROM products, sales of such
products will decline. Although the Company is currently pursuing the
development of optical storage semiconductors for use in DVD-ROM drives, there
can be no assurance that the Company will have a DVD-ROM product, that such
product will be available within an acceptable market window or that with such
product the Company will be able to sustain the current level of optical storage
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.
Although the Company has recently introduced several new products in its attempt
to diversify its product and market base, there can be no assurance that these
products will be successfully designed, accepted by the Company's customers, and
brought to production or that the Company's customer's products will be accepted
in the marketplace.
The Company believes that customer service and technical support are
important competitive factors in the PC, consumer electronics and digital office
equipment markets. The Company provides technical support to its customers
worldwide. Using its headquarters and subsidiary offices in Japan, Taiwan and
Andover, Massachusetts, the Company is able to provide prompt technical support
to its customers. In addition, the Company's representatives travel frequently
to customer sites to assist in design-in activity. The Company provides several
other types of technical support, including software distribution through an
electronic bulletin board, evaluation boards, product demonstration software,
engineering design kits and application notes. The Company works closely with
its customers in qualification of its products and providing needed quality and
reliability data. In addition, the Company makes the latest revision of its
software available to its customers and can customize the Company's software to
a customer's specific requirements.
A substantial majority of the Company's revenues in fiscal 1997, 1996 and
1995 were derived outside of the United States, primarily in Asia. The
geographical areas accounting for the Company's net revenues in fiscal 1997,
1996, and 1995 are as follows:
June 30,
---------------------------------------
1997 1996 1995
------------ ------------ -----------
Japan. . . . . . . . . . . . . . . . . 40.3% 66.1% 51.3%
Other international. . . . . . . . . . 56.1 31.5 41.4
North America. . . . . . . . . . . . . 3.6 2.4 7.3
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 taxes, 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
operating results or require the Company to modify its current business
practices.
The Company sells its products principally to manufacturers of CD-ROM
drives, PCs and add-in boards. CD-ROM drives, in turn, are sold to PC OEMs such
as Acer, AST Research, Compaq, Dell, Gateway 2000, IBM, NEC and Packard Bell.
Add-in boards are in turn sold to PC manufacturers or distributors for the
distribution or retail channel.
A limited number of customers historically has accounted for a substantial
portion of the Company's net revenues. In fiscal 1997, 1996 and 1995, sales to
the Company's top ten customers accounted for approximately 78%, 80% and 76%,
respectively, of the Company's net revenues. These customers were all
purchasers of the Company's CD-ROM products. In fiscal 1997, Mitsumi accounted
for 14% and LG Electronics accounted for 13% of the Company's net revenues. In
fiscal 1996, Mitsumi accounted for 26%, Kanematsu accounted for 19% and NEC
accounted for 13% of the Company's net revenues. Kanematsu, a Japanese trading
company, purchases product from the Company and resells the product to Japanese
manufacturers. In fiscal 1995, Mitsumi accounted
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<PAGE>
for 29% and Kanematsu accounted for 13% of the Company's net revenues. Although
the Company is currently attempting to diversify its products, markets, and
customers base, 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 subject
to cancelable short-term purchase orders. The loss of, or a significant
reduction in, purchases by current major customers such as Mitsumi or LG
Electronics would have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance 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. Moreover, there can be no assurance that the Company could qualify
its foundries for potential new customers or that it could do so in a timely
manner.
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
rescheduled or under certain circumstances may be canceled without penalty.
Consequently, if anticipated sales and shipments in any quarter are rescheduled,
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.
COMPETITION
The markets in which the Company competes are intensely competitive and are
characterized by rapid technological change, declining unit average selling
prices ("ASPs") and rapid product obsolescence. The Company experiences intense
competition and 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, quality control and technological advantages. In
its effort to diversify its customer and market base, the Company is currently
attempting to enter several new markets in which the Company has not operated
previously. These markets are intensely competitive and the Company will have
to compete with large domestic and international companies that have long
standing relationships with the Company's targeted customers. 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 industry 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 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 have product available at the appropriate market window and 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 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 business, financial condition and result of
operations 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
could have a materially adverse effect on the Company's business, financial
condition and operating results.
Prior to the Company's entry into the optical storage market, merchant
suppliers such as Sanyo and captive suppliers such as Panasonic, Sony and
Toshiba supplied semiconductor solutions for proprietary and SCSI drivers.
Although the Company was the first company to sell a single-chip IDE/ATAPI CD-
ROM controller, competitors including Cirrus Logic, Adaptec and Sanyo now offer
single-chip solutions. Furthermore, Toshiba has developed its own IDE/ATAPI
CD-ROM controller and is using it internally. Companies such as Panasonic and
Sony could develop their own IDE/ATAPI CD-ROM controllers and, in addition to
using them internally, could sell these controllers to the merchant market in
competition with the Company's products. As the Company integrates more
functionality into its products, companies which had previously supplied
complementary products may also become competitors.
9
<PAGE>
In the MPEG imaging market, the Company competes primarily with C-Cube
Microsystems, ESS Technology, SGS-Thomson Microelectronics and LSI Logic. The
Company's primary competitors for video/graphic accelerators include 3DFX,
nVidia, NEC, ATI Technologies, Cirrus Logic, Tseng Labs, S3 and Trident
Microsystems. In the audio/communications market, the Company's competitors
include Analog Devices, Cirrus Logic, Creative Technology, ESS Technology, OPTI
and Yamaha. In the digital office equipment market, the Company's competition
does not offer directly competitive products. In some cases, the competition
offers a subset of the Company's product features. In other cases, the
competition offers a software alternative to the Company's hardware solution.
The Company expects direct competition in the digital office equipment market to
emerge in the near future.
RESEARCH AND DEVELOPMENT
The Company currently invests substantial resources in its product
development efforts. During fiscal 1997, 1996 and 1995, the Company spent
approximately $34.7 million, $30.7 million and $14.6 million, respectively, on
research and development activities. The Company intends to continue to invest
in the development of products in each of its core technologies and in products
that integrate its core technologies.
The Company's performance is highly dependent upon the successful
development and timely introduction of new products at competitive price and
performance levels. There can be no assurance that products currently under
development or any other new products will be successfully developed or will
achieve market acceptance. 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, 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 results of
operations.
PROPRIETARY RIGHTS AND LICENSES
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 three patents granted,
fourteen patents pending, seventeen patents in preparation in the United States,
and two international patents pending. The Company intends to seek additional
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. In fiscal 1997, the Company filed a complaint with the
International Trade Commission ("ITC") against certain Asian manufacturers of
optical storage controller devices based on the Company's belief that such
devices infringed one or more of the Company's patents. The complaint seeks a
ban on the importation into the United States of any infringing CD-ROM
controller or products containing such infringing CD-ROM controllers. (See
"Legal Proceedings"). 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, which has resulted in significant,
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
10
<PAGE>
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. The Company
recently initiated such litigation by filing a complaint with the International
Trade Commission. 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 the
Company is required to pay substantial damages or awards, the Company's
business, financial condition and results of operations 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. 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. In 1990, the Company entered into an agreement with Advanced Micro
Devices, Inc. ("AMD") relating to a video compression/expansion processor
("VCEP") developed by AMD. Pursuant to this agreement, AMD granted to the
Company a perpetual, worldwide, non-exclusive license to make, use,
distribute and sell products resulting from the VCEP and certain related
patents and software. The Company has paid AMD a technology license fee
pursuant to this agreement and is obligated to pay a royalty based on a
percentage of net revenues derived from its PM-1V product. The agreement has
no specified term and may be terminated in the event either party breaches
the agreement and such breach is not cured within 30 days after delivery of
notice of the breach.
The Company has licensed technology from third parties for use in its MPEG,
optical storage, video/graphics, audio/communications, and digital imaging
technologies, and pursuant thereto is required to fulfill confidentiality
obligations and in certain cases pay royalties. Certain of the Company's
products require that certain copy protection software or other software be
obtained if the products are to be marketable and exportable. Should the
Company lose its rights to or be unable to obtain the necessary copy protection
software, the Company would be unable to sell and market certain of its MPEG and
optical storage products geared for the DVD market. In the future, it may be
necessary or desirable for the Company to seek additional licenses to
intellectual property rights held by third parties with respect to some or all
of its product offerings. 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 or to maintain
its current licenses on acceptable terms could have a material adverse effect on
the Company's business, financial condition and results of operations.
EMPLOYEES
As of June 30, 1997, the Company had 430 full-time employees, including
268 in research and development, 64 in sales and marketing, and 98 in finance,
administration and operations. The Company believes that its future performance
will depend, in part, on its ability to continue to attract and retain qualified
technical and management personnel, particularly highly skilled design engineers
and software programmers involved in new product development, for whom
competition is intense. In addition, the Company is currently seeking to
acquire additional senior management personnel. Accordingly, the Company
expects there to be an increase in its general and administrative expenses. The
Company's employees are not represented by any collective bargaining unit and
the Company has never experienced a work stoppage. The Company believes that
its employee relations are good.
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ITEM 2. PROPERTIES
The Company's executive offices and its principal marketing, sales and
product development operations are located in approximately 80,000 square feet
of leased space in Sunnyvale, California under a noncancelable operating lease
that expires in December 2001. The Company is currently seeking additional
space in which to move all or a portion of the Company's employees located in
Sunnyvale. The Company believes that suitable additional or alternative space
will be available on commercially reasonable terms, although no assurance can be
given in this regard. In the event the Company relocates all the employees in
Sunnyvale to a new location, it will be required to find a subtenant for its
current location. If the Company fails to find a suitable subtenant or fails to
locate a subtenant who will pay the entire amount of the Company's current lease
rate, the Company may have to pay all or a portion of the rent on its current
leased space as well as rent on its new leased space. Accordingly, the Company
expects there to be an increase in its general and administrative expenses
related to the cost of additional leased space and associated moving expenses.
The Company owns a portion of a building in Taipei, Taiwan, and leases
facilities, primarily for sales, product development, and technical support, in
Andover, Massachusetts; Boca Raton, Florida; Austin, Texas and Tokyo, Japan.
ITEM 3. 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 IN RE OAK
TECHNOLOGY SECURITIES LITIGATION, Master File No. CV758510 pending 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 breaches of fiduciary duty and
abuse of control. On December 6, 1996, the state court Judge sustained the Oak
defendants' demurrer to all causes of action alleged in plaintiffs' First
Amended Consolidated Complaint, but allowed plaintiffs the opportunity to amend.
The plaintiff's Second Amended Consolidated Complaint was filed on August 1,
1997.
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. This action also names as a
defendant one of the Company's investment bankers. On July 29, 1997, the
federal court Judge granted the Oak defendants Motion to Dismiss the plaintiff's
First Amended Consolidated Complaint, but granted plaintiffs leave to amend most
claims. The plaintiff's Second Amended Consolidated Complaint was filed on
September 4, 1997.
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, which 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, has been stayed
pending resolution of the class actions.
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.
On July 21, 1997, the Company filed a complaint with the International
Trade Commission ("ITC") based on the Company's belief that certain CD-ROM
controllers infringed one or more of the Company's patents. The complaint seeks
a ban on the importation into the United States of any infringing CD-ROM
controller or product containing such infringing CD-ROM controller.. A formal
investigative proceeding was instituted by the ITC on August 19, 1997, naming as
respondents: Winbond Electronics Corporation; Winbond Electronics North America
Corporation; Wearnes Technology (Private) Ltd.; and Wearnes Electronics Malaysia
Sendirian Berhad. Discovery proceedings are now ongoing and a full hearing of
the matter has not yet been scheduled, but is expected to occur in mid-1998. In
connection with this legal proceeding, the Company expects to incur substantial
legal and other expenses.
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As originally filed with the ITC, the Company's complaint also identified
as proposed respondents: United Microelectronics Corporation ("UMC"); Lite-On
Group; Lite-On Technology Corp.; Behavior Tech Computer Corp.; and Behavior Tech
Computer (USA) Corp. The Company and UMC entered into a settlement agreement,
effective July 31, 1997, pursuant to which UMC agreed to cease and desist
manufacture of its specified CD-ROM controllers, except under certain limited
conditions which expire on January 31, 1998. The settlement agreement
additionally provided for the withdrawal of the Company's ITC complaint against
UMC and the above-named Lite-On and Behavior Tech companies.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company has paid no cash dividends on its Common Stock since its
incorporation and anticipates that for the foreseeable future it will continue
to retain any earnings for use in its business. In addition, the Company's bank
arrangements currently prohibit the Company from issuing cash dividends.
The Company's Common Stock commenced trading on the Nasdaq National Market
on February 14, 1995 under the symbol OAKT. The following table indicates the
range of the high and low closing prices as reported by Nasdaq.
High Low
----------- -----------
FISCAL 1995
Third Quarter (commencing February 14, 1995). . . $ 15-5/8 $ 10-1/4
Fourth Quarter. . . . . . . . . . . . . . . . . . $ 19-1/4 $ 11-7/8
FISCAL 1996
First Quarter . . . . . . . . . . . . . . . . . . $ 23-5/8 $ 18-1/4
Second Quarter. . . . . . . . . . . . . . . . . . $ 29-1/8 $ 17-1/2
Third Quarter . . . . . . . . . . . . . . . . . . $ 30 $ 17-1/2
Fourth Quarter. . . . . . . . . . . . . . . . . . $ 22-3/4 $ 8-7/8
FISCAL 1997
First Quarter . . . . . . . . . . . . . . . . . . $ 11 $ 5-1/2
Second Quarter. . . . . . . . . . . . . . . . . . $ 13-3/4 $ 8-11/16
Third Quarter . . . . . . . . . . . . . . . . . . $ 14-9/16 $ 9-1/2
Fourth Quarter. . . . . . . . . . . . . . . . . . $ 10-1/2 $ 7-9/16
FISCAL 1998
First Quarter (through August 29, 1997) . . . . . $ 12 $ 9-5/16
On August 29, 1997, the closing price of the Common Stock on the Nasdaq
National Market was $10 7/8 per share. As of August 29, 1997, there were 330
holders of record of the Common Stock of the Company.
Pursuant to a shareholder rights plan, adopted in August 1997, the Company
distributed one right per share of common stock which becomes exercisable in
certain events involving the acquisition of 15% or more of Oak common stock.
Upon the occurrence of such an event, each right entitles its holder to purchase
for $60.00 the economic equivalent of common stock of Oak or, in certain
circumstances, of the acquirer, worth twice as much. In connection with the
plan, 400,000 shares of preferred stock were reserved for issuance. The rights
expire on August 19, 2007.
All share and per share information in this Annual Report on Form 10-K give
effect to a two-for-one split of the Company's Common Stock, which was effected
on March 28, 1996.
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ITEM 6. SELECTED FINANCIAL DATA
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended June 30,
----------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues (1) . . . . . . . . . . . . $ 167,395 $ 247,984 $ 110,982 $ 42,562 $ 30,058
Gross profit . . . . . . . . . . . . . . 94,181 109,485 54,616 16,572 4,524
Operating income (loss). . . . . . . . . 32,848 57,147 29,440 4,200 (5,324)
Net income (loss). . . . . . . . . . . . $ 23,719 $ 37,133 $ 21,222 $ 3,823 $ 5,425)
Net income (loss) per share. . . . . . . $ 0.55 $ 0.87 $ 0.67 $ 0.15 $ (0.55)
Shares used in per share
calculations (2). . . . . . . . . . . 42,757 42,614 31,474 25,756 9,940
</TABLE>
<TABLE>
<CAPTION>
As of June 30,
----------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and
short-term investments. . . . . . . $ 145,269 $ 113,284 $ 150,943 $ 3,738 $ 2,606
Working capital. . . . . . . . . . . . . 168,168 134,686 156,258 7,723 1,224
Total assets . . . . . . . . . . . . . . 287,595 256,308 193,953 27,413 15,864
Long-term debt, excluding
current portion . . . . . . . . . . 2,496 2,858 2,227 1,950 2,106
Total stockholders' equity . . . . . . . $ 238,697 $ 210,827 $ 162,643 $ 11,736 $ 3,449
</TABLE>
(1) Net revenues include nonrefundable technology license fees. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(2) Computed on the basis described in Note 2 of Notes to Consolidated
Financial Statements.
15
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------------------------------------------------
June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30,
1997 1997 1996 1996 1996 1996 1995 1995
----------- ---------- ----------- ----------- ------------ --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues (1) . . . . . . $ 50,224 $ 50,634 $ 47,611 $ 18,926 $ 19,418 $ 88,359 $ 83,735 $ 56,472
Gross profit (deficit) . . . 25,280 27,805(3) 32,386(4) 8,710(5) (15,059)(6) 48,395 44,813 31,336
Operating income (loss). . . 3,553(8) 13,533 19,439 (3,677) (27,424) 35,524 27,355(7) 21,692
Net income (loss). . . . . . $ 2,644 $ 9,540 $ 13,188 $ (1,653) $ (16,500) $ 22,183 $ 18,217 $ 13,233
Net income (loss)
per share (2) . . . . . $ (0.06) $ 0.22 $ 0.31 $ (0.04) $ (0.41) $ 0.52 $ 0.43 $ 0.31
Shares used in per share
calculations (2). . . . 42,347 42,801 42,701 40,297 40,100 42,755 42,694 42,682
</TABLE>
(1) Net revenues include nonrefundable technology license fees. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(2) Computed on the basis described in Note 2 of Notes to Consolidated
Financial Statements.
(3) Gross profit in the third quarter of fiscal 1997 includes the impact of
adjustments of approximately $5.1 million to cost of revenues associated
with the sale of products which had been fully reserved in prior periods.
See Note 3 and Note 7 of Notes to Consolidated Financial Statements.
(4) Gross profit in the second quarter of fiscal 1997 includes the impact of
adjustments of approximately $13.0 million to cost of revenues associated
with the sale of products which had been fully reserved in prior periods as
well as favorable manufacturing cost adjustments of $1.5 million related to
foundry agreements. See Note 3 and Note 7 of Notes to Consolidated
Financial Statements.
(5) Gross profit in the first quarter of fiscal 1997 includes the impact of
adjustments of approximately $0.6 million to cost of revenues associated
with the sale of products which had been fully reserved in prior periods as
well as favorable manufacturing cost adjustments of $1.5 million related to
foundry agreements. See Note 3 and Note 7 of Notes to Consolidated
Financial Statements.
(6) Gross (deficit) in the fourth quarter of fiscal 1996 includes inventory-
related charges of $24.0 million to cost of sales. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and Note 3 of Notes to Consolidated Financial Statements.
(7) Operating income in the second quarter of fiscal 1996 includes a charge for
in-process research and development related to the acquisition of Pixel
Magic. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Note 5 of Notes to Consolidated Financial
Statements.
(8) Operating income for the fourth quarter of fiscal 1997 includes the impact
of a $5.0 million compensation related expense to the contingent amount
associated with the acquisition of Pixel Magic, Inc. as described in Note 5
of Notes to Consolidated Financial Statements.
16
<PAGE>
ITEM 7. 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 ANNUAL REPORT ON FORM 10-K 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. 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 THE ENTRY OF NEW COMPETITORS INTO THE COMPANY'S MARKETS, (VI) THE
COMPANY'S ABILITY TO DIVERSIFY ITS PRODUCT AND MARKET BASE BY DEVELOPING AND
INTRODUCING NEW PRODUCTS WITHIN DESIGNATED MARKET WINDOWS 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) ABILITY OF THE
COMPANY TO MAINTAIN ADEQUATE PRICE LEVELS AND MARGINS WITH RESPECT TO ITS
PRODUCTS, (XVI) MANAGEMENT OF CHANGING OPERATIONS RELATED TO THE COMPANY'S
ATTEMPT TO DIVERSIFY ITS PRODUCT AND MARKET BASE, (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.
The Company designs, develops and markets high performance integrated
semiconductors and related software to original equipment manufacturers
worldwide that serve the PC, consumer electronics and digital office equipment
markets. The Company provides semiconductor products for these markets by
leveraging its expertise in 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 the paragraphs below, 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 June and November 1995, the Company entered into agreements with TSMC
and Chartered to obtain certain additional wafer capacity through the year 2001
(see Note 7 of Notes to Consolidated Financial Statements). The agreements call
for the Company to commit to certain future wafer purchases and 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. The price of such wafers will be determined
in the future periods in which specific orders are actually placed. If the
Company is not able to use, assign, or sell the additional wafer quantities, all
or a portion of the deposits may be forfeited.
In October 1996, the Company amended its previous agreement with TSMC
resulting in a reduction of approximately $73 million of the Company's future
wafer purchases required under the original agreement. Under the amended
agreement, no additional prepayment is required; however, the Company must
utilize the entire amount of the prepayment paid to date through a certain
committed amount of wafer purchases in the years 1997, 1998, and 1999 or the
prepayment will be forfeited.
In September 1996 and April 1997, the Company amended its agreement with
Chartered. The amendments resulted in a reduction of the Company's future wafer
purchase commitments and the elimination of required future cash deposits under
the original agreement of approximately $36 million. Under the amended
agreement, the required future cash deposits of approximately $36 million 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.
The Company recorded $3.0 million in cost of sales during fiscal 1996
associated with manufacturing cost adjustments related to its wafer foundry
agreements as a result of lower forecasted capacity usage during the calendar
year ending December 31, 1996. The execution of these amendments reduced the
Company's wafer purchase commitments during the remainder of calendar 1996 and
thereafter 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 based on an estimate of the wafers purchased during
those quarters. The remaining deposits and prepayments under the amended
foundry agreements described above are recorded at cost
17
<PAGE>
and total approximately $34.2 million as of June 30, 1997. The Company
currently anticipates being able to utilize and fully recover the value of all
foundry prepayments and deposits under the terms of the amended agreements.
The markets in which the Company competes are intensely competitive and are
characterized by rapid technological change, declining ASPs and rapid product
obsolescence. In addition, a limited number of customers have historically
accounted for a substantial portion of the Company's net revenues. In fiscal
1997, 1996 and 1995, sales to the Company's top ten customers accounted for
approximately 78%, 80% and 76%, respectively, of the Company's net revenues.
The Company is also heavily dependent on the market for CD-ROM controller
products. In fiscal 1997, 1996 and 1995, the Company's CD-ROM controller
products accounted for 84%, 91% and 74%, respectively, of net revenues. The
Company expects that, for the foreseeable future, its CD-ROM controller products
will account for a substantial majority of its net revenues. Any decrease in
the demand for such products or the loss of one or more key customers would have
a material adverse effect on the Company's business, financial condition and
results of operations.
In addition, in fiscal 1997, 1996 and 1995, 96%, 98% and 93%, respectively,
of net revenues were derived from international sales. A substantial portion of
the Company's international revenues in fiscal 1997, 1996 and 1995 were derived
from Japanese, Taiwanese, Korean and Singapore manufacturers of CD-ROM drives.
The Company's international sales are subject to a number of risks, including
the effect of currency fluctuations, state-imposed restrictions on repatriation
of funds and import and export duties and restrictions. There can be no
assurance that such risks will not have a material adverse effect on the
Company's business, financial condition and results of operations.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net revenues, certain
consolidated statement of operations data for the periods indicated:
June 30,
---------------------------
1997 1996 1995
-------- ------- ------
Net revenues . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
Cost of revenues . . . . . . . . . . . . . . . . 43.7 55.8 50.8
-------- ------- ------
Gross margin . . . . . . . . . . . . . . . . . 56.3 44.2 49.2
Research and development expenses. . . . . . . . 20.7 12.4 13.2
Selling, general and administrative expenses . . 12.9 6.8 9.5
Acquisition-related charges. . . . . . . . . . . 3.0 2.0 -
-------- ------- ------
Operating income . . . . . . . . . . . . . . . 19.7 23.0 26.5
Nonoperating income, net . . . . . . . . . . . . 3.2 2.5 1.5
-------- ------- ------
Income before income taxes . . . . . . . . . . 22.9 25.5 28.0
Income taxes . . . . . . . . . . . . . . . . . . 8.7 10.5 8.9
-------- ------- ------
Net income . . . . . . . . . . . . . . . . . . 14.2% 15.0% 19.1%
-------- ------- ------
-------- ------- ------
FISCAL 1997 COMPARED TO FISCAL 1996
NET REVENUES. The Company's net revenues in the comparison periods were
primarily derived from product sales. Net revenues decreased 32% to
$167.4 million in fiscal 1997 from $248.0 million in fiscal 1996. This decrease
was primarily attributable to a reduction in the unit sales and average selling
prices of CD-ROM controllers in fiscal 1997 compared to fiscal 1996. The
decrease in unit sales resulted from the Company receiving substantially fewer
orders for its CD-ROM controller products in fiscal 1997 than in fiscal 1996.
The Company believes the decline in orders is primarily attributable to a change
in the ordering patterns of CD-ROM drive manufacturers and the continued
maturation of the CD-ROM industry. (See "Factors That May Affect Future Results"
below.) International sales, principally to Japan, Taiwan, Korea and Singapore
accounted for approximately 96% and 98% of the Company's net revenues in fiscal
1997 and fiscal 1996, respectively. Sales of the Company's CD-ROM controller
products accounted for 84% and 91% of net revenues in fiscal 1997 and fiscal
1996, respectively. The Company expects that international sales of its CD-ROM
controller products will continue to represent a substantial majority of its net
revenues for the foreseeable future. Included in net revenues for fiscal 1997
and fiscal 1996 were $0.2 million and $3.0 million, respectively of
nonrefundable technology license fees.
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
56.3% in fiscal 1997 from 44.2%
18
<PAGE>
in fiscal 1996. This increase in gross margin is primarily the result of
adjustments of approximately $18.7 million to cost of revenues associated with
the sale of products which had been fully reserved in prior periods as well as
manufacturing cost adjustments of $3.0 million related to foundry agreements.
Additionally, fiscal 1996 gross margins were reduced as a result of inventory-
related charges to cost of sales of $24.0 million. Excluding the impact of
these adjustments, gross margin for fiscal 1997 and 1996 would have been
approximately 43.3% and 53.8%, respectively. 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 that was not offset
by a comparable decrease in product costs. 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. In addition, the Company believes that
gross margins for new products will be lower than historical levels and that, as
a result, gross margins in general will decline in the future.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development costs are all
expensed as incurred. Research and development expenses increased 12.8% to
$34.7 million in fiscal 1997 from $30.7 million in fiscal 1996. 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 20.7% in fiscal 1997 from 12.4% in fiscal 1996 due primarily to the
decrease in the Company's net revenues. The Company will continue to invest
substantial resources in research and development, including hiring additional
technical personnel, in an effort to maintain its technological leadership in
the CD-ROM controller market and to diversify its product development in its
other core technologies: video/graphics, MPEG imaging, audio/communications,
and digital imaging. As a result, the Company expects to incur higher research
and development expenses in absolute dollars in fiscal 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 29.1% to $21.7 million in fiscal 1997 from
$16.8 million 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 12.9% in
fiscal 1997 from 6.8% in fiscal 1996, due primarily to the decrease in the
Company's net revenues. As a result of continuing efforts to develop the
Company's infrastructure and hire additional senior management personnel, the
Company expects to incur higher administrative expenses in absolute dollars in
fiscal 1998.
ACQUISITION-RELATED CHARGES. 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 was 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 fiscal 1996. In June 1997, the
Company waived certain of the performance criteria and agreed to pay the
contingent amount of $5.0 million in two installments during calendar 1998. The
first payment of $3.0 million is due in January 1998 and the second payment of
$2.0 million is due in December 1998. As a result of this agreement and because
the contingent earnout was based, in part, on the continued employment of the
former shareholder/employees of Pixel Magic, Inc., the Company recorded a
compensation charge of $5.0 million in the quarter ended June 30, 1997.
NONOPERATING INCOME, NET. Nonoperating income, net consisted primarily of
net interest income in fiscal 1997. Nonoperating income, net was $5.4 million
in fiscal 1997 and $6.0 million in fiscal 1996. The decrease is primarily the
result of lower net interest income in fiscal 1997 compared to fiscal 1996.
INCOME TAXES. The Company's effective tax rate was 38.0% and 41.2% in
fiscal 1997 and 1996, respectively. The lower tax rate in 1997 was primarily
attributable to the effect of the reinstated research and development tax credit
on fiscal 1997 results as well as a geographical shift in the sources of taxable
income in fiscal 1997. See Note 6 of Notes to Consolidated Financial
Statements.
FISCAL 1996 COMPARED TO FISCAL 1995
NET REVENUES. The Company's net revenues in the comparison periods were
primarily derived from product sales. Net revenues increased 123% to
$248.0 million in fiscal 1996 from $111.0 million in fiscal 1995. This increase
was primarily attributable to growth in unit sales of CD-ROM controllers.
International sales, principally to Japan, Singapore and Taiwan, accounted for
approximately 98% and 93% of the Company's net revenues in fiscal 1996 and
fiscal 1995, respectively. Sales of the Company's CD-ROM controller products
accounted for 91% and 74% of net revenues in fiscal 1996 and fiscal 1995,
respectively. Included in net revenues for fiscal 1996 and fiscal 1995 were
$3.0 million and $1.3 million, respectively of nonrefundable technology license
fees.
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
44.2% in fiscal 1996 from 49.2% in fiscal 1995. This decrease in gross margin
is primarily the result of inventory-related charges to cost of sales of
19
<PAGE>
$24.0 million during the fourth quarter of fiscal 1996, partially offset by an
increase in margin from CD-ROM controller sales during fiscal 1996. In both
fiscal 1996 and 1995, the Company's gross margin was also favorably affected by
nonrefundable technology license fee revenues, which had no associated cost of
revenues. 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.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development costs are all
expensed as incurred. Research and development expenses increased 110% to
$30.7 million in fiscal 1996 from $14.6 million in fiscal 1995. This increase
was principally the result of the hiring of additional personnel and associated
expenses. Research and development expenses decreased as a percentage of net
revenues to 12.4% in fiscal 1996 from 13.2% in fiscal 1995 due primarily to
rapid growth in the Company's net revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 59% to $16.8 million in fiscal 1996 from
$10.5 million in fiscal 1995. This increase was primarily the result of the
hiring of additional personnel and associated expenses. Selling, general and
administrative expenses decreased as a percentage of net revenues to 6.8% in
fiscal 1996 from 9.5% in fiscal 1995, due primarily to rapid growth in the
Company's net revenues.
ACQUISITION-RELATED CHARGES. 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 was paid up front and $5.0 million
was 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 fiscal 1996.
NONOPERATING INCOME, NET. Nonoperating income, net consisted primarily of
net interest income in fiscal 1996. Nonoperating income, net was $6.0 million
in fiscal 1996 and $1.7 million in fiscal 1995.
INCOME TAXES. The Company's effective tax rate was 41.2% and 31.7% in
fiscal 1996 and 1995, respectively. The higher tax rate in 1996 was primarily
attributable to an increase in income before tax in fiscal 1996 and the full
utilization of the Company's federal net operating loss carryforwards by the
middle of fiscal 1995. See Note 6 of Notes to Consolidated Financial
Statements.
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, the cyclical nature of both 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 development of the Company's support infrastructure, 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.
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 rescheduled or under certain circumstances may be canceled without
significant penalty. Consequently, if anticipated sales and shipments in any
quarter are rescheduled, 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
20
<PAGE>
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 "Legal Proceedings." 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 ASP's 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 as well as some of the Company's own
customers and suppliers. The Company is currently attempting to enter several
new markets in which the Company has not previously operated. These markets are
intensely competitive and the Company will have to compete with large domestic
and international companies that have long standing relationships with the
Company's target customers. 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 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 have product available at the appropriate market window and 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 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. In addition, 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 in its other core technologies: video/graphics, MPEG
imaging, audio/communications, and digital imaging. There can be no assurance
that products currently under development in these core technologies 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
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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 three patents granted,
fourteen patents pending, seventeen patents in preparation in the United States,
and two international patents pending. The Company intends to seek additional
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. In fiscal 1997, the Company filed a complaint with the
International Trade Commission ("ITC") against certain Asian manufacturers of
optical storage controller devices based on the Company's belief that such
devices infringed one or more of the Company's patents. The complaint seeks a
ban on the importation into the United States of any infringing CD-ROM
controller or products containing such infringing CD-ROM controllers. (See
"Legal Proceedings"). 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, which has resulted in significant,
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. The Company recently initiated
such litigation by filing a complaint with the International Trade Commission.
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. 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. Some of the Company's products, particularly those targeted for the
DVD market, require certain types of copy protection software that the Company
must license from third parties. There can be no assurance that such licenses,
or licenses of other third party technology, will be available on terms
acceptable to the Company, if at all. The inability of the Company to enter
into such license arrangements on acceptable terms could have a material adverse
effect on the Company's business, financial condition and results of operations.
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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. Certain of the Company's foundry agreements require up-front,
nonrefundable prepayments or deposits and these fixed costs could affect the
Company's operating margins if the Company is unable to utilize the minimum
number of wafers required under the agreements. 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 Company has recently
experienced a decrease in the supply of available foundry capacity which in turn
has created an increase in the lead time required to manufacture the Company's
products. If the Company is unsuccessful in getting its customers to place
orders on a longer lead time, the Company may be unable to fulfill customer
demand. 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 operating results.
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.
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 84%, 91% and
74% of the Company's net revenues in fiscal 1997, 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 or
becomes obsolete due to the introduction of DVD-ROM products, sales of such
products will decline. Although the Company is currently pursuing the
development of optical storage semiconductors for use in DVD-ROM drives, there
can be no assurance that the Company will have a DVD-ROM product, that such
product will be available within an acceptable market window, or that such
product will be able to sustain the current level of optical storage 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. Although the
Company has recently introduced several new products in its attempt to diversify
its product and market base, there can be no assurance that these products will
be successfully designed in and brought to production or that the Company's
customer's products will be accepted in the marketplace.
During fiscal 1997, 1996 and 1995, 96%, 98% and 93%, respectively, of the
Company's net revenues were derived from international sales. A substantial
portion of the Company's international revenues in fiscal 1997, 1996 and 1995
were derived from Japanese, Taiwanese, Korean and Singapore 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 taxes, 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
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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 operating results 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 fiscal 1997, 1996 and 1995, sales to
the Company's top ten customers accounted for approximately 78%, 80% and 76%,
respectively, of the Company's net revenues. These customers were all
purchasers of the Company's CD-ROM product. In fiscal 1997, Mitsumi accounted
for 14% and LG Electronics accounted for 13%. In fiscal 1996, Mitsumi accounted
for 26%, Kanematsu accounted for 19% and NEC accounted for 13% of the Company's
net revenues. Kanematsu, a Japanese trading company, purchases product from the
Company and resells the product to Japanese manufacturers. In fiscal 1995,
Mitsumi accounted for 29% and Kanematsu accounted for 13% of the Company's net
revenues. Although the Company is currently attempting to diversify its
products, markets, and customer base, 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. For example, Mitsumi has only
been a significant customer of the Company since fiscal 1994. The Company does
not have long-term purchase agreements with any of its customers. Customers
generally purchase the Company's products pursuant to short-term purchase
orders. The loss of, or significant reduction in purchases by, current major
customers such as Mitsumi or LG Electronics would have a material adverse effect
on the Company's business, financial condition and operating results. 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. 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 senior managers and technical personnel.
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 June 30, 1997 consisted of approximately $145.3 million in cash,
cash equivalents and short-term investments. The Company also has approximately
$12.6 million in lines of letters of credit with Taiwanese financial
institutions, of which $12.5 million was available at June 30, 1997.
Additionally, approximately $25.0 million in lines of credit exist with Japanese
financial institutions, of which approximately $18.0 million was available at
June 30, 1997.
In fiscal 1997, operating activities provided net cash of approximately
$65.4 million. This cash resulted primarily from net income of approximately
$23.7 million, utilization of foundry deposits of $11.0 million, an increase in
accounts payable and accrued expenses of $10.3 million, and an increase in
deferred income taxes of $9.4 million. Investing activities utilized cash of
approximately $24.1 million primarily due to an investment in a foundry joint
venture of $25.9 million, additions to property, plant and equipment of $6.9
million, partially offset by net cash provided from short-term investments of
$10.7 million. In fiscal 1996, the Company's operating activities provided net
cash of approximately $30.7 million. This cash resulted primarily from net
income of approximately $37.1 million. Approximately $12.7 million in cash was
used to finance additions to property and equipment. In fiscal 1995, the
Company's operating activities provided net cash of approximately $22.5 million.
This cash resulted primarily from net income of approximately $21.2 million.
Approximately $4.2 million in cash was used to finance additions to property and
equipment.
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 fiscal 1998 are
anticipated to be approximately $16.0 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 TSMC
and Chartered to obtain certain additional wafer capacity through the year 2001
(see Note 7 of Notes to Consolidated Financial Statements).
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The agreements call for the Company to commit to certain future wafer purchases
and 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. The price of such
wafers will be determined in the future periods in which specific orders are
actually placed. If the Company is not able to use, assign, or sell the
additional wafer quantities, all or a portion of the deposits may be forfeited.
In October 1996, the Company amended its previous agreement with TSMC
resulting in a reduction of approximately $73 million of the Company's future
wafer purchases required under the original agreement. Under the amended
agreement, no additional prepayment is required; however, the Company must
utilize the entire amount of the prepayment paid to date through a certain
committed amount of wafer purchases in the years 1997, 1998, and 1999 or the
prepayment will be forfeited.
In September 1996 and April 1997, the Company amended its agreement with
Chartered. The amendments resulted in a reduction of the Company's future wafer
purchase commitments and the elimination of required future cash deposits under
the original agreement of approximately $36 million. Under the amended
agreement, the required future cash deposits of approximately $36 million 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.
The Company recorded $3.0 million in cost of sales during fiscal 1996
associated with manufacturing cost adjustments related to its wafer foundry
agreements as a result of lower forecasted capacity usage during the calendar
year ending December 31, 1996. The execution of these amendments reduced the
Company's wafer purchase commitments during the remainder of calendar 1996 and
thereafter and resulted in a favorable manufacturing cost adjustment recorded to
cost of revenues of $3.0 million. The remaining deposits and prepayments under
the amended foundry agreements described above are recorded at cost and total
approximately $34.2 million as of June 30, 1997. The Company currently
anticipates being able to utilize and fully recover the value of all foundry
prepayments and deposits under the terms of the amended agreements.
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, United Integrated Circuits Corporation "UICC", 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 a 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. As an investor in this venture, the
Company will have rights to a portion of the total wafer capacity for the
manufacture of its proprietary products. However, there can be no assurance
that a market will develop for the shares representing the Company's equity
investment at any time in the future. See Note 7 of Notes to Consolidated
Financial Statements.
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 was 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 fiscal 1996. In June 1997, the Company waived certain of the
performance criteria and agreed to pay the contingent amount of $5.0 million in
two installments during calendar 1998. The first payment of $3.0 million is due
in January 1998 and the second payment of $2.0 million is due in December 1998.
As a result of this agreement and because the contingent earnout was based, in
part, on the continued employment of the former shareholder/employees of Pixel
Magic, Inc., the Company recorded a compensation charge of $5.0 million in the
quarter ended June 30, 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data of the Company required by
this item are set forth at the pages indicated at Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As of August 31, 1997, the Directors of the Company, and the executive
officers of the Company, who are elected by and serve at the discretion of the
Board of Directors, were as follows:
Name Age Position
- ---- --- --------
David D. Tsang 55 Chairman of the Board of Directors, President and
Chief Executive Officer
Sidney S. Faulkner 44 Vice President, Finance, Chief Financial Officer and
Secretary
Kenji Fujimoto 48 Vice President of Oak, General Manager, Oak
Technology, K.K.
Abel S. Lo 47 Vice President of Oak, General Manager, Oak
Technology, Taiwan
Ben T. Taniguchi 66 Vice President of Sales
Mou Hsin Yang, Ph.D. 51 Vice President of Operations
Aydin Koc 46 Vice President, Optical Storage Business Unit
Paul Vroomen 40 Vice President, Strategic Marketing
Ta-Lin Hsu, Ph.D. 54 Director
Timothy Tomlinson 47 Director
Richard B. Black 64 Director
Mr. Tsang has been President and Chief Executive Officer of the Company
since he founded the Company in July 1987 and a Director of the Company since
October 1987. He has also served as Chairman of the Board of Directors of the
Company since January 1991. Mr. Tsang has also held the positions of Chief
Financial Officer from July 1987 to March 1993 and Secretary of the Company from
July 1987 to December 1994. He also is a Director of Quality Semiconductor,
Inc. and Enable Semiconductor, Inc., both developers of semiconductor products
and ASE Test, a semiconductor assembly and testing company. Prior to joining
Oak, Mr. Tsang was the founder and served in various positions including
President, Chief Executive Officer and Chairman of Data Technology Corp., a
manufacturer of disk controllers and high density disk drives, from 1979 to
1987, and co-founded Xebec, a manufacturer of disk controllers, where he was
employed from 1974 to 1979. Mr. Tsang holds a B.S.E.E. degree in electrical
engineering from Brigham Young University and an M.S. degree in electrical
engineering from the Santa Clara University.
Mr. Faulkner joined the Company as Corporate Controller in February 1991
and has served as Chief Financial Officer since March 1993. Mr. Faulkner has
also held the position of Vice President, Finance since July 1994 and Secretary
since December 1994. Prior to joining Oak, Mr. Faulkner was a private
consultant from May 1990 to January 1991 and was Director of Quality of Falco
Data Products, a computer hardware company, from 1985 to April 1990.
Mr. Faulkner has also held various accounting positions with Eaton Corp. and
Cordis Dow Corporation. Mr. Faulkner holds a B.S.B.A. degree in accounting from
the University of Florida.
Mr. Fujimoto has been General Manager, Oak Technology, K.K., the Company's
Japanese subsidiary, since joining the Company in February 1991 and became a
Vice President of Oak in April 1995. He has also been a Director of EDEE, a
technology development company in Japan, since September 1993. Prior to joining
Oak, Mr. Fujimoto served as Senior Manager, Marketing and Applications of AMD
Japan from 1976 to January 1991. He holds a B.S. degree in electrical
engineering from the University of Electrocommunications (Japan).
Mr. Lo joined the Company as Engineering Design Manager in 1987. He has
been General Manager, Oak Technology, Taiwan since 1989 and became a Vice
President of Oak in April 1995. Prior to joining Oak, he was Software Manager
at Convergent Technologies, a computer system manufacturer, from June 1986 to
May 1987, and Software Manager at the Systems Division of ITT Corp. from May
1985 to June 1986. Mr. Lo holds a B.S. degree in electrical engineering from
Seattle University, an M.S. degree in electrical engineering from the University
of Washington and an M.S. degree in computer science from Rensselaer Polytechnic
Institute.
Mr. Taniguchi joined the Company as Director, Optical Storage Business Unit
in January 1995 and has served as Vice President of Sales since July 1996.
Prior to joining Oak, he was Western Regional Sales Manager for Standard
Microsystems Corporation, a manufacturer of network interface boards and
components, from March 1994 to January 1995; Vice President and General Manager
of Ultrastor Corporation, a manufacturer of SCSI host
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adapters and disk array controllers, from August 1993 to March 1994, and
Regional Sales Director for Kenteck Information Systems, a manufacturer of laser
printers, from August 1991 until August 1993. From November 1990 to August
1991, he was Vice President, Sales and Marketing for Cornerstone Imaging, and
from 1986 to November 1990 he was Vice President, Sales and Marketing of Data
Technology Corp., a manufacturer of disk controllers and high density disk
drives. Mr. Taniguchi holds a B.S. degree in applied physics from the
University of California, Los Angeles.
Dr. Yang joined the Company as Director of IC Development in 1987, served
as the Company's Director of Operations from January 1995 until April 1995 and
has been Vice President of Operations since April 1995. Mr. Yang holds a
B.S.E.E. degree from National Chiao Tung University, Hsinchu, Taiwan and a
M.S.E.E. degree and a Ph.D. in electrical engineering from Washington
University, St. Louis, Missouri.
Mr. Koc joined the Company as Vice President and General Manager of the
Optical Storage Business Unit in September 1996. Prior to joining the Company,
Mr. Koc spent nine years at LSI Logic Corporation, most recently as Director of
ASIC marketing. Mr. Koc holds both a B.S.E.E. and an M.S.E.E. from Middle East
Technical University as well as an M.B.A. from Stanford University.
Mr. Vroomen joined the Company as Vice President, Strategic Marketing in
September 1997. From May 1996 to June 1997, Mr. Vroomen was Vice President and
General Manager of the Consumer Digital Entertainment business unit at VLSI
Technology, Inc. From November 1994 to April 1996, Mr. Vroomen was Vice
President, Sales & Marketing at Array Microsystems, Inc., a developer of codec
chips for digital video applications and from April 1989 to November 1994, Mr.
Vroomen was at Zilog, Inc. where he was Vice President of the Computer
Peripherals business unit. He holds an M.S.E.E. from the Philips International
Institute in Eindhoven, the Netherlands, and a Managerial Advancement Program
diploma from the University of the Witwatersrand Graduate School of Business in
Johannesburg, South Africa.
Dr. Hsu has been a Director of the Company since January 1991. He has been
employed by H&Q Asia Pacific, the parent company of H&Q Taiwan Co., Ltd., since
February 1985, most recently as Chairman. He is also a Director of Enable
Semiconductor, Inc., Headway Technologies, ASE Technology Corporation, Behavior
Tech Computer Corporation and AimQuest Corporation. Dr. Hsu holds a B.S. degree
in physics from National Taiwan University, an M.S. degree in electrophysics
from Polytechnic Institute of Brooklyn and a Ph.D. in electrical engineering
from the University of California, Berkeley.
Mr. Tomlinson has been a Director of the Company since June 1988. He has
been a partner of Tomlinson Zisko Morosoli & Maser LLP, a law firm, since 1983.
Mr. Tomlinson is also a Director of Portola Packaging, Inc., a manufacturer of
tamper evident closures and related equipment. Mr. Tomlinson holds a B.A.
degree in economics, an M.B.A. and a J.D. from Stanford University.
Mr. Black has been a Director of the Company since November 1992 and was
also a Director from December 1989 to January 1991. He has been the Chairman of
the Board of Directors of ECRM Incorporated, an electronic publishing equipment
manufacturer, since 1983 and a general partner of KBA Partners, L.P., an
investment company, since 1987. Mr. Black holds a B.S. degree in civil
engineering from Texas A&M University and an M.B.A. from Harvard University.
The information required by Item 11 with respect to compliance with Section
16(a) of the Securities Exchange Act of 1934 is incorporated by reference from
the Proxy Statement under the Caption "Executive Compensation And Other
Matters."
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K is incorporated by
reference to the information contained in the section captioned "Executive
Compensation and Other Matters" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 of Form 10-K is incorporated by
reference to the information contained in the section captioned "Stock Ownership
of Certain Beneficial Holders and Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 of Form 10-K is incorporated by
reference to the information contained in the section captioned "Certain
Relationships and Related Transactions" in the Proxy Statement.
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GLOSSARY OF TECHNICAL TERMS
BIOS: BASIC INPUT/OUTPUT SYSTEM. The software interface layer between the
system hardware and the operating system on a PC.
CD-R: COMPACT DISC RECORDABLE. CD-R drives are an extension of optical storage
technology that use one-time CD-Recordable discs (as opposed to CD-ROM discs
which are read-only).
CD-ReWritable: CD-based drives which use special recordable and rewritable
compact discs.
CD-ROM: COMPACT DISC READ-ONLY MEMORY. A popular high-density storage media
for digital data of all kinds, including graphics, text, video and sound.
DAA: DATA ACCESS ARRANGEMENT. Provides interface and isolation barrier between
modem and phone line.
DCC: DISPLAY CONTROL COMMAND. Information that determines a pictures appearance
(colors, contrast, sub-picture screen position, etc.)
DRAM: DYNAMIC RANDOM ACCESS MEMORY. Refers to memory in a PC that stores
portions of active applications and data for fast access.
DSI: DATA SEARCH INFORMATION. a feature that makes it possible to search for
data while maintaining seamless playback of video.
DVD: DIGITAL VERSATILE DISC OR DIGITAL VIDEO DISC. A new industry standard
which provides much higher levels of data (video, audio, graphics) to be stored
on discs the same size as standard audio or CD-ROM discs.
EDO Memory: EXTENDED DATA-OUT MEMORY. A type of memory used in PCs offering
higher performance than standard DRAM.
G3/G4: International fax compression standards.
GUI: GRAPHICAL USER INTERFACE. A visually descriptive computer interface
with icons and windows such as Microsoft Windows (as opposed to a text-based
interface like DOS) that allows users to perform various tasks on a computer
in a point-and-click environment.
HLI: HIGHLIGHT INFORMATION. A feature that enables users to scroll through a
menu bar and highlight an item of choice.
IDE/ATAPI: INTEGRATED DRIVE ELECTRONICS/AT ATTACHMENT PACKET INTERFACE. A
dominant PC industry-standard CD-ROM drive interface.
JPEG: JOINT PHOTOGRAPHIC EXPERTS GROUP. A working committee under the guidance
of the ISO that is attempting to define a proposed universal standard for the
digital compression and decompression of still images for use in computer
systems.
Kbps: THOUSANDS OF BITS PER SECOND. A standard for describing the speed of
information over transmission lines such as phone lines.
MPEG: MOTION PICTURE EXPERTS GROUP. MPEG-1 and MPEG-2 are standards for the
compression and decompression of video and audio data.
OEM: ORIGINAL EQUIPMENT MANUFACTURER.
OSD: ON-SCREEN DISPLAY. A feature that allows text and graphics to be overlaid
on full-motion video.
PCI: PERIPHERAL CONNECT INTERFACE. An industry standard architecture for
connecting devices to a PC.
PCI: PRESENTATION CONTROL INFORMATION. Information concerning the timing and
presentation of a program.
PCM: PULSE CODE MODULATION. A method of encoding information in a signal by
varying the amplitude of pulses.
RAMDAC: RANDOM ACCESS MEMORY DIGITAL-TO-ANALOG CONVERTER. A device typically
integrated as part of a graphics accelerator which converts the graphics
information for display to a monitor.
28
<PAGE>
SGRAM: SYNCHRONOUS GRAPHICS RANDOM ACCESS MEMORY. A type of memory
specifically used in graphics subsystems offering higher performance than EDO
memory and standard DRAM.
3D: THREE-DIMENSIONAL. 3D graphics on a PC create the illusion of 3D space
on the two dimensions of a computer screen and are commonplace in many imaging
applications.
VideoCD: VIDEO COMPACT DISC. VideoCD players allow playback of digitally
recorded video and audio.
VMI: VIDEO MODULE INTERFACE. A standard proposal for connecting a video module,
such as an MPEG module, to a "Video-Ready" GUI device. VMI offers a common
function set for computer manufacturers and semiconductor suppliers.
29
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
1. Financial Statements.
Page
----
Report of Independent Certified Public Accountants. . . . . . . . . . . 33
Consolidated Balance Sheets -- As of June 30, 1997 and 1996 . . . . . . 34
Consolidated Statements of Operations -- For the Three
Year Period Ended June 30, 1997 . . . . . . . . . . . . . . . . . . . . 35
Consolidated Statements of Stockholders' Equity - For the
Three Year Period Ended June 30, 1997 . . . . . . . . . . . . . . . . . 36
Consolidated Statements of Cash Flows - For the Three Year
Period Ended June 30, 1997. . . . . . . . . . . . . . . . . . . . . . . 37
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . 38
2. Financial Statement Schedule. The following Financial Statement
Schedule of the Registrant is filed as part of this report:
Schedule II - Valuation and Qualifying Accounts . . . . . . . . . . . . 54
All other schedules are omitted because they are not applicable or the
required information is shown in the Consolidated Financial Statements or
notes thereto.
3. Exhibits. The following Exhibits are filed as part of, or incorporated by
reference into, this report:
Exhibit
Number Exhibit Title
------- -------------
3.01 The Company's Restated Certificate of Incorporation,
amended (1)
3.02 The Company's Restated Bylaws (2)
3.03 Certificate of Correction to the Restated Certificate of
Incorporation of the Company
4.01 Form of Specimen Certificate for the Company's Common Stock (3)
4.02 Amended and Restated Registration Rights Agreement dated as of
October 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)
4.05 Form of Certificate of Designation of Series A Junior
Participating Preferred Stock of the Company dated August 18,
1997
4.06 Rights Agreement between the Company and BankBoston, N.A. dated
August 19, 1997
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)*
30
<PAGE>
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)
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. Peery 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)**
10.19 Amendment Agreement (No. 2) dated April 7, 1997 to Deposit
Agreement dated November 8, 1995 between Chartered Semiconductor
Manufacturing Ltd. and the Company** (15)
10.20 First Amendment to Plan of Reorganization and Agreement of
Merger dated October 27, 1995 among the Company, Oak
Acquisition Corporation, Pixel Magic, Inc. and the then
shareholders of Pixel dated June 25, 1996 and Second Amendment
thereto dated June 13, 1997
10.21 First Amendment to Non-Compete and Technology Transfer Agreement
by and among the Company, Pixel Magic, Inc. and Peter D. Besen
dated June 13, 1997**
10.22 Agreement of Termination of Employment Agreement between Pixel
Magic, Inc. and Peter D. Besen dated June 13, 1997
31
<PAGE>
10.23 Agreement of Termination of Employment Agreement between Pixel
Magic, Inc. and Don Schulsinger dated June 13, 1997
10.24 Release and Settlement Agreement between the Company and United
Microelectronics Corporation dated July 31, 1997**
11.01 Statement regarding computation of net income per share
23.01 Consent of Independent Auditors
24.01 Power of Attorney (see page 55 of this Form 10-K)
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 on
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.
(15) 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 March 31, 1997.
* Indicates Management incentive plan.
** Confidential treatment granted and/or requested as to portions of the
exhibit.
(b) Reports on Form 8-K.
There were no Reports on Form 8-K filed by the Company during the
quarter ended June 30, 1996.
TRADEMARK ACKNOWLEDGMENTS
- Oak Technology, Inc. and the Oak logo are registered trademarks
of the Company. Eon, Pixel Magic, TelAudia3D , Audia3D, Troika,
Warp, Interactive DVD Browser, IDB and "Multimedia Solutions in
Silicon" are trademarks of the Company.
- All other brand names or trademarks appearing in the Form 10-K
are the property of their respective owners.
32
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Oak Technology, Inc.:
We have audited the accompanying consolidated balance sheets of Oak Technology,
Inc. and subsidiaries as of June 30, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended June 30, 1997. In connection with our
audits of the consolidated financial statements, we have also audited the
consolidated financial statement schedule, insofar as it relates to the three-
year period ended June 30, 1997. These consolidated financial statements and
consolidated financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and consolidated financial statement schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Oak Technology, Inc.
and subsidiaries as of June 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related consolidated financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG Peat Marwick LLP
Palo Alto, California
July 29, 1997, except as to Note 13,
which is as of August 19, 1997
33
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
ASSETS
June 30,
----------------------
1997 1996
--------- ---------
Current assets:
Cash and cash equivalents. . . . . . . . . . . . $ 87,609 $ 44,934
Short-term investments . . . . . . . . . . . . . 57,660 68,350
Accounts receivable, net of allowance
for doubtful accounts of $663 and $916,
respectively. . . . . . . . . . . . . . . . . 24,872 20,172
Inventories. . . . . . . . . . . . . . . . . . . 12,322 14,763
Current portion of foundry deposits. . . . . . . 15,015 4,595
Deferred tax asset . . . . . . . . . . . . . . . 4,350 13,889
Prepaid expenses and other current assets. . . . 4,107 3,809
--------- ---------
Total current assets. . . . . . . . . . . . . 205,935 170,512
Property and equipment, net . . . . . . . . . . . . 19,958 18,212
Foundry deposits. . . . . . . . . . . . . . . . . . 19,145 52,000
Investment in foundry venture . . . . . . . . . . . 39,618 13,696
Other assets. . . . . . . . . . . . . . . . . . . . 2,939 1,888
--------- ---------
Total assets. . . . . . . . . . . . . . . . . $ 287,595 $ 256,308
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of
long-term debt. . . . . . . . . . . . . . . . $ 7,264 $ 22,062
Accounts payable . . . . . . . . . . . . . . . . 16,144 7,887
Accrued expenses . . . . . . . . . . . . . . . . 9,882 4,824
Income taxes payable . . . . . . . . . . . . . . 3,893 -
Deferred revenue . . . . . . . . . . . . . . . . 584 1,053
--------- ---------
Total current liabilities . . . . . . . . . . 37,767 35,826
Long-term debt. . . . . . . . . . . . . . . . . . . 2,496 2,858
Deferred income taxes . . . . . . . . . . . . . . . 6,344 6,435
Other long-term liabilities . . . . . . . . . . . . 2,291 362
--------- ---------
Total liabilities . . . . . . . . . . . . . . 48,898 45,481
--------- ---------
--------- ---------
Stockholders' equity:
Preferred stock, $0.001 par value; 2,000,000
shares authorized; none issued and
outstanding as of June 30, 1997 and 1996 . . - -
Common stock, $0.001 par value; 60,000,000
shares authorized; 41,086,754 shares
issues and outstanding as of June 30, 1997
and 40,196,796 shares issued and outstanding
as of June 30, 1996 . . . . . . . . . . . . . 41 40
Additional paid-in capital . . . . . . . . . . . 159,901 155,751
Retained earnings. . . . . . . . . . . . . . . . 78,755 55,036
--------- ---------
Total stockholders' equity. . . . . . . . . . 238,697 210,827
--------- ---------
Total liabilities and stockholders' equity. . $ 287,595 $ 256,308
--------- ---------
--------- ---------
See accompanying notes to consolidated financial statements.
34
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended June 30,
--------------------------------
1997 1996 1995
--------- --------- ---------
Net revenues. . . . . . . . . . . . . . $ 167,395 $ 247,984 $ 110,982
Cost of revenues. . . . . . . . . . . . 73,214 138,499 56,366
--------- --------- ---------
Gross profit . . . . . . . . . . . . 94,181 109,485 54,616
Research and development expenses . . . 34,660 30,718 14,646
Selling, general, and administrative
expenses . . . . . . . . . . . . . . 21,673 16,783 10,530
Acquisition related charges . . . . . . 5,000 4,837 -
--------- --------- ---------
Operating income . . . . . . . . . . 32,848 57,147 29,440
Nonoperating income, net. . . . . . . . 5,408 6,011 1,651
--------- --------- ---------
Income before income taxes . . . . . 38,256 63,158 31,091
Income taxes. . . . . . . . . . . . . . 14,537 26,025 9,869
--------- --------- ---------
Net income . . . . . . . . . . . . . $ 23,719 $ 37,133 $ 21,222
--------- --------- ---------
--------- --------- ---------
Net income per share. . . . . . . . . . $ 0.55 $ 0.87 $ 0.67
--------- --------- ---------
--------- --------- ---------
Shares used in computing net income
per share. . . . . . . . . . . . . . 42,757 42,614 31,474
--------- --------- ---------
--------- --------- ---------
See accompanying notes to consolidated financial statements.
35
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Convertible Additional Retained Total
Preferred Stock Common Stock Paid-in Earnings Stockholders'
Shares Amount Shares Amount Capital (Deficit) Equity
---------- ------ ---------- ------ ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, June 30, 1994. . . . . . . . . . . . 4,616,750 $ 5 7,575,158 $ 8 $ 15,042 $ (3,319) $ 11,736
Conversion of preferred stock
to common stock . . . . . . . . . . . . . . (4,616,750) (5) 15,100,650 15 (10) - -
Issuance of common stock, net
of issuance costs of $1,168 . . . . . . . . - - 13,625,000 14 128,139 - 128,153
Exercise of warrants . . . . . . . . . . . . . - - 907,630 1 1,102 - 1,103
Repurchase of common stock . . . . . . . . . . - - (80,000) - (9) - (9)
Exercise of stock options. . . . . . . . . . . - - 460,060 - 166 - 166
Tax benefit on exercise of stock options . . . - - - - 272 - 272
Net income . . . . . . . . . . . . . . . . . . - - - - - 21,222 21,222
---------- ------ ---------- ------ ---------- --------- -----------
Balances, June 30, 1995. . . . . . . . . . . . - - 37,588,498 38 144,702 17,903 162,643
Exercise of warrants . . . . . . . . . . . . . - - 807,430 - 1,211 - 1,211
Repurchase of common stock . . . . . . . . . . - - (57,780) - (1,211) - (1,211)
Exercise of stock options. . . . . . . . . . . - - 1,784,508 2 1,469 - 1,471
Employee stock purchase plan . . . . . . . . . - - 74,140 - 909 - 909
Tax benefit on exercise of stock options . . . - - - - 8,671 - 8,671
Net income . . . . . . . . . . . . . . . . . . - - - - - 37,133 37,133
---------- ------ ---------- ------ ---------- --------- -----------
Balances, June 30, 1996. . . . . . . . . . . . - - 40,196,796 40 155,751 55,036 210,827
Exercise of stock options. . . . . . . . . . . - - 748,682 1 1,048 - 1,049
Employee stock purchase plan . . . . . . . . . - - 141,276 - 1,169 - 1,169
Tax benefit on exercise of stock options . . . - - - - 1,933 - 1,933
Net income . . . . . . . . . . . . . . . . . . - - - - - 23,719 23,719
---------- ------ ---------- ------ ---------- --------- -----------
Balances, June 30, 1997. . . . . . . . . . . . - $ - 41,086,754 $ 41 $ 159,901 $ 78,755 $ 238,697
---------- ------ ---------- ------ ---------- --------- -----------
---------- ------ ---------- ------ ---------- --------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year Ended June 30,
--------------------------------
1997 1996 1995
--------- --------- ---------
Cash flows from operating activities:
Net income. . . . . . . . . . . . . . . . $ 23,719 $ 37,133 $ 21,222
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization. . . . . 5,502 3,586 1,502
Inventory-related adjustments. . . . . (21,754) 24,845 1,538
Equity in (income) or loss of
unconsolidated affiliates . . . . . 602 (442) (236)
Acquisition-related charges. . . . . . 5,000 4,837 -
Deferred income taxes. . . . . . . . . 9,448 (5,491) (2,098)
Foundry deposits utilized. . . . . . . 11,035 - -
Changes in operating assets
and liabilities:
Accounts receivable. . . . . . . . . . (4,700) 2,050 (11,920)
Inventories. . . . . . . . . . . . . . 21,195 (30,533) (86)
Prepaid expenses and other
current assets . . . . . . . . . . . (298) (2,362) (274)
Accounts payable and accrued
expenses . . . . . . . . . . . . . . 10,315 (4,915) 6,340
Income taxes payable, deferred
revenue and other liabilities. . . . 5,286 2,008 6,542
--------- --------- ---------
Net cash provided by operating
activities . . . . . . . . . . 65,350 30,716 22,530
--------- --------- ---------
Cash flows from investing activities:
Purchases of short-term investments . . . (66,791) (107,150) (29,537)
Proceeds from matured short-term
investments. . . . . . . . . . . . . . 77,481 64,607 4,673
Additions to property and
equipment, net . . . . . . . . . . . . (6,908) (12,665) (4,167)
Acquisition of Pixel Magic, Inc.,
net of cash acquired . . . . . . . . . - (5,126) -
Investment in foundry venture . . . . . . (25,922) (13,696) -
Foundry deposits. . . . . . . . . . . . . - (45,520) -
Other assets. . . . . . . . . . . . . . . (1,993) (161) (484)
--------- --------- ---------
Net cash used in investing
activities . . . . . . . . . . (24,133) (119,711) (29,515)
--------- --------- ---------
Cash flows from financing activities:
Issuance of debt. . . . . . . . . . . . . 32,730 54,865 7,859
Repayment of debt . . . . . . . . . . . . (33,490) (48,452) (7,946)
Issuance of common stock. . . . . . . . . 2,218 2,380 129,413
--------- --------- ---------
Net cash provided by financing
activities. . . . . . . . . . . . . . . . 1,458 8,793 129,326
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . . 42,675 (80,202) 122,341
Cash and cash equivalents, beginning of
period . . . . . . . . . . . . . . . . 44,934 125,136 2,795
--------- --------- ---------
Cash and cash equivalents, end of
period . . . . . . . . . . . . . . . . $ 87,609 $ 44,934 $ 125,136
--------- --------- ---------
--------- --------- ---------
Supplemental information:
Cash paid during the period:
Interest . . . . . . . . . . . . . . . $ 465 $ 680 $ 402
--------- --------- ---------
--------- --------- ---------
Income taxes . . . . . . . . . . . . . $ - $ 28,514 $ 5,582
--------- --------- ---------
--------- --------- ---------
Noncash investing and financing
activities:
Accrual of foundry commitments . . . . $ (14,400) $ 14,400 $ 1,200
--------- --------- ---------
--------- --------- ---------
Utilization of foundry deposits. . . . $ 11,035 $ - $ -
--------- --------- ---------
--------- --------- ---------
Conversion of preferred stock to
common stock. . . . . . . . . . . . $ - $ - $ 14,928
--------- --------- ---------
--------- --------- ---------
Tax benefit related to stock plans . . $ 1,933 $ 8,671 $ 272
--------- --------- ---------
--------- --------- ---------
See accompanying notes to consolidated financial statements.
37
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY
Oak Technology, Inc. (the "Company") commenced operations in August 1987,
as a California corporation. The Company is engaged in the design,
development and marketing of high performance multimedia semiconductors and
related software to the PC, consumer electronics, and digital office
equipment markets. The Company formed a subsidiary in Taipei, Taiwan, in
January 1989, and in Tokyo, Japan, in January 1991. In December 1994, the
Board of Directors approved the reincorporation of the Company as a
Delaware corporation. In November 1995, the Company acquired Pixel Magic,
Inc.
In February 1995, the Company completed an initial public offering of
10,925,000 shares of its common stock, of which 7,425,000 were sold by the
Company. At that time, all of the outstanding convertible preferred stock
automatically converted into approximately 15,100,000 shares of common
stock. In May 1995, the Company completed a secondary public offering of
9,200,000 shares of its common stock, of which 6,200,000 shares were sold
by the Company.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND PREPARATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant
intercompany transactions and accounts have been eliminated in
consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
CASH EQUIVALENTS AND INVESTMENTS
The Company's policy is to invest cash in excess of operating requirements
in interest-bearing investments. Securities purchased with remaining
maturities of three months or less at the date of acquisition are
considered to be cash equivalents. Securities purchased with remaining
maturities greater than three months at the date of acquisition are
included in short-term investments.
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES, effective July 1, 1994. SFAS No. 115 requires entities to
classify investments in debt and equity securities with readily determined
fair values as "held-to-maturity," "available-for-sale" or "trading" and
establishes accounting and reporting requirements for each classification.
In accordance with SFAS No. 115, the Company has classified all securities
held as available-for-sale securities. Such securities are reported at
fair value with unrealized gains or losses, if material, excluded from
earnings and reported as a separate component of stockholders' equity. To
date, unrealized gains and losses have not been significant.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily cash and cash equivalents,
short-term investments and accounts receivable. The Company's cash
equivalents and short-term investments are primarily in money market
accounts, certificates of deposit, corporate notes and U.S. government
obligations. The Company's short-term investments have maturities ranging
from 1997 through 1999. Also included in cash and cash equivalents as of
June 30, 1997, and 1996, are approximately $19,005,000 and $9,780,000,
respectively, in accounts with Taiwanese and Japanese banks and financial
institutions. The Company periodically discounts notes receivable with
recourse due from some customers with banks in Japan. As of June 30, 1997,
the Company had no discounted notes receivable outstanding.
Generally, the Company requires no collateral on trade receivables,
although a substantial portion of export international sales are guaranteed
by letters of credit. The Company believes that any credit risks are
substantially mitigated by its credit evaluation process and its
maintenance of reserves for estimated credit losses.
38
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost (first in, first out) or
market. The Company periodically reviews its inventories for potential
slow-moving or obsolete items and writes down specific items to net
realizable value as appropriate.
DEPRECIATION AND AMORTIZATION
Property and equipment is stated at cost. Depreciation and amortization
are computed using the straight-line method. Useful lives of three to five
years are used for computer equipment, purchased software and furniture and
fixtures; useful lives of up to five years are used for leasehold
improvements and a useful life of 60 years is used for a building.
FOUNDRY DEPOSITS AND PREPAYMENTS
Deposits and prepayments paid under agreements to secure additional wafer
capacity are carried at the lessor of cost or net realizable value.
REVENUE RECOGNITION
Product revenue is recognized upon shipment, with provisions for estimated
returns and allowances. Revenue from nonrefundable technology license fees
is recognized upon transfer of the associated technology. Product design
revenue is recognized upon completion of contractual milestones.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The Company's transactions are generally denominated in U.S. dollars, which
is considered to be the functional currency of the Company and its
subsidiaries. Sales to customers in Japan and Taiwan are invoiced in local
currencies. Assets and liabilities of the Company's foreign subsidiaries
are remeasured into the functional currency from the local currency at
rates in effect at period-end except for inventories, property and
equipment, and intangible assets, which are remeasured at historical rates.
Revenues and expenses are remeasured at average rates during the period.
Adjustments arising from the remeasurement of local currency financial
statements are included in nonoperating results.
The Company enters into forward contracts to hedge certain exposures
related to foreign currency transactions. Gains and losses on contracts
are recognized in the same period as the transactions being hedged and are
charged to nonoperating income. As of June 30, 1997 and 1996, the Company
had forward contracts to exchange yen for approximately $4,100,000 and
$1,084,000, respectively.
INCOME TAXES
The Company records income taxes using an asset and liability approach that
results in the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's consolidated financial statements or tax returns. In estimating
future tax consequences, all expected future events other than enactment of
changes in tax laws or rates are considered.
U.S. income taxes are provided on income from foreign subsidiaries to the
extent the Company plans to repatriate such income.
NET INCOME PER SHARE
Net income per share data have been computed using the weighted average
number of shares of common stock, dilutive common equivalent shares from
the convertible preferred stock and dilutive common equivalent shares from
stock options and warrants outstanding (using the treasury stock method).
Pursuant to the Securities and Exchange Commission Staff Accounting
Bulletin No. 83, common equivalent shares issued during the twelve-month
period prior to the Company's initial public offering in February 1995 have
been included in the calculation as if they were outstanding for all
periods prior to the offering (even if antidilutive, using the treasury
stock method).
39
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
The Company accounts for its stock option plan in accordance with the
provisions of the Accounting Principles Board (APB) Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations. As
such, compensation expense would be recorded on the date of grant only if
the current market price of the underlying stock exceeded the exercise
price. On January 1, 1996, the Company adopted the disclosure requirements
of Statement of Financial Accounting Standards (SFAS) No. 123, ACCOUNTING
FOR STOCK-BASED COMPENSATION. Under SFAS No. 123 the Company must disclose
pro forma net income and pro forma earnings per share disclosures for
employee stock option grants made in 1996 and future years as if the fair
value-based method defined in SFAS No. 123 had been applied.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-
LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. SFAS No. 121
requires the Company to review the recoverability of the carrying amount of
its long-lived assets whenever events or changes in circumstances indicate
that the carrying amount of an asset might not be recoverable.
In the event that facts and circumstances indicate that the carrying amount
of long-lived assets may be impaired, an evaluation of recoverability would
be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset would be compared to the
asset's carrying amount to determine if a write-down to fair value is
required. Fair value may be determined by reference to discounted future
cash flows over the remaining useful life of the related asset. Such
adoption did not have a material effect on the Company's consolidated
financial position or results of operations.
In February 1997 the Financial Accounting Standards Board issued SFAS No.
128 "Earnings Per Share." SFAS No. 128 requires the presentation of basic
earnings per share ("EPS") and, for companies with complex capital
structures, diluted EPS. SFAS No. 128 is effective for annual and interim
periods ending after December 15, 1997. The Company expects that basic EPS
will be higher than primary earnings per share as presented in the
accompanying consolidated financial statements. Generally, diluted EPS
will be the same as fully diluted earnings per share.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and displaying comprehensive income and its components in the
consolidated financial statements. It does not, however, require a
specific format for the statement, but requires the Company to display an
amount representing total comprehensive income for the period in that
financial statement. The Company is in the process of determining its
preferred format. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
SFAS No. 131 establishes standards for the way public business enterprises
are to report information about operating segments in annual financial
statements and requires those enterprises to report selected information
about operating segments in interim financial reports issued to
shareholders. SFAS No 131 is effective for financial statements for
periods beginning after December 15, 1997.
STOCK SPLIT
In March 1996, the Company completed a two-for-one stock split in the form
of a 100% stock dividend. All share and per share information for all
periods presented has been adjusted to reflect the impact of the stock
split.
RECLASSIFICATIONS
Certain reclassifications were made to the 1995 and 1996 consolidated
financial statements to conform to the 1997 presentation.
40
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) BALANCE SHEET AND OPERATING STATEMENT COMPONENTS
INVESTMENTS
As of June 30, 1997, all investments were considered available-for-sale
securities and consisted of the following (in thousands):
Estimated
Accrued Fair
Cost Interest Value
--------- -------- ----------
Money market funds. . . . . . . $ 63,002 $ 5 $ 63,007
Certificates of deposit . . . . 34,916 18 34,934
Corporate notes . . . . . . . . 16,521 285 16,806
U.S. government obligations . . 30,046 225 30,271
--------- -------- ----------
$ 144,485 $ 533 $ 145,018
--------- -------- ----------
--------- -------- ----------
As of June 30, 1997, approximately $97.9 million of these investments had
contractual maturities within one year and approximately $46.6 million had
contractual maturities between one and two years. These investments were
classified on the consolidated balance sheet as follows (in thousands):
Cash equivalents. . . . . . . . . . . . . . . . . . . . $ 86,825
Short-term investments. . . . . . . . . . . . . . . . . 57,660
----------
$ 144,485
As of June 30, 1996, all investments were considered available-for-sale
securities and consisted of the following (in thousands):
Estimated
Accrued Fair
Cost Interest Value
--------- -------- ---------
Money market funds. . . . . . . . . . $ 35,579 $ - $ 35,579
Repurchase agreements . . . . . . . . 1,843 4 1,847
Certificates of deposit . . . . . . . 17,205 - 17,205
Corporate notes . . . . . . . . . . . 8,009 191 8,200
U.S. government obligations . . . . . 43,136 574 43,710
--------- -------- ---------
. . . . . . . . . . . . . . . . . . . $ 105,772 $ 769 $106,541
--------- -------- ---------
--------- -------- ---------
As of June 30, 1996, approximately $55 million of these investments had
contractual maturities within one year and approximately $51 million had
contractual maturities between one and two years. These investments were
classified on the consolidated balance sheet as follows (in thousands):
Cash equivalents. . . . . . . . . . . . . . . . . . . . . . . $ 37,422
Short-term investments. . . . . . . . . . . . . . . . . . . . 68,350
----------
$ 105,772
----------
----------
41
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) BALANCE SHEET AND OPERATING STATEMENT COMPONENTS (CONTINUED)
INVENTORIES
Inventories consisted of the following (in thousands):
June 30,
---------------------
1997 1996
-------- ---------
Purchased parts and work in process. . . . . $ 5,521 $ 5,888
Finished goods . . . . . . . . . . . . . . . 6,801 8,875
--------- ---------
$ 12,322 $ 14,763
--------- ---------
--------- ---------
In 1996, the Company recorded a charge of approximately $21.0 million to
increase the allowance against inventory to reflect a deterioration in the
net realizable value of excess or obsolete inventory, the majority of which
was composed of one of the Company's CD-ROM controller products. In 1997,
due to more favorable market and economic conditions, the Company sold
$18.7 million of the inventory which had been reserved in 1996 resulting in
a favorable adjustment to cost of revenues.
PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
June 30,
---------------------
1997 1996
-------- --------
Land . . . . . . . . . . . . . . . . . . . . . $ 3,487 $ 3,487
Building and leasehold improvements. . . . . . 2,152 2,023
Computers, equipment and purchased software. . 24,190 17,715
Furniture and fixtures . . . . . . . . . . . . 1,126 970
--------- ---------
30,955 24,195
Less accumulated depreciation and
amortization . . . . . . . . . . . . . . . . 10,997 5,983
--------- ---------
$ 19,958 $ 18,212
--------- ---------
--------- ---------
ACCRUED EXPENSES
Accrued expenses consisted of the following (in thousands):
June 30,
---------------------
1997 1996
-------- --------
Commission and payroll related items . . . . $ 4,510 $ 3,072
Royalties. . . . . . . . . . . . . . . . . . 788 668
Current portion of acquisition-related
accrued liability to former Pixel Magic
shareholders. . . . . . . . . . . . . . . 3,000 -
Other. . . . . . . . . . . . . . . . . . . . 1,584 1,084
-------- --------
$ 9,882 $ 4,824
-------- --------
-------- --------
42
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) BALANCE SHEET AND OPERATING STATEMENT COMPONENTS (CONTINUED)
LICENSE FEES
Nonrefundable technology license fees of approximately $235,322, $3,003,000
and $1,334,000 were recorded as revenue in fiscal 1997, 1996 and 1995
respectively.
NONOPERATING INCOME, NET
Nonoperating income, net consisted of the following (in thousands):
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Interest income. . . . . . . . . . . . . . . . . . . . . . . $ 6,614 $ 7,299 $ 2,034
Interest expense . . . . . . . . . . . . . . . . . . . . . . (468) (725) (387)
Foreign currency translation/transaction loss. . . . . . . . (722) (1,082) (186)
Income(loss) on equity method investee. . . . . . . . . . . (602) 442 236
Other income (expense) . . . . . . . . . . . . . . . . . . . 586 77 (46)
-------- -------- --------
$ 5,408 $ 6,011 $ 1,651
-------- -------- --------
-------- -------- --------
</TABLE>
(4) NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consisted of the following (in thousands):
June 30,
-----------------------
1997 1996
-------- ---------
Accrued foundry commitments. . . . . . . . . $ - $ 14,400
Short-term notes . . . . . . . . . . . . . . 158 2,340
Mortgage notes . . . . . . . . . . . . . . . 2,446 2,637
Short-term bank loans. . . . . . . . . . . . 7,105 5,479
Capital lease obligations. . . . . . . . . . 51 64
-------- --------
9,760 24,920
Less current portion . . . . . . . . . . . . 7,264 22,062
-------- --------
$ 2,496 $ 2,858
-------- --------
-------- --------
Accrued foundry commitments consisted primarily of payments due under
agreements with Taiwan Semiconductor Manufacturing Company and Chartered
Semiconductor Manufacturing Pte. Ltd. to obtain additional wafer capacity.
As a result of the amendments to the foundry agreements described in
Note 7, the Company was relieved of these commitments in fiscal 1997.
Short-term notes consist primarily of revolving borrowings from five
Taiwanese financial institutions, collateralized by land and a building in
Taiwan, and bear interest at rates determined at the time of each
borrowing. Under arrangements with the five financial institutions, as of
June 30, 1997, the Company may borrow up to an aggregate of approximately
$12,619,000 subject to annual renewal. Compensating balances ranging from
20% to 30% of outstanding borrowings are required for individual balances
exceeding established minimums, however no compensating balances were
required as of June 30, 1997. Borrowings as of June 30, 1997 bore interest
at 3.25%.
Mortgage notes are payable in monthly installments of principal and
interest totaling approximately $28,807 and are also collateralized
by land and a building in Taiwan. These notes mature at various dates
through March 2012 and bear interest at variable rates, based on the Taiwan
Bank reference rate, ranging from 8% to 8.025% as of June 30, 1997.
43
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
Short-term bank loans consist of borrowings from two Japanese financial
institutions, collateralized by standby letters of credit drawn on U.S.
banks, and bear interest based on the Japanese prime rate. Under
arrangements with these two financial institutions, as of June 30, 1997,
the Company may borrow up to an aggregate of approximately $25 million
subject to annual renewal. Borrowings as of June 30, 1997, bore interest
ranging from 1.08% to 1.12%.
Future principal payments under all outstanding obligations as of June 30,
1997 are as follows (in thousands):
Year Ending June 30,
--------------------
1998. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,264
1999. . . . . . . . . . . . . . . . . . . . . . . . . . . . 363
2000. . . . . . . . . . . . . . . . . . . . . . . . . . . . 193
2001. . . . . . . . . . . . . . . . . . . . . . . . . . . . 197
2002. . . . . . . . . . . . . . . . . . . . . . . . . . . . 214
Thereafter. . . . . . . . . . . . . . . . . . . . . . . . . 1,529
--------
$ 9,760
--------
--------
(5) ACQUISITION OF PIXEL MAGIC, INC.
In November 1995, the Company acquired all of the outstanding stock of
Pixel Magic, Inc. ("Pixel Magic"), a privately held company based in
Andover, Massachusetts, specializing in the design and manufacture of
compression/decompression and image enhancement technology for the digital
equipment product market, for $10.5 million of which $5.0 million was
contingent upon the achievement of certain performance criteria over a
three year period. In June 1997, the Company waived certain of the
performance criteria and agreed to pay the entire contingent amount of $5.0
million in two installments during calendar 1998. The first payment of
$3.0 million is due in January 1998 and the second payment of $2.0 million
is due in December 1998. As a result of this agreement and because the
contingent earnout was based, in part, on the continued employment of the
former shareholder/employees of Pixel Magic, Inc., the Company recorded a
compensation charge of $5.0 million in the quarter and fiscal year ended
June 30, 1997. The acquisition was accounted for using the purchase method
of accounting and accordingly, the operating results of Pixel Magic have
been included in the consolidated financial statements of the company from
the date of acquisition. The initial cash payment was allocated as follows
(in thousands):
Net liabilities assumed. . . . . . . . . . . . . . . . . . . $ (191)
In-process research and development. . . . . . . . . . . . . 4,837
Purchased technology . . . . . . . . . . . . . . . . . . . . 854
--------
$ 5,500
--------
--------
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. The remainder of the cost was allocated
to purchased software and assets and liabilities based upon management's
estimate of their fair market values as of the acquisition date. The
amount allocated to purchased technology will be amortized over 30 months.
44
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) ACQUISITION OF PIXEL MAGIC, INC. (CONTINUED)
The following unaudited pro forma combined results of operations for the
twelve months ended June 30, 1996 and 1995 are presented as if the
acquisition had occurred at the beginning of each period. The one-time
charge for the write-off of in-process research and development and the
compensation expense associated with the waiver of the performance criteria
associated with the contingent payment amount have not been reflected in
the following pro forma summary as they are nonrecurring. This pro forma
summary does not necessarily reflect the results of operations as they
would have been if the Company and Pixel Magic had constituted a
consolidated entity during such periods (in thousands, except per share
data):
June 30,
-------------------------
1996 1995
---------- ----------
Net revenues . . . . . . . . . . . . . . . . $ 249,170 $ 113,645
Net income . . . . . . . . . . . . . . . . . $ 39,857 $ 21,155
Net income per share . . . . . . . . . . . . $ 0.94 $ 0.67
(6) INCOME TAXES
The components of the income tax expense are as follows (in thousands):
<TABLE>
<CAPTION>
June 30,
----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal and state . . . . . . . . . . . . . . . . $ 1,087 $ 21,622 $ 11,970
Foreign . . . . . . . . . . . . . . . . . . . . . 2,069 1,223 1,050
Deferred:
Federal and state . . . . . . . . . . . . . . . . 9,771 (9,984) (4,008)
Foreign . . . . . . . . . . . . . . . . . . . . . (323) 4,493 1,910
Less benefit of net operating loss carryovers. . . . . - - (1,325)
Charge in lieu of taxes attributable to
employee stock option plans . . . . . . . . . . . 1,933 8,671 272
--------- --------- ---------
Total tax provision $ 14,537 $ 26,025 $ 9,869
--------- --------- ---------
--------- --------- ---------
</TABLE>
A reconciliation between the income tax provision computed at the federal
statutory rate and the effective tax rate is as follows (in thousands):
<TABLE>
<CAPTION>
June 30,
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Expense at federal statutory tax rate. . . . . . . . . $ 13,390 $ 22,105 $ 10,882
State income tax, net of federal benefit . . . . . . . 523 1,209 733
Rate differential on foreign income. . . . . . . . . . (327) 1,615 -
Pixel Magic acquisition. . . . . . . . . . . . . . . . 1,667 1,773 -
Valuation allowance adjustment . . . . . . . . . . . . - - (3,770)
Other. . . . . . . . . . . . . . . . . . . . . . . . . (716) (677) 2,024
--------- --------- --------
Total tax provision $ 14,537 $ 26,025 $ 9,869
--------- --------- --------
--------- --------- --------
</TABLE>
45
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities are as follows (in thousands):
June 30,
---------------------
1997 1996
--------- ---------
Various reserves and accruals . . . . . . . . $ 4,086 $ 13,982
Deferred research and development expenses. . 66 73
State tax credits . . . . . . . . . . . . . . 412 -
--------- ---------
Total gross deferred tax assets . . . . . 4,564 14,055
--------- ---------
Fixed assets depreciation differences . . . . (344) (63)
Other foreign liabilities . . . . . . . . . . (6,214) (6,538)
--------- ---------
Total gross deferred tax liabilities. . . (6,558) (6,601)
--------- ---------
Net deferred tax assets (liabilities). $ (1,994) $ 7,454
--------- ---------
--------- ---------
As of June 30, 1997, the Company has a state tax credit carryforward of
approximately $412,000; if not utilized, approximately $284,000 of these
credits will expire in 2005. As of June 30, 1997 and 1996, the cumulative
amount of unremitted earnings of non-U.S. subsidiaries on which the Company
had not provided U.S. taxes approximated $15,000,000 and $11,600,000,
respectively. The additional taxes that could arise if those earnings were
to be remitted to the U.S. would not be material after consideration of
existing foreign taxes. It is management's intent that these earnings
remain indefinitely invested.
(7) FOUNDRY AGREEMENTS AND INVESTMENT IN FOUNDRY VENTURE
FOUNDRY AGREEMENTS
In June and November 1995, the Company entered into agreements with TSMC
and Chartered to obtain certain additional wafer capacity through the year
2001. The agreements call for the Company to commit to certain future
wafer purchases and 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. The price of such wafers will be determined in the future periods
in which specific orders are actually placed. If the Company is not able
to use, assign, or sell the additional wafer quantities, all or a portion
of the deposits may be forfeited.
In October 1996, the Company amended its previous agreement with TSMC
resulting in a reduction of the Company's future wafer purchases required
under the original agreement by approximately $73 million . Under the
amended agreement, no additional prepayment is required; however, the
Company must utilize the entire amount of the prepayment paid to date
through a certain committed amount of wafer purchases in the years 1997,
1998, and 1999 or the prepayment will be forfeited.
In September 1996 and April 1997, the Company amended its agreement with
Chartered. The amendments resulted in a reduction of the Company's future
wafer purchase commitments and the elimination of required future cash
deposits under the original agreement of approximately $36 million. Under
the amended agreement, the required future cash deposits of approximately
$36 million 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.
The Company recorded $3.0 million in cost of sales during fiscal 1996
associated with manufacturing cost adjustments related to its wafer foundry
agreements as a result of lower forecasted capacity usage during the
calendar year ending December 31, 1996. The execution of these amendments
reduced the Company's wafer purchase commitments during the remainder of
calendar 1996 and thereafter and resulted in a favorable manufacturing cost
adjustment recorded to cost of revenues of $3.0 million. The remaining
deposits and prepayments under the amended foundry agreements described
above are recorded at cost and total approximately $34.2 million as of June
30, 1997. The Company currently anticipates being able to utilize and
fully recover the value of all foundry prepayments and deposits under the
terms of the amended agreements.
46
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) FOUNDRY AGREEMENTS AND INVESTMENT IN JOINT VENTURE (CONTINUED)
INVESTMENT IN FOUNDRY VENTURE
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, United Integrated Circuits Corporation "UICC",
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 a 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. Investment in the foundry venture was approximately $39.6 million as
of June 30, 1997. As an investor in this venture, the Company will have
rights to a portion of the total wafer capacity for the manufacture of its
proprietary products. However, there can be no assurance that a market
will develop for the shares representing the Company's equity investment at
any time in the future.
(8) COMMITMENTS AND 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 IN RE OAK TECHNOLOGY SECURITIES LITIGATION, Master File No.
CV758510 pending 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 breaches of fiduciary duty and abuse of
control. On December 6, 1996, the state court Judge sustained the Oak
defendants' demurrer to all causes of action alleged in plaintiffs' First
Amended Consolidated Complaint, but allowed plaintiffs the opportunity to
amend. The plaintiff's Second Amended Consolidated Complaint was filed on
August 1, 1997.
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. This action also
names as a defendant one of the Company's investment bankers. On July 29,
1997, the federal court Judge granted the Oak defendants Motion to Dismiss
the plaintiffs; First Amended Consolidated Complaint, but granted
plaintiffs leave to amend most claims. The plaintiffs' Second Amended
Consolidated Complaint was filed on September 4, 1997.
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, which 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, has been stayed pending resolution of the class actions.
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. Although it is reasonably possible the
Company may incur a loss upon conclusion of these claims, an estimate of
any loss or range of loss cannot be made. 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.
47
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) STOCKHOLDERS' EQUITY
The Company is authorized to issue two classes of stock, preferred stock
and common stock, each with a par value of $0.001 per share.
PREFERRED STOCK
Upon conversion of all of the outstanding preferred stock at the effective
date of the Company's initial public offering in February 1995, the number
of preferred shares authorized was reduced to 14,760,708 undesignated
shares. In April 1995 the number of preferred shares authorized was reduced
to 4,000,000 undesignated shares and in March 1996, to 2,000,000
undesignated shares; none of these preferred shares have been issued. The
Board of Directors is authorized, subject to any limitations prescribed by
Delaware law, to provide for the issuance of shares of preferred stock in
one or more series, to establish the number of shares to be included in
each series, and to fix the powers, preferences and rights of the shares.
WARRANTS
Warrants to purchase an aggregate of 796,644 shares of Series D preferred
stock at $2.25 per share were outstanding as of June 30, 1994. The warrants
are exercisable at any time on or prior to December 15, 1997. Following
the conversion of Series D preferred stock to common stock upon the
Company's initial public offering in February 1995, these warrants
represented the right to purchase 1,194,948 shares of common stock at $1.50
per share. Warrants representing the right to purchase 204,990 shares of
common stock were exercised under the warrants' cashless exercise
provisions, resulting in the issuance of 177,098 shares of common stock in
1995; 807,448 shares of common stock resulted in the issuance of 749,650
shares of common stock in 1996; no shares were issued pursuant to warrant
exercises in 1997. Warrants representing the right to purchase 182,528
shares of common stock were outstanding as of June 30, 1997 and 1996.
STOCK OPTIONS
Upon the reincorporation of the Company in Delaware in February 1995, the
Company assumed the obligations of its predecessor under the 1988 Stock
Option Plan (the "1988 Plan"), as amended and restated. The Company does
not intend to issue any additional options under the 1988 Plan.
In December 1994, the Board of Directors approved the 1994 Stock Option
Plan (the "1994 Plan") under which 3,000,000 shares of Common Stock were
reserved for issuance; 3,000,000 additional shares were approved in
February 1996. Under the 1994 Plan, either incentive or nonqualified
options to purchase the Company's common stock may be granted to employees
as determined by the Board of Directors at prices generally at fair market
value at the date of grant (110% in certain cases of nonqualified options).
Nonqualified options may be granted to employees and consultants as
determined by the Board of Directors at prices not lower than 85% of fair
market value at the date of grant. The Board of Directors also has the
authority to set exercise dates (generally no longer than five years from
date of grant), payment terms and other provisions for each grant.
On August 1, 1996 the Company repriced 1,800,370 options under the 1994
Plan to $6.50, the fair market value as of that date. The repriced shares
were treated as canceled and regranted; however, they retained their
original vesting terms and were not exercisable until after April 30, 1997.
In December 1994 the Board of Directors also approved the 1994 Outside
Directors' Stock Option Plan (the "Directors Plan"), under which 500,000
shares of Common Stock were reserved for issuance. The Directors Plan
provides for the automatic grant of options to purchase shares of Common
Stock to nonemployee Directors of the Company.
Stock options are subject to vesting, generally over 50 months. Under the
1988 Plan, shares are exercisable prior to vesting and are held in escrow
until vested; however, unvested shares are subject to a right of repurchase
by the Company at their original purchase price upon termination of
employment. Unexercised options expire 90 days after termination of
employment with the Company.
48
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) STOCKHOLDERS' EQUITY (CONTINUED)
A summary of all the Company's stock option plans is set forth below:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Options Exercise Options Exercise
Outstanding Price Exercisable Price
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balances, June 30, 1994. . . . . . . . . 4,031,000 $ 0.66
Granted . . . . . . . . . . . . . . 1,443,200 8.05
Exercised . . . . . . . . . . . . . (460,060) 0.39
Canceled. . . . . . . . . . . . . . (318,660) 2.72
------------- ------------- ------------- -------------
Balances, June 30, 1995. . . . . . . . . 4,695,480 $ 2.82 4,092,280 $ 1.15
Granted . . . . . . . . . . . . . . 1,576,400 22.33
Exercised . . . . . . . . . . . . . (1,784,508) 0.82
Canceled. . . . . . . . . . . . . . (495,862) 13.55
------------- ------------- ------------- -------------
Balances, June 30, 1996. . . . . . . . . 3,991,510 $ 10.08 2,257,424 $ 2.11
Granted . . . . . . . . . . . . . . 3,118,240 7.69
Exercised . . . . . . . . . . . . . (748,682) 1.41
Canceled. . . . . . . . . . . . . . (2,579,072) 15.82
------------- ------------- ------------- -------------
Balances, June 30, 1997. . . . . . . . . 3,781,996 $ 5.91 1,459,573 $ 3.33
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The weighted average fair values of options granted in fiscal years 1997
and 1996 were $3.82 and $14.12, respectively.
The following table summarizes information about the stock options
outstanding as of June 30, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------- -------------------------
Weighted
Average
Shares Remaining Weighted Shares Weighted
at Contractual Average at Average
June 30, Life Exercise June 30, Exercise
Exercise Prices 1997 (Years) Price 1997 Price
- ---------------------------------------- ---------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$0.43 to $5.00 1,175,336 1.60 $ 1.65 905,815 $ 1.27
$6.50 1,538,310 3.40 6.50 547,998 6.50
$6.81 to $10.13 778,700 4.61 8.53 - -
$10.38 to $14.25 271,650 4.49 12.30 - -
$25.00 18,000 3.59 25.00 5,760 25.00
---------- ----------- ----------- ---------- ----------
$0.43 to $25.00 3,781,996 3.17 $ 5.91 1,459,573 $ 3.33
---------- ----------- ----------- ---------- ----------
---------- ----------- ----------- ---------- ----------
</TABLE>
49
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) STOCKHOLDERS' EQUITY (CONTINUED)
STOCK PURCHASE PLAN
In December 1994, the Board of Directors approved the 1994 Stock Purchase
Plan (the "Stock Purchase Plan") under which 600,000 shares of common stock
were reserved for issuance. The Stock Purchase Plan permits eligible
employees to purchase shares at a price equal to 85% of the lower of the
fair market value at the beginning or end of each six-month offering
period. Under the Stock Purchase Plan, 141,276 and 74,140 shares were
issued in fiscal years 1997 and 1996 at weighted average prices of $8.28
and $12.27, and weighted average fair values of $3.84 and $6.97,
respectively.
FAIR VALUE INFORMATION
The Company applies APB Opinion 25 and related Interpretations in
accounting for its stock options plans. Accordingly, no compensation cost
has been recognized for its stock option plans nor its Stock Purchase Plan.
Had compensation cost for the Company's option plans been determined
consistent with FASB Statement No. 123, the Company's net income and net
income per share would have been reduced to the pro forma amounts indicated
below (in thousands, except per share data):
June 30,
-------------------
1997 1996
-------- --------
Net income:
As reported . . . . . . . . . . . . . . . . . $ 23,719 $ 37,133
Pro forma . . . . . . . . . . . . . . . . . . 18,890 35,014
Net income per share:
As reported . . . . . . . . . . . . . . . . . $ 0.55 $ 0.87
Pro forma . . . . . . . . . . . . . . . . . . 0.44 0.82
Pro forma net income reflects only options granted in fiscal 1997 and 1996.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income
amounts presented above because compensation cost is reflected over the
options' vesting period of three to four years and compensation cost for
options granted prior to July 1, 1995, is not considered.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with a dividend yield of 0% and the
following weighted average assumptions:
Stock Option Plans Stock Purchase Plan
1997 1996 1997 1996
------ ------ ------ ------
Expected life (years). . . . . 3.745 3.745 0.500 0.500
Expected volatility. . . . . . 85% 85% 85% 85%
Risk-free interest rate. . . . 6.51% 5.82% 5.29% 5.38%
(10) EMPLOYEE BENEFIT PLAN
In July 1990, the Company adopted a 401(k) Profit Sharing Plan (''401(k)
Plan'') which is intended to qualify under section 401(k) of the Internal
Revenue Code of 1986, as amended. The 401(k) Plan covers substantially all
of the Company's U.S. employees. Participants may elect to contribute a
percentage of their compensation to this plan, up to the statutory maximum
amount. The Company makes contributions to the 401(k) Plan based on 25% of
an employee's contribution up to a maximum of 1.25% of total compensation;
$198,820 and $226,844 in matching contributions were recorded during fiscal
1997 and fiscal 1996, respectively. No matching contributions were made
in prior years.
50
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) INDUSTRY SEGMENT AND MAJOR CUSTOMERS
The Company designs, develops and markets high performance multimedia
semiconductors and related software to original equipment manufacturers
worldwide who serve the PC, consumer electronics and digital office
equipment markets.
The following table summarizes the annual percentage contribution to net
revenues by customers when sales to such customers exceeded 10% of net
revenues and the percentage of total accounts receivable due from these
customers.
Percentage of Net Revenues
--------------------------
Year Ended June 30,
--------------------------
1997 1996 1995
------ ------ ------
LG Electronics . . . . . . . . . . . . . 13% 2% -
Mitsumi Electronic Co.,Ltd.. . . . . . . 14% 26% 29%
Kanematsu Semiconductor Corporation. . . 7% 19% 13%
NEC Home Electronics, Ltd. . . . . . . . 8% 13% 9%
Percentage of Total Accounts
Receivable
--------------------------
As of June 30,
--------------------------
1997 1996 1995
------ ------ ------
LG Electronics . . . . . . . . . . . . . 1% - -
Mitsumi Electronic Co.,Ltd.. . . . . . . 23% 31% 32%
Kanematsu Semiconductor Corporation. . . 6% 7% 21%
NEC Home Electronics, Ltd. . . . . . . . 22% 20% 20%
Sales of the Company's CD-ROM controller products comprised 84%, 91%, and
74% of the net revenues in fiscal 1997, 1996, and 1995, respectively.
51
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) GEOGRAPHIC SEGMENT REPORTING
The Company maintains significant operations in the United States, Taiwan
and Japan. Activities in the United States consist of corporate
administration, product development, logistics and worldwide sales
management. Foreign operations consist of regional sales and limited
board-level manufacturing.
The following is a summary of operations by geographic areas (in
thousands):
Year Ended June 30,
--------------------------
1997 1996 1995
------ ------ ------
Revenue from unaffiliated customers
originating from:
United States. . . . . . . . . $ 15,139 $ 37,142 $ 25,224
Taiwan . . . . . . . . . . . . 82,613 47,963 28,368
Japan. . . . . . . . . . . . . 69,643 162,879 57,390
--------- --------- --------
$ 167,395 $ 247,984 $110,982
--------- --------- --------
--------- --------- --------
Transfers between geographic areas
(eliminated in consolidation):
United States . . . . . . . . . . . $ 130,102 $ 180,569 $ 72,483
Taiwan. . . . . . . . . . . . . . . 1 4,175 5,523
Japan . . . . . . . . . . . . . . . 710 233 7,161
--------- --------- --------
$ 130,813 $ 184,977 $ 85,167
--------- --------- --------
--------- --------- --------
Income before income taxes:
United States . . . . . . . . . . . $ 31,767 $ 48,349 $ 27,579
Taiwan. . . . . . . . . . . . . . . 6,041 2,536 3,069
Japan . . . . . . . . . . . . . . . 834 8,574 3,844
Eliminations. . . . . . . . . . . . (386) 3,699 (3,401)
--------- --------- --------
$ 38,256 $ 63,158 $ 31,091
--------- --------- --------
--------- --------- --------
Identifiable assets:
United States . . . . . . . . . . . $ 251,706 $ 226,039 $178,262
Taiwan. . . . . . . . . . . . . . . 27,743 14,778 20,096
Japan . . . . . . . . . . . . . . . 25,731 22,848 28,118
Eliminations. . . . . . . . . . . . (17,585) (7,357) (32,523)
--------- --------- --------
$ 287,595 $ 256,308 $193,953
--------- --------- --------
--------- --------- --------
Export sales from United States to
unaffiliated customers:
Canada. . . . . . . . . . . . . . . $ 51 $ 50 $ 207
Taiwan. . . . . . . . . . . . . . . 190 9 59
Japan . . . . . . . . . . . . . . . 211 1,273 6
Other Asia. . . . . . . . . . . . . 6,621 26,189 13,594
Europe. . . . . . . . . . . . . . . 1,212 3,668 2,134
--------- --------- --------
$ 8,285 $ 31,189 $ 16,000
--------- --------- --------
--------- --------- --------
52
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) SUBSEQUENT EVENT
On August 19, 1997 the Board of Directors of the Company declared a
dividend of one preferred share purchase right (a "Right") for each
outstanding share of Common Stock, par value $0.001 per share (the "Common
Stock") of the Company. The dividend is payable on August 29, 1997 (the
"Record Date") to the stockholders of record on that date. Each Right
entitles the registered holder to purchase from the Company one
one-thousandth of a share (a "Unit") of Series A Junior Participating
Preferred Stock, par value $0.001 per share of the Company at a price of
$60.00 per Unit subject to adjustment. The description and terms of the
Rights are set forth in a Rights Agreement dated as of August 19, 1997
between the Company and BankBoston, N.A., as Rights Agent.
53
<PAGE>
SCHEDULE II
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Additions
Charged to
Beginning Costs and Deductions Ending
Allowance for Doubtful Accounts Balance Expenses Write-Offs Balance
- ------------------------------- --------- -------- ---------- -------
Year ended June 30, 1997....... $ 916 $ 286 $ (539) $ 663
Year ended June 30, 1996....... 534 866 (484) 916
Year ended June 30, 1995....... 218 458 (142) 534
54
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: September 24, 1997 OAK TECHNOLOGY, INC.
By:/s/ Sidney S. Faulkner
------------------------------------
Sidney S. Faulkner
Vice President, Finance,
Chief Financial Officer
and Secretary
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints David D. Tsang and Sidney S. Faulkner,
and each of them, his or her true and lawful attorneys-in-fact, each with full
power of substitution, for him or her in any and all capacities, to sign any
amendments to this report on Form 10-K and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact or their substitute or substitutes may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/ David D. Tsang President, Chief Executive Officer September 24, 1997
- ---------------------- and Director
David D. Tsang (Principal Executive Officer)
/s/ Sidney S. Faulkner Vice President, Finance, September 24, 1997
- ---------------------- Chief Financial Officer and
Sidney S. Faulkner Secretary
(Principal Financial and Accounting
Officer)
/s/ Richard B. Black Director September 24, 1997
- ----------------------
Richard B. Black
/s/ Ta-Lin Hsu Director September 24, 1997
- ----------------------
Ta-Lin Hsu
/s/ Timothy Tomlinson Director September 24, 1997
- ----------------------
Timothy Tomlinson
55
<PAGE>
EXHIBIT INDEX
Sequentially
Exhibit Numbered
Number Exhibit Title Page
- ------ ------------- ----
3.03 Certificate of Correction to the Restated Certificate
of Incorporation of the Company
4.05 Form of Certificate of Designation of Series A Junior
Participating Preferred Stock of the Company dated
August 18, 1997
4.06 Rights Agreement between the Company and BankBoston, N.A.
dated August 19, 1997
10.20 First Amendment to Plan of Reorganization and Agreement
of Merger dated October 27,1995 among the Company, Oak
Acquisition Corporation, Pixel Magic, Inc. and the then
shareholders of Pixel dated June 25, 1996 and Second
Amendment thereto dated June 13, 1997
10.21 First Amendment to Non-Compete and Technology Transfer
Agreement by and amongthe Company, Pixel Magic, Inc. and
Peter D. Besen dated June 13, 1997**
10.22 Agreement of Termination of Employment Agreement between
Pixel Magic, Inc. and Peter D. Besen dated June 13, 1997
10.23 Agreement of Termination of Employment Agreement between
Pixel Magic, Inc. and Don Schulsinger dated June 13, 1997
10.24 Release and Settlement Agreement between the Company and
United Microelectronics Corporation dated July 31, 1997**
11.01 Statement regarding computation of net income per share
23.01 Consent of Independent Auditors
24.01 Power of Attorney (see page 55 of this Form 10-K)
27.01 Financial Data Schedule
- -----------------
** Confidential treatment granted and/or requested as to portions of the
exhibit.
56
<PAGE>
CERTIFICATE OF CORRECTION
TO THE RESTATED CERTIFICATE OF INCORPORATION
OF OAK TECHNOLOGY, INC.
FILED IN THE OFFICE OF THE DELAWARE SECRETARY OF STATE
ON MAY 1, 1995
OAK TECHNOLOGY, INC., a corporation organized and existing under the
laws of the State of Delaware (the "Corporation") hereby certifies that:
1. The Restated Certificate of Incorporation of the Corporation (the
"Restated Certificate") filed in the Office of the Secretary of State of the
State of Delaware (the "Office") on May 1, 1995 requires correction, as
permitted by Section 103(f) of the Delaware General Corporation Law.
2. The inaccuracies or defects in the Restated Certificate exist in
Article FOURTH. Due to an inadvertent error, the Restated Certificate failed to
accurately restate and integrate the provisions of the Restated Certificate of
Incorporation of the Corporation filed in the Office on December 28, 1994, as
amended and supplemented prior to May 1, 1995, in that a paragraph was omitted
from the end of Article FOURTH of the Restated Certificate.
3. Article FOURTH of the Restated Certificate is hereby corrected by
adding the following paragraph as the second and last paragraph of Article
FOURTH:
The Board of Directors is authorized to determine, alter or
eliminate any or all of the rights, preferences, privileges
and restrictions granted or imposed upon any wholly unissued
series of Preferred Shares, and to fix, increase or decrease
the number of shares comprising any such series and the
designation thereof, or any of them, and to provide for the
rights and terms of redemption or conversion of the shares
of any such series.
[THE REMAINDER OF THIS PAGE LEFT BLANK INTENTIONALLY]
<PAGE>
IN WITNESS WHEREOF, Oak Technology, Inc. has caused this Certificate
to be signed by its duly authorized officer on this ___ day of July, 1997.
OAK TECHNOLOGY, INC.
By:
------------------------
Sidney Faulkner
Vice President, Finance, Chief
Financial Officer and Secretary
<PAGE>
FORM
of
CERTIFICATE OF DESIGNATION
of
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
of
OAK TECHNOLOGY, INC.
(Pursuant to Section 151 of the
Delaware General Corporation Law)
----------------------------------
OAK TECHNOLOGY, INC., a corporation organized and existing under the
General Corporation Law of the State of Delaware (hereinafter called the
"Corporation"), hereby certifies that the following resolution was adopted by
the Board of Directors of the Corporation as required by Section 151 of the
General Corporation Law at a meeting duly called and held on August 18, 1997;
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of the Corporation (hereinafter called the "Board of
Directors" or the "Board") in accordance with the provisions of the Certificate
of Incorporation, the Board of Directors hereby creates a series of Preferred
Stock, par value $.001 per share (the "Preferred Stock"), of the Corporation and
hereby states the designation and number of shares, and fixes the relative
rights, preferences, and limitations thereof as follows:
Series A Junior Participating Preferred Stock:
Section 1. DESIGNATION AND AMOUNT. The shares of such series shall be
designated as "Series A Junior Participating Preferred Stock" (the "Series A
Preferred Stock") and the number of shares constituting the Series A Preferred
Stock shall be four hundred thousand (400,000). Such number of shares may be
increased or decreased by resolution of the Board of Directors; PROVIDED, that
no decrease shall reduce the number of shares of Series A
1
<PAGE>
Preferred Stock to a number less than the number of shares then outstanding plus
the number of shares reserved for issuance upon the exercise of outstanding
options, rights or warrants or upon the conversion of any outstanding securities
issued by the Corporation convertible into Series A Preferred Stock.
Section 2. DIVIDENDS AND DISTRIBUTIONS.
(A) Subject to the rights of the holders of any shares of any series
of Preferred Stock (or any similar stock) ranking prior and superior to the
Series A Preferred Stock with respect to dividends, each holder of one one-
thousandth (1/1,000) of a share of Series A Preferred Stock (a "Unit"), in
preference to the holders of shares of Common Stock, par value $.001 per share
(the "Common Stock"), of the Corporation, and of any other junior stock, shall
be entitled to receive, when declared by the Board of Directors out of funds
legally available for the purpose, quarterly dividends payable in cash on the
last day of March, June, September and December in each year (each such date
being referred to herein as a "Quarterly Dividend Payment Date"), commencing on
the first Quarterly Dividend Payment Date after the first issuance of a Unit of
Series A Preferred Stock, in an amount per share (rounded to the nearest cent)
equal to, subject to the provision for adjustment hereinafter set forth, 1,000
times the aggregate per share amount of all cash dividends, and 1,000 times the
aggregate per share amount (payable in kind) of all non-cash dividends or other
distributions, other than a dividend payable in shares of Common Stock or a
subdivision of the outstanding shares of Common Stock (by reclassification or
otherwise), declared on the Common Stock since the immediately preceding
Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend
Payment Date, since the first issuance of a Unit of Series A Preferred Stock.
In the event the Corporation shall at any time declare or pay any dividend on
the Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the amount to which holders of shares of Series A Preferred Stock were
entitled immediately prior to such event under clause (b) of the preceding
sentence shall be adjusted by multiplying such amount by a fraction, the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on the
Units of Series A Preferred Stock as provided in paragraph (A) of this
Section immediately after it declares a dividend or distribution on the
Common Stock (other than a dividend payable in shares of Common Stock);
provided, however, that, in the event no dividend or distribution shall
have been declared on the Common Stock during the period between any
Quarterly Distribution Date and the next subsequent Quarterly Dividend
Payment Date, a dividend of $1.00 per Unit on the Series A Preferred Stock
shall nevertheless be
2
<PAGE>
payable on such subsequent Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on each
outstanding Unit of Series A Participating Preferred Stock from the
Quarterly Dividend Payment Date next preceding the date of issue of such
Unit of Series A Participating Preferred Stock, unless the date of issue of
such Unit is prior to the record date for the first Quarterly Dividend
Payment Date, in which case dividends on such Unit shall begin to accrue
from the date of issue of such Unit, or unless the date of issue is a
Quarterly Dividend Payment Date or is a date after the record date for the
determination of holders of Units of Series A Preferred Stock entitled to
receive a quarterly dividend and before such Quarterly Dividend Payment
Date, in either of which events such dividends shall begin to accrue and be
cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid
dividends shall not bear interest. Dividends paid on the Units of Series A
Preferred Stock in an amount less than the total amount of such dividends
at the time accrued and payable on such Units shall be allocated pro rata
on a Unit-by-Unit basis among all such Units at the time outstanding. The
Board of Directors may fix a record date for the determination of holders
of Units of Series A Preferred Stock entitled to receive payment of a
dividend or distribution declared thereon, which record date shall be not
more than 60 days prior to the date fixed for the payment thereof.
Section 3. VOTING RIGHTS. The holders of Units of Series A Preferred
Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth,
each Unit of Series A Preferred Stock shall entitle the holder thereof to
1,000 votes on all matters submitted to a vote of the stockholders of the
Corporation. In the event the Corporation shall at any time declare or pay
any dividend on the Common Stock payable in shares of Common Stock, or
effect a subdivision or combination or consolidation of the outstanding
shares of Common Stock (by reclassification or otherwise than by payment of
a dividend in shares of Common Stock) into a greater or lesser number of
shares of Common Stock, then in each such case the number of votes per Unit
to which holders of Units of Series A Preferred Stock were entitled
immediately prior to such event shall be adjusted by multiplying such
number by a fraction, the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator
of which is the number of shares of Common Stock that were outstanding
immediately prior to such event.
(B) Except as otherwise provided herein, in any other Certificate of
Designations creating a series of Preferred Stock or any similar stock, or
by law, the holders of Units of Series A Preferred Stock and the holders of
shares of Common Stock and any other capital stock of the Corporation
having general voting rights shall vote together as one class on all
matters submitted to a vote of stockholders of the Corporation.
3
<PAGE>
(C) Except as set forth herein, or as otherwise provided by law,
holders of Series A Preferred Stock shall have no special voting rights and
their consent shall not be required (except to the extent they are entitled
to vote with holders of Common Stock as set forth herein) for taking any
corporate action.
Section 4. CERTAIN RESTRICTIONS.
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Preferred Stock as provided in Section 2 are in
arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on Units of Series A Preferred
Stock outstanding shall have been paid in full, the Corporation shall not:
(i) declare or pay dividends, or make any other distributions,
on any shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred
Stock;
(ii) declare or pay dividends, or make any other distributions,
on any shares of stock ranking on a parity (either as to dividends or
upon liquidation, dissolution or winding up) with the Series A
Preferred Stock, except dividends paid ratably on the Units of
Series A Preferred Stock and all such parity stock on which dividends
are payable or in arrears in proportion to the total amounts to which
the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred
Stock, provided that the Corporation may at any time redeem, purchase
or otherwise acquire shares of any such junior stock in exchange for
shares of any stock of the Corporation ranking junior (either as to
dividends or upon dissolution, liquidation or winding up) to the
Series A Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for consideration
any Units of Series A Preferred Stock, or any shares of stock ranking
on a parity with the Series A Preferred Stock, except in accordance
with a purchase offer made in writing or by publication (as determined
by the Board of Directors) to all holders of such shares upon such
terms as the Board of Directors, after consideration of the respective
annual dividend rates and other relative rights and preferences of the
respective series and classes, shall determine in good faith will
result in fair and equitable treatment among the respective series or
classes.
4
<PAGE>
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares
of stock of the Corporation unless the Corporation could, under paragraph
(A) of this Section 4, purchase or otherwise acquire such shares at such
time and in such manner.
Section 5. REACQUIRED UNITS. Any Units of Series A Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and cancelled promptly after the acquisition thereof. All such
Units shall upon their cancellation become authorized but unissued Units of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
subject to the conditions and restrictions on issuance set forth herein, in the
Certificate of Incorporation, or in any other Certificate of Designations
creating a series of Preferred Stock or any similar stock or as otherwise
required by law.
Section 6. LIQUIDATION, DISSOLUTION OR WINDING UP.
(A) Upon any liquidation, dissolution or winding up of the
Corporation, no distribution shall be made (1) to the holders of shares of
stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred Stock unless, prior
thereto, the holders of Units of Series A Preferred Stock shall have
received $1,000 per share, plus an amount equal to accrued and unpaid
dividends and distributions thereon, whether or not declared, to the date
of such payment, provided that the holders of Units of Series A Preferred
Stock shall be entitled to receive an aggregate amount per share, subject
to the provision for adjustment hereinafter set forth, equal to 1,000 times
the aggregate amount to be distributed per share to holders of shares of
Common Stock, or (2) to the holders of shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or winding up)
with the Series A Preferred Stock, except distributions made ratably on the
Series A Preferred Stock and all such parity stock in proportion to the
total amounts to which the holders of all such shares are entitled upon
such liquidation, dissolution or winding up. In the event the Corporation
shall at any time declare or pay any dividend on the Common Stock payable
in shares of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of
Common Stock) into a greater or lesser number of shares of Common Stock,
then in each such case the aggregate amount to which holders of Units of
Series A Preferred Stock were entitled immediately prior to such event
under the proviso in clause (1) of the preceding sentence shall be adjusted
by multiplying such amount by a fraction the numerator of which is the
number of shares of Common Stock outstanding immediately after such event
and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
(B) In the event, however, that there are not sufficient assets
available to permit payment in full to the Series A Liquidation Preference
and the liquidation preferences of all other series of Preferred Stock, if
any, which rank on a parity with the
5
<PAGE>
Series A Participating Preferred Stock, then such remaining assets shall be
distributed ratably to the holders of such parity shares in proportion to
their respective liquidation preferences.
6
<PAGE>
Section 7. CONSOLIDATION, MERGER, ETC. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the Units of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each share of
Series A Preferred Stock shall at the same time be similarly exchanged or
changed into an amount per Unit, subject to the provision for adjustment
hereinafter set forth, equal to 1,000 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged.
In the event the Corporation shall at any time declare or pay any dividend on
the Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the amount set forth in the preceding sentence with respect to the
exchange or change of Units of Series A Preferred Stock shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 8. NO REDEMPTION. The Units of Series A Preferred Stock
shall not be redeemable.
Section 9. RANK. The Series A Preferred Stock shall rank, with
respect to the payment of dividends and the distribution of assets, junior to
all series of any other class of the Corporation's Preferred Stock.
Section 10. AMENDMENT. The Amended and Restated Certificate of
Incorporation of the Corporation shall not be amended in any manner which would
materially alter or change the powers, preferences or special rights of the
Series A Preferred Stock so as to affect them adversely without the affirmative
vote of the holders of at least a majority of the outstanding Units of Series A
Preferred Stock, voting together as a single class.
7
<PAGE>
IN WITNESS WHEREOF, this Certificate of Designation is executed on
behalf of the Corporation by its President and its corporate seal attested by
its Chief Financial Officer this __th day of August, 1997.
Name:
Title:
Attest:
Name:
Title:
8
<PAGE>
OAK TECHNOLOGY, INC.
AND
BANKBOSTON, N.A.
(RIGHTS AGENT)
RIGHTS AGREEMENT
DATED AS OF AUGUST 19, 1997
<PAGE>
TABLE OF CONTENTS
Page
----
Section 1. Certain Definitions........................................... 1
Section 2. Appointment of Rights Agent................................... 5
Section 3. Issue of Rights Certificates.................................. 5
Section 4. Form of Rights Certificates................................... 7
Section 5. Countersignature and Registration............................. 8
Section 6. Transfer, Split-Up, Combination and Exchange of Rights
Certificates; Mutilated, Destroyed, Lost or Stolen Rights
Certificates.................................................. 9
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights. 9
Section 8. Cancellation and Destruction of Rights Certificates........... 11
Section 9. Reservation and Availability of Preferred Stock............... 11
Section 10. Preferred Stock Record Date................................... 13
Section 11. Adjustment of Purchase Price, Number of Shares or Number of
Rights........................................................ 13
Section 12. Certificate of Adjusted Purchase Price or Number of Shares.... 21
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning
Power......................................................... 22
Section 14. Fractional Rights and Fractional Shares....................... 25
Section 15. Rights of Action.............................................. 26
Section 16. Agreement of Rights Holders................................... 26
Section 17. Rights Certificate Holder Not Deemed a Stockholder............ 27
Section 18. Concerning the Rights Agent................................... 27
Section 19. Merger or Consolidation or Change of Name of Rights Agent..... 27
Section 20. Duties of Rights Agent........................................ 28
i.
<PAGE>
Page
----
Section 21. Change of Rights Agent........................................ 30
Section 22. Issuance of New Rights Certificates........................... 31
Section 23. Redemption and Termination.................................... 31
Section 24. Exchange...................................................... 32
Section 25. Notice of Certain Events...................................... 34
Section 26. Notices....................................................... 34
Section 27. Supplements and Amendments.................................... 35
Section 28. Successors.................................................... 36
Section 29. Determinations and Actions by the Board of Directors.......... 36
Section 30. Benefits of this Agreement.................................... 36
Section 31. Severability.................................................. 36
Section 32. Governing Law................................................. 37
Section 33. Counterparts.................................................. 37
Section 34. Descriptive Headings.......................................... 37
EXHIBITS
Exhibit A - Form of Certificate of Designation for Series A Junior
Participating Preferred Stock
Exhibit B - Form of Rights Certificate
Exhibit C - Summary of Rights to Purchase Preferred Stock
ii.
<PAGE>
RIGHTS AGREEMENT
RIGHTS AGREEMENT, dated as of August 19, 1997, between OAK TECHNOLOGY,
INC., a Delaware corporation (the "Company"), and BankBoston, N.A., a national
banking association (the "Rights Agent").
WHEREAS, effective August 19, 1997 (the "Rights Dividend Declaration
Date"), the Board of Directors authorized and declared a distribution of one
Right (each, a "Right") for each share of Common Stock (as hereinafter defined)
of the Company outstanding as of the Close of Business (as hereinafter defined)
on August 29, 1997 (the "Record Date"), each Right initially representing the
right to purchase one one-thousandth of a share (a "Unit") of Preferred Stock
(as hereinafter defined) upon the terms and subject to the conditions herein set
forth, and has further authorized and directed the issuance of one Right with
respect to each share of Common Stock that shall become outstanding between the
Record Date and the earliest of the Distribution Date, the Redemption Date or
the Final Expiration Date (as such terms are hereinafter defined).
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereby agree as follows:
Section 1. CERTAIN DEFINITIONS. For purposes of this Agreement,
the following terms have the meanings indicated:
"Acquiring Person" shall mean any Person (as such term is hereinafter
defined) who or which, together with all Affiliates and Associates (as such
terms are hereinafter defined) of such Person, shall be the Beneficial Owner (as
such term is hereinafter defined) of 15% or more of the shares of Common Stock
of the Company then outstanding, but shall not include the Company, any
Subsidiary (as such term is hereinafter defined) of the Company, any employee
benefit plan of the Company or any Subsidiary of the Company, or any entity
holding shares of Common Stock for or pursuant to the terms of any such plan.
Notwithstanding the foregoing:
(i) no Person shall become an "Acquiring Person" as the result of
an acquisition of shares of Common Stock by the Company which, by reducing
the number of shares outstanding, increases the proportionate number of
shares beneficially owned by such Person to 15% or more of the shares of
Common Stock of the Company then outstanding; PROVIDED, HOWEVER, that if a
Person shall become the Beneficial Owner of 15% or more of the shares of
Common Stock of the Company then outstanding by reason of share purchases
by the Company and shall, after such share purchases by the Company, become
the Beneficial Owner of any additional shares of Common Stock of the
Company, then such Person shall be deemed to be an "Acquiring Person"
thereunder; and
(ii) if the Board of Directors of the Company determines (upon
approval by a majority of the Continuing Directors (as such term is
hereinafter defined)) in good faith that
1.
<PAGE>
a Person who would otherwise be an "Acquiring Person" as defined pursuant
to the foregoing provisions of this paragraph (a), has become such
inadvertently, and such Person divests as promptly as practicable a
sufficient number of shares of Common Stock so that such Person would no
longer be an "Acquiring Person" as defined pursuant to the foregoing
provisions of this paragraph (a), then such Person shall not be deemed to
be an "Acquiring Person" for any purpose of this Agreement.
"Adjustment Shares" has the meaning set forth in Section 11(a)(ii).
"Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Exchange Act (as such term is hereinafter defined).
A Person shall be deemed the "Beneficial Owner" of and shall be deemed
to "beneficially own" any securities:
(i) which such Person or any of such Person's Affiliates or
Associates beneficially owns, directly or indirectly, for purposes of
Section 13(d) of the Exchange Act and Rule 13d-3 thereunder (or any
comparable or successor law or regulation); or
(ii) which such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has (A) the right to acquire (whether
such right is exercisable immediately or only after the passage of time)
pursuant to any agreement, arrangement or understanding (whether or not in
writing, other than customary agreements with and between underwriters and
selling group members with respect to a bona fide public offering of
securities), or upon the exercise of conversion rights, exchange rights,
rights (other than the Rights), warrants or options, or otherwise;
PROVIDED, HOWEVER, that a Person shall not be deemed the Beneficial Owner
of, or to beneficially own, securities tendered pursuant to a tender or
exchange offer made by or on behalf of such Person or any of such Person's
Affiliates or Associates until such tendered securities are accepted for
purchase or exchange; or (B) the right to vote pursuant to any agreement,
arrangement or understanding; PROVIDED FURTHER, HOWEVER, that a Person
shall not be deemed the "Beneficial Owner" of, or to "beneficially own,"
any security under this subparagraph (ii) as a result of an agreement,
arrangement or understanding to vote such security if such agreement,
arrangement or understanding: (x) arises solely from a revocable proxy
given in response to a public proxy or consent solicitation made pursuant
to, and in accordance with, the applicable provisions of the Exchange Act
and the Exchange Act Regulations, and (y) is not reportable by such Person
on Schedule 13D under the Exchange Act (or any comparable or successor
report); or
(iii) which are beneficially owned, directly or indirectly, by any
other Person (or any Affiliate or Associate thereof) with which such Person
(or any of such Person's Affiliates or Associates) has any agreement,
arrangement or understanding, (whether or not in writing, other than
customary agreements with and between underwriters and selling
2.
<PAGE>
group members with respect to a bona fide public offering of securities),
for the purpose of acquiring, holding, voting (except to the extent
contemplated by the proviso to subparagraph (i) of this paragraph (e)) or
disposing of any securities of the Company; PROVIDED, HOWEVER, that in no
case shall an officer or director of the Company be deemed (A) the
Beneficial Owner of any securities beneficially owned by another officer or
director of the Company solely by reason of actions undertaken by such
persons in their capacity as officers or directors of the Company or (B)
the Beneficial Owner of securities held of record by the trustee of any
employee benefit plan of the Company or any Subsidiary of the Company for
the benefit of any employee of the Company or any Subsidiary of the
Company, other than the officer or director, by reason of any influence
that such officer or director may have over the voting of the securities
held in the plan;
Notwithstanding anything in this definition of Beneficial Ownership to the
contrary, the phrase "then outstanding," when used with reference to a Person's
Beneficial Ownership of securities of the Company, shall mean the number of such
securities then issued and outstanding together with the number of such
securities not then actually issued and outstanding which such Person would be
deemed to own beneficially hereunder.
"Business Day" shall mean any day other than a Saturday, a Sunday, or
a day on which banking institutions in the State of California or the state in
which the principal office of the Rights Agent is located are authorized or
obligated by law or executive order to close.
"Close of Business" on any given date shall mean 5:00 P.M.,
Massachusettes time, on such date; PROVIDED, HOWEVER, that if such date is not a
Business Day it shall mean 5:00 P.M., Massachusettes time, on the next
succeeding Business Day.
"Common Stock" when used with reference to the Company shall mean the
shares of common stock, par value $.001, of the Company. "Common Stock" when
used with reference to any Person other than the Company shall mean the capital
stock (or other equity interest) with the greatest voting power of such other
Person or, if such other Person is a Subsidiary of another Person, the Person or
Persons which ultimately control such first-mentioned Person.
"Company" shall have the meaning set forth in the recitals to this
Agreement.
"Continuing Director" shall mean a member of the Board of Directors of
the Company who is not an Acquiring Person, or an Affiliate or Associate of an
Acquiring Person, or a representative or agent of an Acquiring Person or of any
such Affiliate or Associate, and who was either (i) a member of the Board of
Directors prior to the date of this Agreement, or (ii) subsequently became a
member of the Board of Directors and whose election or nomination for election
is recommended or approved by a majority of the Continuing Directors then on the
Board of Directors.
"current per share market price" shall have the meaning set forth in
Section 11(d)(i)
3.
<PAGE>
hereof.
"Current Value" shall have the meaning set forth in Section 11(a)(iii)
hereof.
"Distribution Date" shall have the meaning set forth in Section 3(a)
hereof.
"equivalent preferred shares" shall have the meaning set forth in
Section 11(b) hereof.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Exchange Act Regulations" shall mean the General Rules and
Regulations under the Exchange Act.
"Exchange Ratio" shall have the meaning set forth in Section 24
hereof.
"Expiration Date" shall have the meaning set forth in Section 7
hereof.
"Final Expiration Date" shall have the meaning set forth in
Section 7(a) hereof.
"NASDAQ" shall have the meaning set forth in Section 11(d).
"Person" shall mean any individual, firm, corporation or other entity,
and shall include any successor (by merger or otherwise) of such entity.
"Preferred Stock" shall mean shares of Series A Junior Participating
Preferred Stock, par value $.001, of the Company having the rights and
preferences set forth in the Form of Certificate of Designation attached to this
Agreement as Exhibit A.
"preferred stock equivalents" shall have the meaning set forth in
Section 11(a)(iii) hereto.
"Purchase Price" shall have the meaning set forth in Section 7(b)
hereof.
"Record Date" shall have the meaning set forth in the recitals to this
Agreement.
"Redemption Date" shall have the meaning set forth in Section 7(a)
hereof.
"Redemption Price" shall have the meaning set forth in Section 23(a)
hereof.
"Right" shall have the meaning set forth in the recitals to this
Agreement.
"Rights Agent" shall have the meaning set forth in the recitals to
this Agreement.
4.
<PAGE>
"Rights Certificate" shall have the meaning set forth in Section 3(a)
hereof.
"Rights Dividend Declaration Date" shall have the meaning set forth in
the recitals to this Agreement.
"Section 11(a)(ii) Event" shall mean any event described in Section
11(a)(ii)(A), (B) or (C).
"Section 11(a)(ii) Trigger Date" shall have the meaning set forth in
Section 11(a)(iii) hereof.
"Section 13 Event" shall mean any event described in clause (i), (ii)
or (iii) of Section 13(a) hereof.
"Section 24(a) Exchange Ratio" has the meaning set forth in Section
24(a) hereof.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Shares Acquisition Date" shall mean the first date of public
announcement (which, for purposes of this definition, shall include, without
limitation, a report filed pursuant to Section 13(d) of the Exchange Act) by the
Company or an Acquiring Person that an Acquiring Person has become such.
"Spread" shall have the meaning set forth in Section 11(a)(iii)
hereof.
"Subsidiary" of any Person shall mean any corporation or other entity
of which a majority of the voting power of the voting equity securities or
equity interest is owned, directly or indirectly, by such Person.
"Substitution Period" shall have the meaning set forth in Section
11(a)(iv) hereof.
"Summary of Rights" shall have the meaning set forth in Section 3(b)
hereof.
"Trading Day" shall have the meaning set forth in Section 11(d)(i)
hereof.
"Triggering Event" shall mean any Section 11(a)(ii) Event or any
Section 13 Event.
Section 2. APPOINTMENT OF RIGHTS AGENT. The Company hereby
appoints the Rights Agent to act as agent for the Company in accordance with the
terms and conditions hereof, and the Rights Agent hereby accepts such
appointment. The Company may from time to time appoint such co-Rights Agents as
it may deem necessary or desirable, upon ten (10) days' prior written notice to
the Rights Agent. The Rights Agent shall have no duty to supervise, and in no
5.
<PAGE>
event be liable for, the acts or omissions of any such co-Rights Agent.
Section 3. ISSUE OF RIGHTS CERTIFICATES. (a) Until the earlier of
(i) the Close of Business on the Shares Acquisition Date and (ii) the Close of
Business on the tenth Business Day (or such later date as may be determined by
action of the Company's Board of Directors upon approval by a majority of the
Continuing Directors prior to such time as any Person becomes an Acquiring
Person and of which the Company will give the Rights Agent prompt written
notice) after the date that a tender or exchange offer by any Person (other than
the Company, any Subsidiary of the Company, any employee benefit plan of the
Company or of any Subsidiary of the Company or any entity holding shares of
Common Stock for or pursuant to the terms of any such plan) is first published
or sent or given within the meaning of Rule 14d-4(a) of the Exchange Act
Regulations or any successor rule or of the first public announcement of the
intention of any Person (other than the Company, any Subsidiary of the Company,
any employee benefit plan of the Company or of any Subsidiary of the Company or
any entity holding shares of Common Stock for or pursuant to the terms of any
such plan) to commence, a tender or exchange offer, if upon consummation thereof
such Person would be the Beneficial Owner of 15% or more of the shares of
Company Common Stock then outstanding (the earlier of (i) and (ii) above being
the "Distribution Date"), (x) the Rights will be evidenced (subject to the
provisions of Section 3(b) hereof) by the certificates for shares of Common
Stock registered in the names of the holders thereof (which certificates shall
also be deemed to be Rights Certificates) and not by separate Rights
Certificates, and (y) the right to receive Rights Certificates will be
transferable only in connection with the transfer of shares of Common Stock. As
soon as practicable after the Distribution Date, the Company will notify the
Rights Agent thereof and the Company will prepare and execute, the Rights Agent
will countersign, and the Company will send or cause to be sent (and the Rights
Agent will, if requested, send) by first-class, insured, postage-prepaid mail,
to each record holder of shares of Common Stock as of the Close of Business on
the Distribution Date, at the address of such holder shown on the records of the
Company, a Rights Certificate, in substantially the form of Exhibit B hereto (a
"Rights Certificate"), evidencing one Right for each share of Common Stock so
held. As of the Distribution Date, the Rights will be evidenced solely by such
Rights Certificates.
(b) On the Record Date, or as soon as practicable thereafter, the
Company will send a copy of a Summary of Rights to Purchase Preferred Stock, in
substantially the form of Exhibit C hereto (the "Summary of Rights"), by
first-class, postage-prepaid mail, to each record holder of shares of Common
Stock as of the Close of Business on the Record Date, at the address of such
holder shown on the records of the Company. With respect to certificates for
shares of Common Stock outstanding as of the Record Date, until the Distribution
Date, the Rights will be evidenced by such certificates registered in the names
of the holders thereof together with a copy of the Summary of Rights attached
thereto. Until the Distribution Date (or the Expiration Date), the surrender
for transfer of any certificate for shares of Common Stock outstanding on the
Record Date, with or without a copy of the Summary of Rights attached thereto,
shall also constitute the transfer of the Rights associated with the shares of
Common Stock represented thereby.
(c) Certificates for shares of Common Stock which become
outstanding
6.
<PAGE>
(including, without limitation, reacquired shares of Common Stock referred to in
the last sentence of this paragraph (c)) after the Record Date but prior to the
earliest of the Distribution Date and the Expiration Date shall have impressed
on, printed on, written on or otherwise affixed to them the following legend:
This certificate also evidences and entitles the holder
hereof to certain rights as set forth in a Rights Agreement
between Oak Technology, Inc. and BankBoston, N.A., dated as
of August 19, 1997 (the "Rights Agreement"), the terms of
which are hereby incorporated herein by reference and a copy
of which is on file at the principal executive offices of
Oak Technology, Inc. Under certain circumstances, as set
forth in the Rights Agreement, such Rights will be evidenced
by separate certificates and will no longer be evidenced by
this certificate. Oak Technology, Inc. will mail to the
holder of this certificate a copy of the Rights Agreement
without charge after receipt of a written request therefor.
Under certain circumstances, as set forth in the Rights
Agreement, Rights issued to any Person who becomes an
Acquiring Person (as defined in the Rights Agreement),
whether currently held by or on behalf of such person or by
any subsequent holder, may become null and void.
With respect to such certificates containing the foregoing legend, until the
earlier of the Distribution Date and the Expiration Date, the Rights associated
with the shares of Common Stock represented by such certificates shall be
evidenced by such certificates alone, and the surrender for transfer of any such
certificate shall also constitute the transfer of the Rights associated with the
shares of Common Stock represented thereby. In the event that the Company
purchases or acquires any shares of Common Stock after the Record Date but prior
to the Distribution Date, any Rights associated with such shares of Common Stock
shall be deemed cancelled and retired so that the Company shall not be entitled
to exercise any Rights associated with the shares of Common Stock which are no
longer outstanding.
Section 4. FORM OF RIGHTS CERTIFICATES. (a) The Rights
Certificates (and the forms of election to purchase Units of Preferred Stock and
of assignment to be printed on the reverse thereof) shall be substantially the
same as Exhibit B hereto and may have such marks of identification or
designation and such legends, summaries or endorsements printed thereon as the
Company may deem appropriate and as are not inconsistent with the provisions of
this Agreement, or as may be required to comply with any applicable law or with
any rule or regulation made pursuant thereto or with any rule or regulation of
any stock exchange or transaction reporting system on which the Rights may from
time to time be listed, or to conform to usage. Subject to the provisions of
Section 11 and Section 22 hereof, the Rights Certificates shall entitle the
holders thereof to purchase the number of Units of Preferred Stock as shall be
set forth therein at the price per Unit of Preferred Stock set forth therein,
but the number of such Units of Preferred Stock and the Purchase Price shall be
subject to adjustment as provided herein.
7.
<PAGE>
(b) Any Rights Certificate issued pursuant hereto that represents
Rights beneficially owned by: (i) an Acquiring Person or any Associate or
Affiliate of an Acquiring Person, (ii) a transferee of an Acquiring Person (or
of any such Associate or Affiliate) who becomes a transferee after the Acquiring
Person becomes such or (iii) a transferee of an Acquiring Person (or of any such
Associate or Affiliate) who becomes a transferee prior to or concurrently with
the Acquiring Person becoming such and receives such Rights pursuant to either
(A) a transfer (whether or not for consideration) from the Acquiring Person to
holders of equity interests in such Acquiring Person or to any Person with whom
such Acquiring Person has any continuing agreement, arrangement or understanding
regarding the transferred Rights or (B) a transfer which a majority of the
Continuing Directors of the Company has determined is part of a plan,
arrangement or understanding which has as a primary purpose or effect avoidance
of Section 7(e) hereof shall contain (to the extent feasible) the following
legend:
The Rights represented by this Rights Certificate are or
were beneficially owned by a Person who was or became an
Acquiring Person or an Affiliate or Associate of an
Acquiring Person (as such terms are defined in the Rights
Agreement between Oak Technology, Inc. and BankBoston, N.A.,
as Rights Agent, dated as of August 19, 1997 (the "Rights
Agreement"). Accordingly, this Rights Certificate and the
Rights represented hereby may become null and void in the
circumstances specified in Section 7(e) of the Rights
Agreement.
Section 5. COUNTERSIGNATURE AND REGISTRATION. (a) The Rights
Certificates shall be executed on behalf of the Company by its Chairman of the
Board or any of its Vice Presidents, either manually or by facsimile signature,
shall have affixed thereto the Company's seal or a facsimile thereof, and shall
be attested by the Secretary or an Assistant Secretary of the Company, either
manually or by facsimile signature. The Rights Certificates shall be manually
countersigned by the Rights Agent and shall not be valid for any purpose unless
countersigned. In case any officer of the Company who shall have signed any of
the Rights Certificates shall cease to be such officer of the Company before
countersignature by the Rights Agent and issuance and delivery by the Company,
such Rights Certificates, nevertheless, may be countersigned by the Rights Agent
and issued and delivered by the Company with the same force and effect as though
the person who signed such Rights Certificates had not ceased to be such officer
of the Company; and any Rights Certificate may be signed on behalf of the
Company by any person who, at the actual date of the execution of such Rights
Certificate, shall be a proper officer of the Company to sign such Rights
Certificate, although at the date of the execution of this Rights Agreement any
such person was not such an officer.
(b) Following the Distribution Date, the Rights Agent will keep or
cause to be kept, at its office designated for such purpose, books for
registration and transfer of the Rights Certificates issued hereunder. Such
books shall show the names and addresses of the respective
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holders of the Rights Certificates, the number of Rights evidenced on its face
by each of the Rights Certificates and the date of each of the Rights
Certificates.
Section 6. TRANSFER, SPLIT-UP, COMBINATION AND EXCHANGE OF RIGHTS
CERTIFICATES; MUTILATED, DESTROYED, LOST OR STOLEN RIGHTS CERTIFICATES.
(a) Subject to the provisions of Sections 4(b), 7(e) and 14 hereof, at any time
after the Close of Business on the Distribution Date, and at or prior to the
Close of Business on the Expiration Date, any Rights Certificate or Rights
Certificates may be transferred, split up, combined or exchanged for another
Rights Certificate or Rights Certificates, entitling the registered holder to
purchase a like number of Units of Preferred Stock (or, following a Triggering
Event, other securities, cash or other assets, as the case may be) as the Rights
Certificate or Rights Certificates surrendered then entitled such holder to
purchase. Any registered holder desiring to transfer, split up, combine or
exchange any Rights Certificate or Rights Certificates shall make such request
in writing delivered to the Rights Agent, and shall surrender the Rights
Certificate or Rights Certificates to be transferred, split up, combined or
exchanged at the office of the Rights Agent designated for such purpose.
Neither the Rights Agent nor the Company shall be obligated to take any action
whatsoever with respect to the transfer of any such surrendered Rights
Certificate until the registered holder shall have completed and signed the
certificate contained in the form of assignment on the reverse side of such
Rights Certificate and shall have provided such additional evidence of the
identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or
Associates thereof as the Company shall reasonably request. Thereupon the
Rights Agent shall, subject to Sections 4(b), 7(e) and 14 hereof, countersign
and deliver to the person entitled thereto a Rights Certificate or Rights
Certificates, as the case may be, as so requested. The Company may require
payment of a sum sufficient to cover any tax or governmental charge that may be
imposed in connection with any transfer, split up, combination or exchange of
Rights Certificates.
(b) Upon receipt by the Company and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation of
a Rights Certificate, and, in case of loss, theft or destruction, of indemnity
or security reasonably satisfactory to them, and, at the Company's request,
reimbursement to the Company and the Rights Agent of all reasonable expenses
incidental thereto, and upon surrender to the Rights Agent and cancellation of
the Rights Certificate if mutilated, the Company will make and deliver a new
Rights Certificate of like tenor to the Rights Agent for delivery to the
registered holder in lieu of the Rights Certificate so lost, stolen, destroyed
or mutilated.
Section 7. EXERCISE OF RIGHTS; PURCHASE PRICE; EXPIRATION DATE OF
RIGHTS. (a) Except as provided in Sections 23(c) and 7(e), the registered
holder of any Rights Certificate may exercise the Rights evidenced thereby
(except as otherwise provided herein) in whole or in part at any time after the
Distribution Date upon surrender of the Rights Certificate, with the form of
election to purchase and certification on the reverse side thereof duly
executed, to the Rights Agent at the office of the Rights Agent designated for
such purpose, together with payment of the Purchase Price for each Unit of
Preferred Stock as to which the Rights are exercised, at or prior to the
earliest of (i) the Close of Business on the tenth anniversary hereof (the
"Final Expiration
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Date"), (ii) the time at which the Rights are redeemed as provided in Section 23
hereof (the "Redemption Date"), or (iii) the time at which such Rights are
exchanged as provided in Section 24 hereof (the earlier of (i), (ii) and
(iii) being the "Expiration Date").
(b) The Purchase Price for each Unit of Preferred Stock pursuant to
the exercise of a Right shall initially be $60.00, shall be subject to
adjustment from time to time as provided in Sections 11 and 13 hereof and shall
be payable in lawful money of the United States of America in accordance with
paragraph (c) below.
(c) Upon receipt of a Rights Certificate representing exercisable
Rights, with the form of election to purchase duly executed, accompanied by
payment of the Purchase Price for the number of Units of Preferred Stock (or
other securities or property, as the case may be) to be purchased and an amount
equal to any applicable transfer tax required to be paid by the holder of such
Rights Certificate in accordance with Section 9 hereof in cash, or by certified
check or cashier's check payable to the order of the Company, the Rights Agent
shall, subject to Section 20(k) hereof, thereupon promptly (i) (A) requisition
from any transfer agent of the Preferred Stock (or make available, if the Rights
Agent is the transfer agent for the Preferred Stock) a certificate or
certificates for the number of Units of Preferred Stock to be purchased and the
Company hereby irrevocably authorizes its transfer agent to comply with all such
requests or (B) if the Company shall have elected to deposit the total number of
Units of Preferred Stock issuable upon exercise of the Rights hereunder with a
depositary agent, requisition from the depositary agent of depositary receipts
representing such number of Units of Preferred Stock as are to be purchased (in
which case certificates for the Units of Preferred Stock represented by such
receipts shall be deposited by the transfer agent with the depositary agent) and
the Company hereby directs the depositary agent to comply with such request,
(ii) when appropriate, requisition from the Company the amount of cash to be
paid in lieu of issuance of fractional shares in accordance with Section 14
hereof, (iii) after receipt of such certificates or depositary receipts, cause
the same to be delivered to or upon the order of the registered holder of such
Rights Certificate, registered in such name or names as may be designated by
such holder and (iv) when appropriate, after receipt thereof, deliver such cash
to or upon the order of the registered holder of such Rights Certificate. The
payment of the Purchase Price (as such amount may be reduced (including to zero)
pursuant to Section 11(a)(iii) hereof) may be made in cash or by certified bank
check or bank draft payable to the order of the Company. In the event that the
Company is obligated to issue other securities of the Company, pay cash and/or
distribute other property pursuant to Section 11(a) hereof, the Company will
make all arrangements necessary so that such other securities, cash and/or other
property are available for distribution by the Rights Agent, if and when
appropriate.
(d) In case the registered holder of any Rights Certificate shall
exercise less than all the Rights evidenced thereby, a new Rights Certificate
evidencing Rights equivalent to the Rights remaining unexercised shall be issued
by the Rights Agent to the registered holder of such Rights Certificate or to
his duly authorized assigns, subject to the provisions of Section 14 hereof.
(e) Notwithstanding anything in this Agreement to the contrary,
from and after
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the first occurrence of a Triggering Event, any Rights beneficially owned by (i)
an Acquiring Person or an Associate or Affiliate of an Acquiring Person, (ii) a
transferee of an Acquiring Person (or of any such Associate or Affiliate) who
becomes a transferee after the Acquiring Person becomes such, (iii) a transferee
of an Acquiring Person (or of any such Associate or Affiliate) who becomes a
transferee prior to or concurrently with the Acquiring Person becoming such and
receives such Rights pursuant to either (A) a transfer (whether or not for
consideration) from the Acquiring Person to holders of equity interests in such
Acquiring Person or to any Person with whom the Acquiring Person has any
continuing agreement, arrangement or understanding regarding the transferred
Rights or (B) a transfer which the a majority of the Continuing Directors of the
Company has determined is part of a plan, arrangement or understanding which has
as a primary purpose or effect the avoidance of this Section 7(e) or (iv) any
subsequent transferee shall become null and void without any further action and
no holder of such Rights shall have any rights whatsoever with respect to such
Rights, whether under any provision of this Agreement or otherwise. The Company
shall use all reasonable efforts to insure that the provisions of this Section
7(e) and Section 4(b) hereof are complied with, but shall have no liability to
any holder of Rights Certificates or to any other Person as a result of its
failure to make any determinations with respect to an Acquiring Person or any of
such Acquiring Person's Affiliates, Associates or transferees hereunder.
(f) Notwithstanding anything in this Agreement to the contrary,
neither the Rights Agent nor the Company shall be obligated to undertake any
action with respect to a registered holder upon the occurrence of any purported
exercise as set forth in this Section 7 unless such registered holder shall have
(i) completed and signed the certificate contained in the form of election to
purchase set forth on the reverse side of the Rights Certificate surrendered for
such exercise and (ii) provided such additional evidence of the identity of the
Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates
thereof as the Company shall reasonably request.
Section 8. CANCELLATION AND DESTRUCTION OF RIGHTS CERTIFICATES.
All Rights Certificates surrendered for the purpose of exercise, transfer, split
up, combination or exchange shall, if surrendered to the Company or to any of
its agents, be delivered to the Rights Agent for cancellation or in cancelled
form, or, if surrendered to the Rights Agent, shall be cancelled by it, and no
Rights Certificates shall be issued in lieu thereof except as expressly
permitted by any of the provisions of this Rights Agreement. The Company shall
deliver to the Rights Agent for cancellation and retirement, and the Rights
Agent shall so cancel and retire, any other Rights Certificate purchased or
acquired by the Company otherwise than upon the exercise thereof. The Rights
Agent shall deliver all cancelled Rights Certificates to the Company, or shall,
at the written request of the Company, destroy such cancelled Rights
Certificates, and in such case shall deliver a certificate of destruction
thereof to the Company.
Section 9. RESERVATION AND AVAILABILITY OF PREFERRED STOCK. (a)
The Company covenants and agrees that it will use its best efforts to cause to
be reserved and kept available out of and to the extent of its authorized and
unissued Units of Preferred Stock not reserved for another
11.
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purpose that will be sufficient to permit the exercise in full of all
outstanding Rights. Upon the occurrence of any events resulting in an increase
in the aggregate number of shares of Preferred Stock (or other equity securities
of the Company) issuable upon exercise of all outstanding Rights above the
number then reserved, the Company shall make appropriate increases in the number
of shares so reserved.
(b) If the Units of Preferred Stock to be issued and delivered upon
the exercise of the Rights are at any time listed on a national securities
exchange or included for quotation on any transaction reporting system, the
Company shall during the period from the Distribution Date to the Expiration
Date use its best efforts to cause all shares reserved for such issuance to be
listed on such exchange or included for quotation on any such transaction
reporting system upon official notice of issuance upon such exercise.
(c) The Company shall use its best efforts to (i) file, as soon as
practicable following the earliest date after the first occurrence of a Section
11(a)(ii) Event in which the consideration to be delivered by the Company upon
exercise of the Rights has been determined in accordance with Section 11(a)(iii)
hereof, or as soon as is required by law following the Distribution Date, as the
case may be, a registration statement under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the securities purchasable upon
exercise of the Rights on an appropriate form, (ii) cause such registration
statement to become effective as soon as practicable after such filing and
(iii) cause such registration statement to remain effective (with a prospectus
at all times meeting the requirements of the Securities Act) until the earlier
of (A) the date as of which the Rights are no longer exercisable for such
securities and (B) the Expiration Date. The Company will also take such action
as may be appropriate under, or to ensure compliance with, the securities or
"blue sky" laws of the various states in connection with the exercisability of
the Rights. Notwithstanding any provision of this Agreement to the contrary,
the Rights shall not be exercisable in any jurisdiction, unless the requisite
qualification in such jurisdiction shall have been obtained, or an exemption
therefrom shall be available and until a registration statement has been
declared effective.
(d) The Company covenants and agrees that it will take all such
action as may be necessary to ensure that all Units of Preferred Stock (and,
following the occurrence of a Triggering Event, any other securities that may be
delivered upon exercise of rights) shall, at the time of delivery of the
certificates for such Units of Preferred Stock (subject to payment of the
Purchase Price), be duly and validly authorized and issued and fully paid and
non-assessable.
(e) The Company further covenants and agrees that it will pay when
due and payable any and all federal and state transfer taxes and charges which
may be payable in respect of the issuance or delivery of the Rights Certificates
or of any Units of Preferred Stock upon the exercise of Rights. The Company
shall not, however, be required to pay any transfer tax which may be payable in
respect of any transfer or delivery of Rights Certificates to a person other
than, or the issuance or delivery of certificates or depositary receipts for
Units of Preferred Stock in a name other than that of, the registered holder of
the Rights Certificate evidencing Rights
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surrendered for exercise or to issue or to deliver any certificates or
depositary receipts for Units of Preferred Stock upon the exercise of any Rights
until any such tax shall have been paid (any such tax being payable by the
holder of such Rights Certificate at the time of surrender) or until it has been
established to the Company's reasonable satisfaction that no such tax is due.
Section 10. PREFERRED STOCK RECORD DATE. Each person in whose name
any certificate for Units of Preferred Stock (or, following the occurrence of a
Triggering Event, other securities) is issued upon the exercise of Rights shall
for all purposes be deemed to have become the holder of record of the Units of
Preferred Stock (or, following the occurrence of a Triggering Event, other
securities) represented thereby on, and such certificate shall be dated, the
date upon which the Rights Certificate evidencing such Rights was duly
surrendered and payment of the Purchase Price (and any applicable transfer
taxes) was made; PROVIDED, HOWEVER, that if the date of such surrender and
payment is a date upon which the Preferred Stock (or, following the occurrence
of a Triggering Event, other securities) transfer books of the Company are
closed, such person shall be deemed to have become the record holder of such
shares on, and such certificate shall be dated, the next succeeding Business Day
on which the Preferred Stock transfer books of the Company are open and FURTHER
PROVIDED, HOWEVER, that if delivery of Units of Preferred Stock is delayed
pursuant to Section 9(c), such Persons shall be deemed to have become the record
holders of such Units of Preferred Stock only when such Units first become
deliverable. Prior to the exercise of the Rights evidenced thereby, the holder
of a Rights Certificate shall not be entitled to any rights of a stockholder of
the Company with respect to securities for which the Rights shall be
exercisable, including, without limitation, the right to vote, to receive
dividends or other distributions or to exercise any preemptive rights, and shall
not be entitled to receive any notice of any proceedings of the Company, except
as provided herein. Prior to the exercise of the Rights evidenced thereby, the
holder of a Rights Certificate shall not be entitled to any rights of a holder
of a Unit of Preferred Stock for which the Rights shall be exercisable,
including, without limitation, the right to vote, to receive dividends or other
distributions or to exercise any preemptive rights, and shall not be entitled to
receive any notice of any proceedings of the Company, except as provided herein.
Section 11. ADJUSTMENT OF PURCHASE PRICE, NUMBER OF SHARES OR
NUMBER OF RIGHTS. The Purchase Price, the number and kinds of securities
covered by each Right and the number of Rights outstanding are subject to
adjustment from time to time as provided in this Section 11.
(a)(i) In the event the Company shall at any time after the date of
this Agreement (A) declare a dividend on the Preferred Stock payable in
shares of Preferred Stock, (B) subdivide the outstanding shares of
Preferred Stock, (C) combine the outstanding Preferred Stock into a smaller
number of shares Preferred Stock or (D) issue any shares of its capital
stock in a reclassification of the Preferred Stock (including any such
reclassification in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation), except as otherwise
provided in this Section 11(a), the Purchase Price in effect at the time of
the record date for such dividend or of the effective date of such
subdivision, combination or reclassification, and the number and kind of
shares of
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capital stock issuable on such date, shall be proportionately adjusted so
that the holder of any Rights exercised after such time shall be entitled
to receive the aggregate number and kind of shares of capital stock which,
if such Rights had been exercised immediately prior to such date and at a
time when the Preferred Stock transfer books of the Company were open, such
holder would have owned upon such exercise and been entitled to receive by
virtue of such dividend, subdivision, combination or reclassification;
PROVIDED, HOWEVER, that in no event shall the consideration to be paid upon
the exercise of one Right be less than the aggregate par value of the
shares of capital stock of the Company issuable upon exercise of one Right.
If an event occurs which would require an adjustment under both this
Section 11(a)(i) and Section 11(a)(ii), the adjustment provided for in this
Section 11(a)(i) shall be in addition to, and shall be made prior, to any
adjustment required pursuant to Section 11(a)(ii).
(ii) Subject to Section 24 of this Agreement, in the event that
(A) any Acquiring person or any Associate or Affiliate of any Acquiring
Person, at any time after the date of this Agreement, directly or
indirectly, shall (1) merge into the Company or otherwise combine with the
Company and the Company shall be the continuing or surviving corporation of
such merger or combination and shares of Company Common Stock shall remain
outstanding and unchanged, (2) in one transaction or a series of
transactions, transfer any assets to the Company or any of its Subsidiaries
in exchange (in whole or in part) for shares of Company Common Stock, for
other equity securities of the Company or any such Subsidiary, or for
securities exercisable for or convertible into shares of equity securities
of the Company or any of its Subsidiaries (whether shares of Company Common
Stock or otherwise) or otherwise obtain from the Company or any of its
Subsidiaries, with or without consideration, any additional shares of such
equity securities or securities exercisable for or convertible into such
equity securities other than pursuant to a pro rata distribution to all
holders of shares of Company Common Stock), (3) sell, purchase, lease,
exchange, mortgage, pledge, transfer or otherwise acquire or dispose of, in
one transaction or a series of transactions, to, from or with the Company
or any of its Subsidiaries or any employee benefit plan maintained by the
Company or any of its Subsidiaries or any trustee or fiduciary with respect
to such plan acting in such capacity, assets (including securities) on
terms and conditions less favorable to the Company or such Subsidiary or
plan than those that could have been obtained in arm's-length negotiations
with an unaffiliated third party, other than pursuant to a transaction set
forth in Section 13(a) hereof, (4) sell, purchase, lease, exchange,
mortgage, pledge, transfer or otherwise acquire or dispose of, in one
transaction or a series of transactions, to, from or with the Company or
any of its Subsidiaries or any employee benefit plan maintained by the
Company or any of its Subsidiaries or any trustee or fiduciary with respect
to such plan acting in such capacity (other than transactions, if any,
consistent with those engaged in, as of the date hereof, by the Company and
such Acquiring Person or such Associate or Affiliate), assets (including
securities or intangible assets) having an aggregate fair market value of
more than $5,000,000, other than pursuant to a transaction set forth in
Section 13(a) hereof, (5) receive, or any designee, agent or
representative of such Acquiring Person or any Affiliate
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or Associate of such Acquiring Person shall receive, any compensation from
the Company or any of its Subsidiaries other than compensation for
full-time employment as a regular employee at rates in accordance with the
Company's (or its Subsidiaries') past practices, or (6) receive the
benefit, directly or indirectly (except proportionately as a holder of
shares of Company Common Stock or as required by law or governmental
regulation), of any loans, advances, guarantees, pledges or other financial
assistance or any tax credits or other tax advantages provided by the
Company or any of its Subsidiaries or any employee benefit plan maintained
by the Company or any of its Subsidiaries or any trustee or fiduciary with
respect to such plan acting in such capacity; or (B) any Person shall
become an Acquiring Person, unless the event causing the Person to become
an Acquiring Person is a transaction set forth in Section 13(a); or
(C) during such time as there is an Acquiring Person, there shall be any
reclassification of securities (including any reverse stock split), or
recapitalization of the Company, or any merger or consolidation of the
Company with any of its Subsidiaries or any other transaction or series of
transactions involving the Company or any of its Subsidiaries, other than a
transaction or transactions to which the provisions of Section 13(a) apply
(whether or not with or into or otherwise involving an Acquiring Person),
which has the effect, directly or indirectly, of increasing by more than 1%
the proportionate share of the outstanding shares of any class of equity
securities of the Company or any of its Subsidiaries that is directly or
indirectly beneficially owned by any Acquiring Person or any Person or any
Associate or Affiliate of any Acquiring Person;
then promptly following the occurrence of an event described in Section
11(a)(ii)(A), (B) or (C) (a "Section 11(a)(ii) Event"), proper provision shall
be made so that each holder of a Right, except as provided in Section 7(e)
hereof, shall thereafter have the right to receive for each Right, upon exercise
thereof in accordance with the terms of this Agreement and payment of the
then-current Total Exercise Price, in lieu of the number of Units of Preferred
Stock for which a Right was exercisable immediately prior to the first
occurrence of a Section 11(a)(ii) Event, such number of Units of Preferred Stock
as shall equal the result obtained by multiplying the then-current Purchase
Price by the then number of Units of Preferred Stock for which a Right was
exercisable (or would have been exercisable if the Distribution Date had
occurred) immediately prior to the first occurrence of a Triggering Event, and
dividing that product by 50% of the current per share market price (determined
pursuant to Section 11(d) hereof) for shares of Common Stock on the date of
occurrence of the Triggering Event (such number of Units of Preferred Stock
being hereinafter referred to as the "Adjustment Shares").
(iii) In the event that the number of Units of Preferred Stock
which are authorized by the Company's Amended and Restated Certificate of
Incorporation but not outstanding or reserved for issuance for purposes
other than upon exercise of the Rights are not sufficient to permit the
exercise in full of the Rights, or if any necessary regulatory approval for
such issuance has not been obtained by the Company, the Company shall, in
lieu of issuing Units of Preferred Stock in accordance with Section
11(a)(ii) hereof, upon approval by a majority of the Continuing Directors:
(A) determine the excess of (1) the value of the Units of Preferred Stock
issuable upon the exercise of a Right (the "Current Value") over
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(2) the Purchase Price (such excess being referred to as the "Spread") and
(B) with respect to each Right, make adequate provision to substitute for
such Units of Preferred Stock, upon exercise of the Rights, (1) cash, (2) a
reduction in the Purchase Price, (3) other equity securities of the Company
(including, without limitation, Common Stock or shares or units of shares
of any series of preferred stock which the Board of Directors of the
Company, upon approval by a majority of the Continuing Directors, has
deemed to have the same value as the Units of Preferred Stock (such shares
or Units of preferred stock are herein called "preferred stock
equivalents"), except to the extent that the Company has not obtained any
necessary regulatory approval for such issuance, (4) debt securities of the
Company, except to the extent that the Company has not obtained any
necessary regulatory approval for such issuance, (5) other assets or
(6) any combination of the foregoing, having an aggregate value equal to
the Current Value, where such aggregate value has been determined by the
Board of Directors of the Company, upon approval by a majority of the
Continuing Directors, based upon the advice of a nationally recognized
investment banking firm selected by the Board of Directors of the Company,
upon approval by a majority of the Continuing Directors; PROVIDED, HOWEVER,
if the Company shall not have made adequate provision to deliver value
pursuant to clause (B) above within thirty (30) days following the later of
(x) occurrence of a Section 11(a)(ii) Event, and (y) the date on which the
Company's right of redemption pursuant to Section 23(a) expires (the later
of (x) and (y) being referred to herein as the "Section 11(a)(iii) Trigger
Date"), then the Company shall be obligated to deliver, upon the surrender
for exercise of a Right and without requiring payment of the Purchase
Price, Units of Preferred Stock (to the extent available), and then, if
necessary, cash, which Units and/or cash have an aggregate value equal to
the Spread.
(b) In the event that the Company shall fix a record date for the
issuance of rights, options or warrants to all holders of Units of Preferred
Stock entitling them (for a period expiring within 45 calendar days after such
record date) to subscribe for or purchase Units of Preferred Stock (or shares
having the same rights, privileges and preferences as the Preferred Stock
("equivalent preferred shares")) or securities convertible into Units of
Preferred Stock or equivalent preferred shares at a price per Unit of Preferred
Stock or equivalent preferred share (or having a conversion price per share, if
a security convertible into Units of Preferred Stock or equivalent preferred
shares) less than the then current per share market price of the Preferred Stock
(as determined pursuant to Section 11(d)) on such record date, the Purchase
Price to be in effect after such record date shall be determined by multiplying
the Purchase Price in effect immediately prior to such record date by a
fraction, the numerator of which shall be the number of Units of Preferred Stock
outstanding on such record date plus the number of Units of Preferred Stock
which the aggregate offering price of the total number of Units of Preferred
Stock and/or equivalent preferred shares so to be offered (and/or the aggregate
initial conversion price of the convertible securities so to be offered) would
purchase at such current market price and the denominator of which shall be the
number of Units of Preferred Stock outstanding on such record date plus the
number of additional Units of Preferred Stock and/or equivalent preferred shares
to be offered for subscription or purchase (or into which the convertible
securities so to be offered are initially convertible). In case such
subscription price may be paid in a consideration part or all of which shall be
in a form
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other than cash, the value of such consideration shall be as determined in good
faith by a majority of the Continuing Directors of the Company, whose
determination shall be described in a statement filed with the Rights Agent and
shall be binding on the Rights Agent and the holders of the Rights. Units of
Preferred Stock owned by or held for the account of the Company shall not be
deemed outstanding for the purpose of any such computation. Such adjustment
shall be made successively whenever such a record date is fixed; and in the
event that such rights, options or warrants are not so issued, the Purchase
Price shall be adjusted to be the Purchase Price which would then be in effect
if such record date had not been fixed.
(c) In case the Company shall fix a record date for a distribution
to all holders of Units of Preferred Stock (including any such distribution made
in connection with a consolidation or merger in which the Company is the
continuing or surviving corporation) of evidences of indebtedness, cash (other
than a regular quarterly cash dividend) assets (other than a dividend payable in
Units of Preferred Stock but including any dividend payable in equity securities
other than Preferred Stock) or subscription rights or warrants (excluding those
referred to in Section 11(d) hereof), the Purchase Price to be in effect after
such record date shall be determined by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the numerator of which
shall be the then current per share market price (as determined pursuant to
Section 11(d)) of the Preferred Stock on such record date, less the fair market
value (as determined in good faith by a majority of the Continuing Directors of
the Company, whose determination shall be described in a statement filed with
the Rights Agent and shall be binding on the Rights Agent and the holder of
rights) of the cash, assets or evidences of indebtedness to be distributed or of
such subscription rights or warrants distributable in respect of a share of
Preferred Stock and the denominator of which shall be such current per share
market price (as determined pursuant to Section 11(d)) of a share of Preferred
Stock. Such adjustments shall be made successively whenever such a record date
is fixed; and in the event that such distribution is not so made, the Purchase
Price shall again be adjusted to be the Purchase Price which would then be in
effect if such record date had not been fixed.
(d)(i) For the purpose of any computation hereunder, the "current
per share market price" of any security (a "Security" for the purpose of
this Section 11(d)(i)) on any date shall be deemed to be the average of the
daily closing prices per share of such Security for the thirty (30)
consecutive Trading Days (as such term is hereinafter defined) immediately
prior to such date; PROVIDED, HOWEVER, that in the event that the "current
per share market price" of the Security is determined during a period
following the announcement by the issuer of such Security of (A) a dividend
or distribution on such Security payable in shares of such Security or
securities convertible into such shares, or (B) any subdivision,
combination or reclassification of such Security and prior to the
expiration of thirty (30) Trading Days after the ex-dividend date for such
dividend or distribution, or the record date for such subdivision,
combination or reclassification, then, and in each such case, the "current
per share market price" shall be appropriately adjusted to reflect the
"current market price" per share equivalent of such Security. The closing
price for each day shall be the last sale price, regular way, or, in case
no such sale takes place on such day, the average of the
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closing bid and asked prices, regular way, in either case as reported in
the principal consolidated transaction reporting system with respect to
securities listed or admitted to trading on the Nasdaq National Market
System ("NASDAQ") or, if the Security is not listed or admitted to trading
on the NASDAQ, as reported in the principal consolidated transaction
reporting system with respect to securities listed on the principal
national securities exchange on which the Security is listed or admitted to
trading or, if the Security is not listed or admitted to trading on any
national securities exchange, the last quoted price or, if not so quoted,
the average of the high bid and low asked prices in the over-the-counter
market, as reported by the NASDAQ or such other system then in use, or, if
on any such date the Security is not quoted by any such organization, the
average of the closing bid and asked prices as furnished by a professional
market maker making a market in the Security selected by a majority of the
Continuing Directors. If on any such date no market maker is making a
market in the Security, the "current per share market price" of such
Security on such date as determined in good faith by the Board of Directors
of the Company as provided for above shall be used. The term "Trading Day"
shall mean a day on which the principal national securities exchange on
which the Security is listed or admitted to trading is open for the
transaction of business or, if the Security is not listed or admitted to
trading on any national securities exchange, a Business Day.
(ii) For the purpose of any computation hereunder, the "current
per share market price" of the Preferred Stock shall be determined in
accordance with the method set forth in Section 11(d)(i). If the "current
per share market price" of the Preferred Stock cannot be determined in the
manner provided above or if the Preferred Stock is not publicly held or
listed or traded in a manner described in clause (i) of this Section 11(d),
the "current per share market price" of the Preferred Stock shall be
conclusively deemed to be an amount equal to $1,000 (as such amount may be
appropriately adjusted for such events as stock splits, stock dividends and
recapitalizations with respect to shares of Company Common Stock occurring
after the date of this Agreement) multiplied by the current market price
per share of Company Common Stock. If shares of neither the Company Common
Stock nor Preferred Stock is publicly held or so listed or traded, "current
per share market price" of the Preferred Stock shall mean the fair value
per share as determined in good faith by the Board of Directors of the
Company, upon approval by a majority of the Continuing Directors, whose
determination shall be described in a statement filed with the Rights Agent
and shall be binding on the Rights Agent and the holders of the Rights.
(e) No adjustment in the Purchase Price shall be required unless
such adjustment would require an increase or decrease of at least 1% in the
Purchase Price; PROVIDED, HOWEVER, that any adjustments which by reason of this
Section 11(e) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment. All calculations under this Section
11 shall be made to the nearest cent or to the nearest one one-thousandth of a
share of Preferred Stock or one one-hundredth of any other share or security as
the case may be. Notwithstanding the first sentence of this Section 11(e), any
adjustment required by this Section 11 shall be made no later than the earlier
of (i) three years from the date of the transaction which
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requires such adjustment or (ii) the Expiration Date.
(f) If as a result of an adjustment made pursuant to Section
11(a)(ii) hereof, the holder of any Rights thereafter exercised shall become
entitled to receive any shares of capital stock of the Company other than Units
of Preferred Stock, thereafter the number of such other shares so receivable
upon exercise of any Rights and the Purchase Price thereof shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Preferred Stock contained in
Section 11(a), (b), (c), (d), (e), (g), (h), (i), (j), (k), (l) and (m), and the
provisions of Sections 7, 9, 10, 13 and 14 with respect to the Preferred Stock
shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of Units of Preferred Stock
purchasable from time to time hereunder upon exercise of the Rights, all subject
to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as
provided in Section 11(i), upon each adjustment of the Purchase Price as a
result of the calculations made in Sections 11(b) and (c), each Right
outstanding immediately prior to the making of such adjustment shall thereafter
evidence the right to purchase, at the adjusted Units of Purchase Price, that
number of Units of Preferred Stock (calculated to the nearest one-millionth of a
share of Preferred Stock) obtained by dividing (i) the product obtained by
multiplying (x) the number of Units of Preferred Stock covered by a Right
immediately prior to this adjustment by (y) the Purchase Price in effect
immediately prior to such adjustment of the Purchase Price by, (ii) the Purchase
Price in effect immediately after such adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any adjustment of
the Purchase Price to adjust the number of Rights, in substitution for any
adjustment in the number of Units of Preferred Stock purchasable upon the
exercise of a Right. Each of the Rights outstanding after such adjustment of
the number of Rights shall be exercisable for the number of Units of Preferred
Stock for which a Right was exercisable immediately prior to such adjustment.
Each Right held of record prior to such adjustment of the number of Rights shall
become that number of Rights (calculated to the nearest one one-thousandth)
obtained by dividing the Purchase Price in effect immediately prior to
adjustment of the Purchase Price by the Purchase Price in effect immediately
after adjustment of the Purchase Price. The Company shall make a public
announcement of its election to adjust the number of Rights, indicating the
record date for the adjustment, and, if known at the time, the amount of the
adjustment to be made. This record date may be the date on which the Purchase
Price is adjusted or any day thereafter, but, if the Rights Certificates have
been issued, shall be at least ten days later than the date of the public
announcement. If Rights Certificates have been issued, upon each adjustment of
the number of Rights pursuant to this Section 11(i), the Company shall, as
promptly as practicable, cause to be distributed to holders of record of Rights
Certificates on such record date Rights Certificates evidencing, subject to
Section 14 hereof, the additional Rights to which such holders shall be
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entitled as a result of such adjustment, or, at the option of the Company, shall
cause to be distributed to such holders of record in substitution and
replacement for the Rights Certificates held by such holders prior to the date
of adjustment, and upon surrender thereof, if required by the Company, new
Rights Certificates evidencing all the Rights to which such holders shall be
entitled after such adjustment. Rights Certificates to be so distributed shall
be issued, executed and countersigned in the manner provided for herein and
shall be registered in the names of the holders of record of Rights Certificates
on the record date specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase Price
or the number of Units of Preferred Stock issuable upon the exercise of the
Rights, the Rights Certificates theretofore and thereafter issued may continue
to express the Purchase Price per Unit and the number of Units of Preferred
Stock which were expressed in the initial Rights Certificates issued hereunder.
(k) Before taking any action that would cause an adjustment
reducing the Purchase Price below the then par value of the number of Units of
Preferred Stock issuable upon exercise of the Rights, the Company shall take any
corporate action which may, in the opinion of its counsel, be necessary in order
that the Company may validly and legally issue fully paid and nonassessable
number of Units of Preferred Stock at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an
adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuing to the holder of any Rights exercised after such record date
of that number of Units of Preferred Stock and other capital stock or securities
of the Company, if any, issuable upon such exercise over and above the Units of
Preferred Stock and other capital stock or securities of the Company, if any,
issuable upon such exercise on the basis of the Purchase Price in effect prior
to such adjustment; PROVIDED, HOWEVER, that the Company shall deliver to such
holder a due bill or other appropriate instrument evidencing such holder's right
to receive such additional shares (fractional or otherwise) upon the occurrence
of the event requiring such adjustment.
(m) Anything in this Section 11 to the contrary notwithstanding,
the Company shall be entitled to make such reductions in the Purchase Price, in
addition to those adjustments expressly required by this Section 11, as and to
the extent that it in its sole discretion shall determine to be advisable in
order that any (i) consolidation or subdivision of the Preferred Stock,
(ii) issuance wholly for cash of any Unit of Preferred Stock at less than the
current market price, (iii) issuance wholly for cash of Preferred Stock or
securities which by their terms are convertible into or exchangeable for
Preferred Stock, (iv) dividends on Preferred Stock payable in Preferred Stock or
(v) issuance of rights, options or warrants referred to in this Section 11,
hereafter made by the Company to holders of Units of its Preferred Stock shall
not be taxable to such stockholders.
(n) The Company shall not, at any time after the Distribution Date,
(i) consolidate with any other Person (other than a Subsidiary of the Company in
a transaction
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which complies with Section 11(o)), (ii) merge with or into any other Person
(other than a Subsidiary of the Company in a transaction which complies with
Section 11(o)), or (iii) sell or transfer (or permit any Subsidiary to sell or
transfer), in one transaction, or a series of transactions, assets or earning
power aggregating more than 50% of the assets or earning power of the Company
and its Subsidiaries (taken as a whole) to any other Person or Persons (other
than the Company and/or any of its Subsidiaries in one or more transactions each
of which complies with Section 11(o)), if (x) at the time of or immediately
after such consolidation, merger or sale there are any rights, warrants or other
instruments or securities outstanding or agreements in effect which would
substantially diminish or otherwise eliminate the benefits intended to be
afforded by the Rights or (y) prior to, simultaneously with or immediately after
such consolidation, merger or sale, the Person which constitutes, or would
constitute the "Principal Party" for purposes of Section 13(a) shall have
distributed or otherwise transferred to its stockholders or other persons
holding an equity interest in such Person Rights previously owned by such Person
or any of its Affiliates and Associates; PROVIDED, HOWEVER, this Section 11(n)
shall not affect the ability of any Subsidiary of the Company to consolidate
with, merge with or into, or sell or transfer assets or earning power to, any
other Subsidiary of the Company.
(o) After the Distribution Date, the Company shall not, except as
permitted by Section 23 or Section 26, take (or permit any Subsidiary to take)
any action if at the time such action is taken it is reasonably foreseeable that
such action will diminish substantially or otherwise eliminate the benefits
intended to be afforded by the Rights.
(p) In the event that, at any time after the date of this Agreement
and prior to the Distribution Date, the Company shall (i) declare or pay any
dividend on outstanding shares of Common Stock payable in shares of Common Stock
or (ii) effect a subdivision, combination or consolidation of the Common Stock
(by reclassification or otherwise than by payment of dividends in shares of
Common Stock) into a greater or lesser number of shares of Common Stock, then in
any such case the number of Units of Preferred Stock purchasable after such
event upon proper exercise of each Right shall be determined by multiplying the
number of Units of Preferred Stock so purchasable immediately prior to such
event by a fraction, the numerator of which is the number of shares of Common
Stock outstanding immediately before such event and the denominator of which is
the number of shares of Common Stock outstanding immediately after such event.
The adjustments provided for in this Section 11(p) shall be made successively
whenever such a dividend is declared or paid or such a subdivision, combination
or consolidation is effected.
Section 12. CERTIFICATE OF ADJUSTED PURCHASE PRICE OR NUMBER OF
SHARES. Whenever an adjustment is made as provided in Sections 11 and 13
hereof, the Company shall promptly (a) prepare a certificate setting forth such
adjustment, and a brief statement of the facts accounting for such adjustment,
(b) file with the Rights Agent and with each transfer agent for the shares of
Common Stock or Units of Preferred Stock a copy of such certificate and (c) mail
a brief summary thereof to each holder of a Rights Certificate in accordance
with Section 25 hereof. Notwithstanding the foregoing sentence, the failure by
the Company to make such certification or give such notice shall not affect the
validity of or the force or effect of the requirement for such
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adjustment. The Rights Agent shall be fully protected in relying on any such
certificate and on any adjustment contained therein and shall not be deemed to
have knowledge of such adjustment unless and until it shall have received such
certificate.
Section 13. CONSOLIDATION, MERGER OR SALE OR TRANSFER OF ASSETS OR
EARNING POWER. (a) Except as provided in Section 13(b) hereof, in the event
that, following a Shares Acquisition Date, directly or indirectly, (x) the
Company shall consolidate with, or merge with and into, any other Person (other
than a Subsidiary of the Company in a transaction which complies with
Section 11(o)), and the Company shall not be the continuing or surviving
corporation of such consolidation or merger, (y) any Person (other than a
Subsidiary of the Company in a transaction which complies with Section 11(o))
shall consolidate with the Company, or merge with and into the Company and the
Company shall be the continuing or surviving corporation of such consolidation
or merger and, in connection with such consolidation or merger, all or part of
the shares of Common Stock shall be changed into or exchanged for stock or other
securities of any other Person or cash or any other property, or (z) the Company
shall sell or otherwise transfer (or one or more of its Subsidiaries shall sell
or otherwise transfer) to any Person or Persons (other than a Subsidiary of the
Company in a transaction which complies with Section 11(o)), in one or more
transactions, directly or indirectly, assets or earning power aggregating 50% or
more of the assets or earning power of the Company and its Subsidiaries (taken
as a whole), any such event being a "Section 13 Event," then, and in each such
case, proper provision shall be made so that: (i) each holder of a Right,
except as provided in Section 7(e), shall thereafter have the right to receive,
upon the exercise thereof at the then current Purchase Price, such number of
validly authorized and issued, fully paid and non-assessable shares of Common
Stock of the Principal Party, which shares shall not be subject to any liens,
encumbrances, rights of first refusal, transfer restrictions or other adverse
claims, as shall be equal to the result obtained by (1) multiplying the then
current Purchase Price by the number of Units of Preferred Stock for which a
Right is exercisable immediately prior to the first occurrence of a Section 13
Event (or, if a Section 11(a)(ii) Event has occurred prior to the first
occurrence of a Section 13 Event, multiplying the number of such Units for which
a Right would be exercisable hereunder but for the occurrence of such
Section 11(a)(ii) Event by the Purchase Price which would be in effect hereunder
but for such first occurrence) and (2) dividing that product (which, following
the direct occurrence of a Section 13 Event, shall be the "Purchase Price" for
all purposes of this Agreement) by 50% of the current per share market price
(determined pursuant to Section 11(d)) of the shares of Common Stock of such
Principal Party on the date of consummation of such Section 13 Event; (ii) such
Principal Party shall thereafter be liable for, and shall assume, by virtue of
such Section 13 Event, all the obligations and duties of the Company pursuant to
this Agreement; (iii) the term "Company" shall, for all purposes of this
Agreement, thereafter be deemed to refer to such Principal Party, it being
specifically intended that the provisions of Section 11 shall apply only to such
Principal Party following the first occurrence of a Section 13 Event; (iv) such
Principal Party shall take such steps (including, but not limited to, the
reservation of a sufficient number of shares of its Common Stock) in connection
with the consummation of any such transaction as may be necessary to ensure that
the provisions of this Agreement shall thereafter be applicable to its shares of
Common Stock thereafter deliverable upon the exercise of the Rights; and (v) the
provisions of Section 11(a)(ii) shall be of no further effect
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following the first occurrence of any Section 13 Event.
(b) "Principal Party" shall mean:
(i) in the case of any transaction described in clause (x) or (y)
of the first sentence of Section 13(a), (A) the Person that is the issuer
of any securities into which shares of Company Common Stock are converted
in such merger or consolidation, or, if there is more than one such issuer,
the issuer of shares of Common Stock that has the highest aggregate current
market price (determined pursuant to Section 11(d)) and (B) if no
securities are so issued, the Person that is the other party to such merger
or consolidation, or, if there is more than one such Person, the Person the
Common Stock of which has the highest aggregate current market price
(determined pursuant to Section 11(d)); and
(ii) in the case of any transaction described in clause (z) of the
first sentence of Section 13(a), the Person that is the party receiving the
largest portion of the assets or earning power transferred pursuant to such
transaction or transactions, or, if each Person that is a party to such
transaction or transactions receives the same portion of the assets or
earning power transferred pursuant to such transaction or transactions or
if the Person receiving the largest portion of the assets or earning power
cannot be determined, whichever Person the Common Stock of which has the
highest aggregate current market price (determined pursuant to
Section 11(d)); PROVIDED, HOWEVER, that in any such case, (1) if the Common
Stock of such Person is not at such time and have not been continuously
over the preceding twelve-month period registered under Section 12 of the
Exchange Act ("Registered Common Stock"), or such Person is not a
corporation, and such Person is a direct or indirect Subsidiary of another
Person that has Registered Common Stock outstanding, "Principal Party"
shall refer to such other Person; (2) if the Common Stock of such Person is
not Registered Common Stock or such Person is not a corporation, and such
Person is a direct or indirect Subsidiary of another Person but is not a
direct or indirect Subsidiary of another Person which has Registered Common
Stock outstanding, "Principal Party" shall refer to the ultimate parent
entity of such first-mentioned Person; (3) if the Common Stock of such
Person is not Registered Common Stock or such Person is not a corporation,
and such Person is directly or indirectly controlled by more than one
Person, and one or more of such other Persons has Registered Common Stock
outstanding, "Principal Party" shall refer to whichever of such other
Persons is the issuer of the Registered Common Stock having the highest
aggregate current per share market price (determined pursuant to Section
11(d)); and (4) if the Common Stock of such Person is not Registered Common
Stock or such Person is not a corporation, and such Person is directly or
indirectly controlled by more than one Person, and none of such other
Persons has Registered Common Stock outstanding, "Principal Party" shall
refer to whichever ultimate parent entity is the corporation having the
greatest stockholders' equity or, if no such ultimate parent entity is a
corporation, shall refer to whichever ultimate parent entity is the entity
having the greatest net assets.
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(c) The Company shall not consummate any such consolidation,
merger, sale or transfer unless the Principal Party shall have a sufficient
number of authorized shares of Common Stock which have not been issued or
reserved for issuance to permit the exercise in full of the Rights in accordance
with this Section 13, and unless prior thereto the Company and such Principal
Party shall have executed and delivered to the Rights Agent a supplemental
agreement providing for the terms set forth in paragraphs (a) and (b) of this
Section 13 and further providing that the Principal Party will:
(i)(A) file on an appropriate form, as soon as practicable
following the execution of such agreement, a registration statement under
the Securities Act with respect to the shares of Common Stock that may be
acquired upon exercise of the Rights, (B) cause such registration statement
to remain effective (and to include a prospectus complying with the
requirements of the Securities Act) until the Expiration Date, and (C) as
soon as practicable following the execution of such agreement take such
action as may be required to ensure that any acquisition of such shares of
Common Stock upon the exercise of the Rights complies with any applicable
state securities or "blue sky" laws; and
(ii) deliver to holders of the Rights historical financial
statements for the Principal Party and each of its Affiliates which comply
in all respects with the requirements for registration on Form 10 under the
Exchange Act.
(d) In case the Principal Party which is to be a party to a
transaction referred to in this Section 13 has a provision in any of its
authorized securities or in its Certificate of Incorporation or Bylaws or other
instrument governing its corporate affairs, which provision would have the
effect of (i) causing such Principal Party to issue, in connection with, or as a
consequence of, the consummation of a transaction referred to in this
Section 13, shares of Common Stock of such Principal Party at less than the then
current market price per share (determined pursuant to Section 11(d)) or
securities exercisable for, or convertible into, shares of Common Stock of such
Principal Party at less than such then current marker price (other than to
holders of Rights pursuant to this Section 13) or (ii) providing for any special
payment, tax or similar provisions in connection with the issuance of the shares
of Common Stock of such Principal Party pursuant to the provisions of this
Section 13, then, in such event, the Company shall not consummate any such
transaction unless prior thereto the Company and such Principal Party shall have
executed and delivered to the Rights Agent a supplemental agreement providing
that the provision in question of such Principal Party shall have been
cancelled, waived or amended, or that the authorized securities shall be
redeemed, so that the applicable provision will have no effect in connection
with, or as a consequence of, the consummation of the proposed transaction.
(e) The provisions of this Section 13 shall similarly apply to
successive mergers or consolidations or sales or other transfers. In the event
that a Section 13 Event shall occur at any time after the occurrence of a
Section 11(a)(ii) Event, the Rights which have not theretofore been exercised
shall thereafter become exercisable in the manner described in Section 13(a).
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Section 14. FRACTIONAL RIGHTS AND FRACTIONAL SHARES. (a) The
Company shall not be required to issue fractions of Rights or to distribute
Rights Certificates which evidence fractional Rights. In lieu of such
fractional Rights, there shall be paid to the registered holders of the Rights
Certificates with regard to which such fractional Rights would otherwise be
issuable, an amount in cash equal to the same fraction of the current market
value of a whole Rights. For the purposes of this Section 14(a), the current
market value of a whole Rights shall be the closing price of the Rights for the
Trading Day immediately prior to the date on which such fractional Rights would
have been otherwise issuable. The closing price for any day shall be the last
sale price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the NASDAQ or, if the Rights are
not listed or admitted to trading on the NASDAQ, as reported in the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which the Rights are listed or
admitted to trading or, if the Rights are not listed or admitted to trading on
any national securities exchange, the last quoted price or, if not so quoted,
the average of the high bid and low asked prices in the over-the-counter market,
as reported by NASDAQ or such other system then in use or, if on any such date
the Rights are not quoted by any such organization, the average of the closing
bid and asked prices as furnished by a professional market maker making a market
in the Rights selected by the Directors. If on any such date no such market
maker is making a market in the Rights, the fair value of the Rights on such
date as determined in good faith by the Board of Directors of the Company, upon
approval by a majority of the Continuing Directors, shall be used.
(b) The Company shall not be required to issue fractions of
Preferred Stock (other than fractions which are integral multiples of one
one-thousandth of a share of Preferred Stock) upon exercise of the Rights or to
distribute certificates which evidence fractional Preferred Stock (other than
fractions which are integral multiples of one one-thousandth of a share of
Preferred Stock). Fractions of Preferred Stock in integral multiples of one
one-thousandth of a share of Preferred Stock may, at the election of the
Company, be evidenced by depositary receipts, pursuant to an appropriate
agreement between the Company and a depositary selected by it; PROVIDED,
HOWEVER, that such agreement shall provide that the holders of such depositary
receipts shall have all the rights, privileges and preferences to which they are
entitled as beneficial owners of the Preferred Stock represented by such
depositary receipts. In lieu of fractional shares of Preferred Stock that are
not integral multiples of one one-thousandth of a share of Preferred Stock, the
Company shall pay to the registered holders of Rights Certificates at the time
such Rights are exercised as herein provided an amount in cash equal to the same
fraction of the current market value of one a share of Preferred Stock as
determined pursuant to Section 11(d).
(c) The holder of a Right by the acceptance of the Right expressly
waives his right to receive any fractional Rights or any fractional shares upon
exercise of a Right (except as provided above).
Section 15. RIGHTS OF ACTION. All rights of action in respect of
this Agreement,
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excepting the rights of action given to the Rights Agent under Section 18
hereof, are vested in the respective registered holders of the Rights
Certificates (and, prior to the Distribution Date, the registered holders of
certificates representing shares of Common Stock); and any registered holder of
any Rights Certificate (or, prior to the Distribution Date, a certificate
representing shares of Common Stock), without the consent of the Rights Agent or
of the holder of any other Rights Certificate (or, prior to the Distribution
Date, of a certificate representing shares of Common Stock), may, in such
holder's own behalf and for such holder's own benefit, enforce, and may
institute and maintain any suit, action or proceeding against the Company to
enforce, or otherwise act in respect of, such holder's right to exercise the
Rights evidenced by such Rights Certificate in the manner provided in such
Rights Certificate and in this Agreement. Without limiting the foregoing or any
remedies available to the holders of Rights, it is specifically acknowledged
that the holders of Rights would not have an adequate remedy at law for any
breach of this Agreement and will be entitled to specific performance of the
obligations hereunder, and injunctive relief against actual or threatened
violations of the obligations of any Person subject to this Agreement.
Section 16. AGREEMENT OF RIGHTS HOLDERS. Every holder of a Right,
by accepting the same, consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be transferable
only in connection with the transfer of shares of the Company's Common Stock;
(b) after the Distribution Date, the Rights Certificates are
transferable only on the registry books of the Rights Agent if surrendered at
the office of the Rights Agent designated for such purpose, duly endorsed or
accompanied by a proper instrument of transfer;
(c) subject to Sections 6(a) and 7(f) hereof, the Company and the
Rights Agent may deem and treat the person in whose name the Rights Certificate
(or, prior to the Distribution Date, the associated Common Stock certificate) is
registered as the absolute owner thereof and of the Rights evidenced thereby
(notwithstanding any notations of ownership or writing on the Rights
Certificates or the associated Common Stock certificate made by anyone other
than the Company or the Rights Agent) for all purposes whatsoever, and neither
the Company nor the Rights Agent shall be affected by any notice to the
contrary; and
(d) notwithstanding anything in this Agreement to the contrary,
neither the Company nor the Rights Agent shall have any liability to any holder
of a Right or other Person as a result of its inability to perform any of its
obligations under this Agreement by reason of any preliminary or permanent
injunction or other order, decree or ruling issued by a court of competent
jurisdiction or by a governmental, regulatory or administrative agency or
commission, or any statute, rule, regulation or executive order promulgated or
enacted by any governmental authority, prohibiting or otherwise restraining
performance of such obligation; PROVIDED, HOWEVER, the Company must use its best
efforts to have any such order, decree or ruling lifted or otherwise overturned
as soon as possible.
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Section 17. RIGHTS CERTIFICATE HOLDER NOT DEEMED A STOCKHOLDER. No
holder, as such, of any Rights Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the Units of Preferred
Stock or any other securities of the Company which may at any time be issuable
on the exercise of the Rights represented thereby, nor shall anything contained
herein or in any Rights Certificate be construed to confer upon the holder of
any Rights Certificate, as such, any of the rights of a stockholder of the
Company or any right to vote for the election of directors or upon any matter
submitted to stockholders at any meeting thereof, or to give or withhold consent
to any corporate action, or to receive notice of meetings or other actions
affecting stockholders (except as provided in Section 25 hereof), or to receive
dividends or subscription rights, or otherwise, until the Right or Rights
evidenced by such Rights Certificate shall have been exercised in accordance
with the provisions hereof.
Section 18. CONCERNING THE RIGHTS AGENT. The Company agrees to pay
to the Rights Agent reasonable compensation for all services rendered by it
hereunder and, from time to time, on demand of the Rights Agent, its reasonable
expenses and counsel fees and other disbursements incurred in the administration
and execution of this Agreement and the exercise and performance of its duties
hereunder. The Company also agrees to indemnify the Rights Agent for, and to
hold it harmless against, any loss, liability, or expense, incurred without
gross negligence, or willful misconduct on the part of the Rights Agent, for any
action taken, suffered or omitted by the Rights Agent in connection with the
execution, acceptance and administration of this Agreement and the exercise and
performance hereunder of its duties, including the costs and expenses of
defending against and appealing any claim of liability in the premises. The
indemnity provided herein shall survive the termination of this Agreement and
the expiration of the Rights. The costs and expenses incurred in enforcing this
right of indemnification shall be paid by the Company.
The Rights Agent may conclusively rely upon and shall be protected and
shall incur no liability for, or in respect of any action taken, suffered or
omitted by it in connection with, its administration of this Agreement and the
exercise and performance of its duties hereunder in reliance upon any Rights
Certificate or certificate for Units of Preferred Stock or shares of Common
Stock or for other securities of the Company, instrument of assignment or
transfer, power of attorney, endorsement, affidavit, letter, notice, direction,
consent, certificate, statement, or other paper or document believed by it to be
genuine and to be signed, executed and, where necessary, verified or
acknowledged, by the proper person or persons, or otherwise upon the advice of
counsel as set forth in Section 20 hereof.
Section 19. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF RIGHTS
AGENT. (a) Any corporation into which the Rights Agent or any successor Rights
Agent may be merged or with which it may be consolidated, or any corporation
resulting from any merger or consolidation to which the Rights Agent or any
successor Rights Agent shall be a party, or any corporation succeeding to the
stock transfer or corporate trust business of the Rights Agent or any successor
Rights Agent, shall be the successor to the Rights Agent under this Agreement
without the execution or filing of any paper or any further act on the part of
any of the parties hereto, provided
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that such corporation would be eligible for appointment as a successor Rights
Agent under the provisions of Section 21 hereof. In case at the time such
successor Rights Agent shall succeed to the agency created by this Agreement any
of the Rights Certificates shall have been countersigned but not delivered, any
such successor Rights Agent may adopt the countersignature of the predecessor
Rights Agent and deliver such Rights Certificates so countersigned; and in case
at that time any of the Rights Certificates shall not have been countersigned,
any successor Rights Agent may countersign such Rights Certificates either in
the name of the predecessor Rights Agent or in the name of the successor Rights
Agent; and in all such cases such Rights Certificates shall have the full force
provided in the Rights Certificates and in this Agreement.
(b) In case at any time the name of the Rights Agent shall be
changed and at such time any of the Rights Certificates shall have been
countersigned but not delivered, the Rights Agent may adopt the countersignature
under its prior name and deliver Rights Certificates so countersigned; and in
case at that time any of the Rights Certificates shall not have been
countersigned, the Rights Agent may countersign such Rights Certificates either
in its prior name or in its changed name; and in all such cases such Rights
Certificates shall have the full force provided in the Rights Certificates and
in this Agreement.
Section 20. DUTIES OF RIGHTS AGENT. The Rights Agent undertakes
the duties and obligations imposed by this Agreement upon the following terms
and conditions and no implied duties or obligations shall be read into this
Agreement against the Rights Agent, by all of which the Company and the holders
of Rights Certificates, by their acceptance thereof, shall be bound:
(a) Before the Rights Agent acts or refrains from acting, it may
consult with legal counsel of its choice (who may be legal counsel for the
Company), and the advice or opinion of such counsel shall be full and complete
authorization and protection to the Rights Agent as to any action taken,
suffered or omitted by it in good faith and in accordance with such advice or
opinion.
(b) Whenever in the administration, exercise and performance of its
duties under this Agreement the Rights Agent shall deem it necessary or
desirable that any fact or matter be proved or established by the Company prior
to taking, suffering or omitting any action hereunder, such fact or matter
(unless other evidence in respect thereof be herein specifically prescribed) may
be deemed to be conclusively proved and established by a certificate signed by
the Chairman of the Board, any Vice President or the Secretary of the Company
and delivered to the Rights Agent; and such certificate shall be full
authorization to the Rights Agent for any action taken, suffered or omitted in
good faith by it under the provisions of this Agreement in reliance upon such
certificate.
(c) The Rights Agent shall be liable hereunder to the Company and
any other Person only for its own gross negligence or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of any of
the
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statements of fact or recitals contained in this Agreement or in the Rights
Certificates (except its countersignature thereof) or be required to verify the
same, but all such statements and recitals are and shall be deemed to have been
made by the Company only.
(e) The Rights Agent shall not be under any liability or
responsibility in respect of the legality, validity or enforceability of this
Agreement or the execution and delivery hereof (except the due execution hereof
by the Rights Agent) or in respect of the legality, validity or enforceability
or the execution of any Rights Certificate (except its countersignature thereof
and has actual knowledge of such change or adjustment); nor shall it be liable
or responsible for any breach by the Company of any covenant or condition
contained in this Agreement or in any Rights Certificate; nor shall it be
responsible for any change in the exercisability of the Rights (including the
Rights becoming void pursuant to Section 11(a)(ii) hereof) or any adjustment in
the terms of the Rights (including the manner, method or amount thereof)
provided for in Section 3, 11, 13, 23 or 24, or the ascertaining of the
existence of facts that would require any such change or adjustment (except with
respect to the exercise of Rights evidenced by Rights Certificates after receipt
of the certificate described in Section 12 hereof or has actual knowledge of
such change or adjustment); nor shall it by any act hereunder be deemed to make
any representation or warranty as to the authorization or reservation of any
Units of Preferred Stock to be issued pursuant to this Agreement or any Rights
Certificate or as to whether any Preferred Stock will, when issued, be validly
authorized and issued, fully paid and nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge
and deliver or cause to be performed, executed, acknowledged and delivered all
such further and other acts, instruments and assurances as may reasonably be
required by the Rights Agent for the carrying out or performing by the Rights
Agent of the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the administration, exercise and performance of its
duties hereunder from the Chairman of the Board, any Vice President or the
Secretary of the Company, and to apply to such officers for advice or
instructions in connection with its duties, and it shall not be responsible or
liable for any action taken, suffered or omitted by it in good faith in
accordance with instructions of any such officer or for any delay in acting
while waiting for those instructions. Any application by the Rights Agent for
written instructions from the Company may, at the option of the Rights Agent,
set forth in writing any action proposed to be taken or omitted by the Rights
Agent under this Rights Agreement and the date on and/or after which such action
shall be taken or such omission shall be effective. The Rights Agent shall not
be liable for any action taken by, or omission of, the Rights Agent in
accordance with a proposal included in any such application on or after the date
specified in such application (which date shall not be less than five (5)
Business Days after the date any officer of the Company actually received such
application, unless any such officer shall have consented in writing to an
earlier date) unless, prior to taking any such action (or the effective date in
the case of an omission), the Rights Agent shall have received written
instructions in response to such application specifying the action to be taken
or omitted.
29.
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(h) The Rights Agent and any stockholder, director, officer or
employee of the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to the
Company or otherwise act as fully and freely as though it were not Rights Agent
under this Agreement. Nothing herein shall preclude the Rights Agent from
acting in any other capacity for the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself or by or
through its attorneys or agents, and the Rights Agent shall not be answerable or
accountable for any act, default, neglect or misconduct of any such attorneys or
agents or for any loss to the Company resulting from any such act, default,
neglect or misconduct, provided reasonable care was exercised in the selection
and continued employment thereof.
(j) No provision of this Agreement shall require the Rights Agent
to expend or risk its own funds or otherwise incur any financial liability in
the performance of any of its duties hereunder or in the exercise of its rights
if the Rights Agent in good faith believes that repayment of such funds or
adequate indemnification against such risk or liability is not reasonably
assured to it.
(k) If, with respect to any Rights Certificate surrendered to the
Rights Agent for exercise, transfer, split up, combination or exchange, the
certification on the form of assignment or form of election to purchase, as the
case may be, that the Rights evidenced by the Rights Certificate are not owned
by an Acquiring Person, or an Affiliate or Associate thereof, has either not
been completed or in any manner indicates any other response thereto, the Rights
Agent shall not take any further action with respect to such requested exercise,
transfer, split up, combination or exchange, without first consulting with the
Company.
Section 21. CHANGE OF RIGHTS AGENT. The Rights Agent or any
successor Rights Agent may resign and be discharged from its duties under this
Agreement upon thirty (30) days' notice in writing mailed to the Company and to
each transfer agent of the Common Stock or Preferred Stock (as to which the
Rights Agent has received prior written notice) by registered or certified mail,
and the Company shall mail notice thereof to the holders of the Rights
Certificates by first-class mail. The Company may remove the Rights Agent or
any successor Rights Agent upon thirty (30) days' notice in writing, mailed to
the Rights Agent or successor Rights Agent, as the case may be, and to each
transfer agent of the Common Stock or Preferred Stock (as to which the Rights
Agent has received prior written notice) by registered or certified mail, and to
the holders of the Rights Certificates by first-class mail. If the Rights Agent
shall resign or be removed or shall otherwise become incapable of acting, the
Company shall appoint a successor to the Rights Agent. If the Company shall
fail to make such appointment within a period of thirty (30) days after giving
notice of such removal or after it has been notified in writing of such
resignation or incapacity by the resigning or incapacitated Rights Agent or by
the holder of a Rights Certificate (who shall, with such notice, submit such
holder's Rights Certificate for inspection by the Company), then the registered
holder of any Rights Certificate may apply to any court of competent
jurisdiction for the
30.
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appointment of a new Rights Agent. Any successor Rights Agent, whether
appointed by the Company or by such a court, shall be a corporation organized
and doing business under the laws of the United States or of any state of the
United States, in good standing, authorized under such laws to exercise
corporate trust or stock transfer powers, and subject to supervision or
examination by federal or state authority and which has at the time of its
appointment as Rights Agent a combined capital and surplus of at least $50
million. After appointment, the successor Rights Agent shall be vested with the
same powers, rights, duties and responsibilities as if it had been originally
named as Rights Agent without further act or deed; but the predecessor Rights
Agent shall deliver and transfer to the successor Rights Agent any property at
the time held by it hereunder, and execute and deliver any further assurance,
conveyance, act or deed necessary for the purpose. Not later than the effective
date of any such appointment the Company shall file notice thereof in writing
with the predecessor Rights Agent and each transfer agent of the Common Stock or
Preferred Stock, and mail a notice thereof in writing to the registered holders
of the Rights Certificates. Failure to give any notice provided for in this
Section 21, however, or any defect therein, shall not affect the legality or
validity of the resignation or removal of the Rights Agent or the appointment of
the successor Rights Agent, as the case may be.
Section 22. ISSUANCE OF NEW RIGHTS CERTIFICATES. Notwithstanding
any of the provisions of this Agreement or of the Rights to the contrary, the
Company may, at its option, issue new Rights Certificates evidencing Rights in
such form as may be approved by its Board of Directors upon approval by a
majority of the Continuing Directors, to reflect any adjustment or change in the
Purchase Price and the number or kind or class of shares or other securities or
property purchasable under the Rights Certificates made in accordance with the
provisions of this Agreement. In addition, in connection with the issuance or
sale of shares of Common Stock following the Distribution Date and prior to the
Expiration Date, the Company (a) shall, with respect to shares of Common Stock
so issued or sold pursuant to the exercise of stock options or under any
employee benefit plan or arrangement or upon the exercise, conversion or
exchange of securities of the Company currently outstanding or issued at any
time in the future by the Company and (b) may, in any other case, if deemed
necessary or appropriate by the Board of Directors of the Company, upon approval
by a majority of the Continuing Directors, issue Rights Certificates
representing the appropriate number of Rights in connection with such issuance
or sale; PROVIDED, HOWEVER, that (i) no such Rights Certificate shall be issued
and this sentence shall be null and void AB INITIO if, and to the extent that,
such issuance or this sentence would create a significant risk of or result in
material adverse tax consequences to the Company or the Person to whom such
Rights Certificate would be issued or would create a significant risk of or
result in such options' or employee plans' or arrangements' failing to qualify
for otherwise available special tax treatment and (ii) no such Rights
Certificate shall be issued if, and to the extent that, appropriate adjustment
shall otherwise have been made in lieu of the issuance thereof.
Section 23. REDEMPTION AND TERMINATION. (a) The Company may, at its
option, upon approval by a majority of the Continuing Directors, at any time
prior to the earlier of (i) the Shares Acquisition Date, or (ii) the Final
Expiration Date redeem all but not less than all the then outstanding Rights at
a redemption price of $.01 per Right, appropriately adjusted to reflect any
31.
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stock split, stock dividend or similar transaction occurring after the date
hereof (such redemption price being hereinafter referred to as the "Redemption
Price"), and the Company may, at its option, pay the Redemption Price either in
cash, shares of Common Stock (based on the current per share market price
thereof (as determined pursuant to Section 11(d) hereof) at the time of
redemption), or any other form of consideration deemed appropriate by the Board
of Directors; PROVIDED that, notwithstanding anything to the contrary contained
in this Section 23(a), the Company may not take any action pursuant to this
Section 23(a) unless (x) at the time of the action of the Board of Directors of
the Company approving such redemption and the form of payment of the Redemption
Price, there are then in office not less than two Continuing Directors and
(y) such action is approved by a majority of the Continuing Directors then in
office. The redemption of the Rights by the Board of Directors may be made
effective at such time on such basis and with such conditions as a majority of
the Continuing Directors in its sole discretion may establish.
(b) Immediately upon the action of a majority of the Continuing
Directors of the Company ordering the redemption of the Rights pursuant to
paragraph (a) of this Section 23, and without any further action and without any
notice, the right to exercise the Rights will terminate and the only right
thereafter of the holders of Rights shall be to receive the Redemption Price.
The Company shall promptly give public notice of any such redemption; PROVIDED,
HOWEVER, that the failure to give, or any defect in, any such notice shall not
affect the validity of such redemption. Within 10 days after such action of a
majority of the Continuing Directors ordering the redemption of the Rights, the
Company shall give notice of such redemption to the Rights Agent and shall mail
a notice of redemption to all the holders of the then outstanding Rights at
their last addresses as they appear upon the registry books of the Rights Agent
or, prior to the Distribution Date, on the registry books of the transfer agent
for the Common Stock. Any notice which is mailed in the manner herein provided
shall be deemed given, whether or not the holder receives the notice. Each such
notice of redemption will state the method by which the payment of the
Redemption Price will be made. Neither the Company nor any of its Affiliates or
Associates may redeem, acquire or purchase for value any Rights at any time in
any manner other than that specifically set forth in this Section 23 or in
Section 24 hereof, and other than in connection with the purchase of shares of
Common Stock prior to the Distribution Date.
(c) Notwithstanding anything contained in this Agreement to the
contrary, the Rights shall not be exercisable pursuant to Section 7(a) at any
time when the Rights are redeemable hereunder.
Section 24. EXCHANGE. (a) The Company, at its option, upon
approval by a majority of the Continuing Directors, at any time after any Person
becomes an Acquiring Person, may exchange all or part of the then outstanding
and exercisable Rights (which shall not include Rights that have become void
pursuant to the provisions of Section 7(f) hereof) for Units of Preferred Stock
at an exchange ratio equal to, subject to adjustment to reflect stock splits,
stock dividends and similar transactions occurring after the date hereof, that
number obtained by dividing the Purchase Price by the then current per share
market price per Unit of Preferred Stock on the earlier of (i) the date on which
any Person becomes an Acquiring Person and (ii) the date on which
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a tender or exchange offer by any Person (other than the Company, any Subsidiary
of the Company, any employee benefit plan maintained by the Company or any of
its Subsidiaries or any trustee or fiduciary with respect to such plan acting in
such capacity) is first published or sent or given within the meaning of Rule
14d-4(a) of the Exchange Act Regulations or any successor rule, if upon
consummation thereof such Person would be the Beneficial Owner of 15% or more of
the shares of Company Common Stock then outstanding (such exchange ratio being
hereinafter referred to as the "Section 24(a) Exchange Ratio"). Notwithstanding
the foregoing, the Company may not effect such exchange at any time after any
Person (other than the Company, any Subsidiary of the Company, any employee
benefit plan maintained by the Company or any of its Subsidiaries, or any
trustee or fiduciary with respect to such plan acting in such capacity),
together with all Affiliates and Associates of such Person, becomes the
Beneficial Owner of 50% or more of the shares of Common Stock then outstanding.
(b) Immediately upon the action of the Board of Directors of the
Company ordering the exchange of any Rights pursuant to subsection (a) of this
Section 24 and without any further action and without any notice, the right to
exercise such Rights shall terminate and the only right thereafter of a holder
of such Rights shall be to receive that number of Units of Preferred Stock equal
to the number of such Rights held by such holder multiplied by the Section 24(a)
Exchange Ratio. The Company shall promptly give public notice of any such
exchange; PROVIDED, HOWEVER, that the failure to give, or any defect in, such
notice shall not affect the validity of such exchange. The Company promptly
shall mail a notice of any such exchange to all of the holders of such Rights at
their last addresses as they appear upon the registry books of the Rights Agent.
Any notice which is mailed in the manner herein provided shall be deemed given,
whether or not the holder receives the notice. Each such notice of exchange
will state the method by which the exchange of shares of Common Stock for Rights
will be effected and, in the event of any partial exchange, the number of Rights
which will be exchanged. Any partial exchange shall be effected PRO RATA based
on the number of Rights (other than Rights which have become void pursuant to
the provisions of Section 7(f) hereof) held by each holder of Rights.
(c) In the event that the number of shares of Preferred Stock which
are authorized by the Company's Certificate of Incorporation but not outstanding
or reserved for issuance for purposes other than upon exercise of the Rights are
not sufficient to permit any exchange of Rights as contemplated in accordance
with this Section 34, the Company shall take all such action as may be necessary
to authorize additional shares of Preferred Stock for issuance upon exchange of
the Rights or make adequate provision to substitute (1) cash, (2) Company Common
Stock or other equity securities of the Company, (3) debt securities of the
Company, (4) other assets, or (5) any combination of the foregoing, having an
aggregate value equal to the Adjustment Spread, where such aggregate value has
been determined by a majority of the Continuing Directors.
(d) The Company shall not be required to issue fractions smaller
than or to distribute certificates which evidence fractions smaller than one
one-thousandth of a share of Preferred Stock. In lieu thereof, the Company
shall pay to the registered holders of the Rights Certificates with regard to
which such fractional Units would otherwise be issuable an amount in
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cash equal to the same fraction of the current market value (as determined
pursuant to Section 11(c)(i) hereof) of one Unit of Preferred Stock.
Section 25. NOTICE OF CERTAIN EVENTS. (a) In case the Company shall
propose (i) to pay any dividend payable in stock of any class to the holders of
its Preferred Stock or to make any other distribution to the holders of its
Preferred Stock (other than a regular quarterly cash dividend), (ii) to offer to
the holders of its Preferred Stock rights or warrants to subscribe for or to
purchase any additional Units of Preferred Stock or shares of stock of any class
or any other securities, rights or options, (iii) to effect any reclassification
of its Preferred Stock (other than a reclassification involving only the
subdivision of outstanding Preferred Stock), (iv) to effect any consolidation or
merger into or with any other Person (other than a Subsidiary of the Company in
a transaction which complies with Section 11(o)), or to effect any sale or other
transfer (or to permit one or more of its Subsidiaries to effect any sale or
other transfer), in one or more transactions, of 50% or more of the assets or
earning power of the Company and its Subsidiaries (taken as a whole) to, any
other Person, (v) to effect the liquidation, dissolution or winding up of the
Company, or (vi) to declare or pay any dividend on the Common Stock payable in
shares of Common Stock or to effect a subdivision, combination or consolidation
of the shares of Common Stock (by reclassification or otherwise than by payment
of dividends in shares of Common Stock), then, in each such case, the Company
shall give to each holder of a Rights Certificate, in accordance with Section 26
hereof, a notice of such proposed action, which shall specify the record date
for the purposes of such stock dividend, or distribution of rights or warrants,
or the date on which such reclassification, consolidation, merger, sale,
transfer, liquidation, dissolution, or winding up is to take place and the date
of participation therein by the holders of the shares of Common Stock and/or
Units of Preferred Stock, if any such date is to be fixed, and such notice shall
be so given in the case of any action covered by clause (i) or (ii) above at
least ten (10) days prior to the record date for determining holders of the
Units of Preferred Stock for purposes of such action, and in the case of any
such other action, at least ten (10) days prior to the date of the taking of
such proposed action or the date of participation therein by the holders of the
shares of Common Stock and/or Units of Preferred Stock, whichever shall be the
earlier.
(b) In case any of the events set forth in Section 11(a)(ii) hereof
shall occur, then the Company shall as soon as practicable thereafter give to
each holder of a Rights Certificate, in accordance with Section 26 hereof, a
notice of the occurrence of such event, which notice shall describe such event
and the consequences of such event to holders of Rights under Section 11(a)(ii)
hereof. In the event any Person becomes an Acquiring Person, the Company will
promptly notify the Rights Agent thereof.
34.
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Section 26. NOTICES. Notices or demands authorized by this
Agreement to be given or made by the Rights Agent or by the holder of any Rights
Certificate to or on the Company shall be sufficiently given or made if sent by
first-class mail, postage prepaid, addressed (until another address is filed in
writing with the Rights Agent) as follows:
Oak Technology, Inc.
139 Kifer Court
Sunnyvale, CA 94086
Attention: General Counsel
Subject to the provisions of Section 21 hereof, any notice or demand authorized
by this Agreement to be given or made by the Company or by the holder of any
Rights Certificate to or on the Rights Agent shall be sent by registered or
certified mail and shall be deemed given upon receipt and addressed (until
another address is filed in writing with the Company) as follows:
BankBoston, N.A.
c/o Boston EquiServe Limited Partnership
150 Royall Street
Canton, MA 02021
Attention: Shareholder Services Division
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Rights Certificate shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the registry
books of the Company.
Section 27. SUPPLEMENTS AND AMENDMENTS. Prior to the Distribution
Date, the Company may supplement or amend this Agreement in any respect, without
the approval of any holders of Rights, by action of its Board of Directors, upon
approval by a majority of the Continuing Directors, and the Rights Agent shall,
if the Company so directs, execute such supplement or amendment. From and after
the Distribution Date, the Company may from time to time supplement or amend
this Agreement without the approval of any holders of Rights, by action of its
Board of Directors, upon approval by a majority of the Continuing Directors, in
order (i) to cure any ambiguity, (ii) to correct or supplement any provision
contained herein which may be defective or inconsistent with any other
provisions herein, (iii) to shorten or lengthen any time period hereunder or
(iv) to change or supplement the provisions hereunder in any manner which the
Company may deem necessary or desirable and which shall not adversely affect the
interests of the holders of Rights Certificates (other than an Acquiring Person
or an Affiliate or Associate of an Acquiring Person), including, without
limitation, to change the Purchase Price, the Redemption Price, any time periods
herein specified, and any other term hereof, any such supplement or amendment to
be evidenced by a writing signed by the Company and the Rights Agent; PROVIDED,
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HOWEVER, that from and after such time as any Person becomes an Acquiring
Person, this Agreement shall not be amended in any manner which would adversely
affect the interests of the holders of Rights. Upon receipt of a certificate
from an appropriate officer of the Company that the proposed supplement or
amendment is consistent with this Section 27 and, after such time as any Person
has become an Acquiring Person, that the proposed supplement or amendment does
not adversely affect the interests of the holders of Rights, the Rights Agent
shall execute such supplement or amendment.
Section 28. SUCCESSORS. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
Section 29. DETERMINATIONS AND ACTIONS BY THE BOARD OF DIRECTORS.
For all purposes of this Agreement, any calculation of the number of shares of
Common Stock outstanding at any particular time, including for purposes of
determining the particular percentage of such outstanding shares of Common Stock
of which any Person is the Beneficial Owner, shall be made in accordance with
the last sentence of Rule 13d-3(d)(1)(i) of the General Rules and Regulations
under the Exchange Act. The Board of Directors of the Company shall have the
exclusive power and authority to administer this Agreement and to exercise all
rights and powers specifically granted to the Board, or the Company, or as may
be necessary or advisable in the administration of this Agreement, including,
without limitation, the right and power to (i) interpret the provisions of this
Agreement and (ii) make all determinations deemed necessary or advisable for the
administration of this Agreement (including a determination to redeem or not
redeem the Rights or to amend the Agreement). All such actions, calculations,
interpretations and determinations (including, for purposes of clause (y) below,
all omissions with respect to the foregoing), which are done or made by the
Board in good faith, shall (x) be final, conclusive and binding on the Company,
the Rights Agent, the holders of the Rights Certificates and all other parties
and (y) not subject the Board or the Continuing Directors to any liability to
the holders of the Rights.
Section 30. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement
shall be construed to give to any person or corporation other than the Company,
the Rights Agent and the registered holders of the Rights Certificates (and,
prior to the Distribution Date, shares of Common Stock) any legal or equitable
right, remedy or claim under this Agreement; but this Agreement shall be for the
sole and exclusive benefit of the Company, the Rights Agent and the registered
holders of the Rights Certificates (and, prior to the Distribution Date, shares
of Common Stock).
Section 31. SEVERABILITY. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated;
PROVIDED, HOWEVER, that notwithstanding anything in this Agreement to the
contrary, if any such term, provision, covenant or restriction is held by such
court or authority to be invalid, void or unenforceable and the Board of
Directors of the Company, upon approval by a majority of the
36.
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Continuing Directors, determines in its good faith judgment that severing the
invalid language from this Agreement would adversely affect the purpose or
effect of this Agreement, the right of redemption set forth in Section 23 hereof
shall be reinstated and shall not expire until the tenth business day following
the date of such determination by the Board of Directors of the Company.
Section 32. GOVERNING LAW. This Agreement and each Rights
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of Delaware and for all purposes shall be governed by and
construed in accordance with the laws of such State applicable to contracts to
be made and performed entirely within such State.
Section 33. COUNTERPARTS. This Agreement may be executed in any
number of counterparts and each of such counterparts shall for all purposes be
deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument.
Section 34. DESCRIPTIVE HEADINGS. Descriptive headings of the
several Sections of this Agreement are inserted or convenience only and shall
not control or affect the meaning or construction of any of the provisions
hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and attested, all as of the day and year first above written.
ATTEST: OAK TECHNOLOGY, INC.
By By
---------------------------- ---------------------------
Name: Name:
Title: Title
ATTEST: BANKBOSTON, N.A.,
as Rights Agent
By By
---------------------------- ---------------------------
Name: Name:
Title: Title
37.
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EXHIBIT A
FORM
of
CERTIFICATE OF DESIGNATION
of
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
of
OAK TECHNOLOGY, INC.
(Pursuant to Section 151 of the
Delaware General Corporation Law)
----------------------------------
OAK TECHNOLOGY, INC., a corporation organized and existing under the
General Corporation Law of the State of Delaware (hereinafter called the
"Corporation"), hereby certifies that the following resolution was adopted by
the Board of Directors of the Corporation as required by Section 151 of the
General Corporation Law at a meeting duly called and held on August 18, 1997;
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of the Corporation (hereinafter called the "Board of
Directors" or the "Board") in accordance with the provisions of the Certificate
of Incorporation, the Board of Directors hereby creates a series of Preferred
Stock, par value $.001 per share (the "Preferred Stock"), of the Corporation and
hereby states the designation and number of shares, and fixes the relative
rights, preferences, and limitations thereof as follows:
Series A Junior Participating Preferred Stock:
Section 1. DESIGNATION AND AMOUNT. The shares of such series shall
be designated as "Series A Junior Participating Preferred Stock" (the "Series A
Preferred Stock") and the number of shares constituting the Series A Preferred
Stock shall be four hundred thousand (400,000). Such number of shares may be
increased or decreased by resolution of the Board of Directors; PROVIDED,
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that no decrease shall reduce the number of shares of Series A Preferred Stock
to a number less than the number of shares then outstanding plus the number of
shares reserved for issuance upon the exercise of outstanding options, rights or
warrants or upon the conversion of any outstanding securities issued by the
Corporation convertible into Series A Preferred Stock.
Section 2. DIVIDENDS AND DISTRIBUTIONS.
(A) Subject to the rights of the holders of any shares of any
series of Preferred Stock (or any similar stock) ranking prior and superior
to the Series A Preferred Stock with respect to dividends, each holder of
one one-thousandth (1/1,000) of a share of Series A Preferred Stock (a
"Unit"), in preference to the holders of shares of Common Stock, par value
$.001 per share (the "Common Stock"), of the Corporation, and of any other
junior stock, shall be entitled to receive, when declared by the Board of
Directors out of funds legally available for the purpose, quarterly
dividends payable in cash on the last day of March, June, September and
December in each year (each such date being referred to herein as a
"Quarterly Dividend Payment Date"), commencing on the first Quarterly
Dividend Payment Date after the first issuance of a Unit of Series A
Preferred Stock, in an amount per share (rounded to the nearest cent) equal
to, subject to the provision for adjustment hereinafter set forth, 1,000
times the aggregate per share amount of all cash dividends, and 1,000 times
the aggregate per share amount (payable in kind) of all non-cash dividends
or other distributions, other than a dividend payable in shares of Common
Stock or a subdivision of the outstanding shares of Common Stock (by
reclassification or otherwise), declared on the Common Stock since the
immediately preceding Quarterly Dividend Payment Date or, with respect to
the first Quarterly Dividend Payment Date, since the first issuance of a
Unit of Series A Preferred Stock. In the event the Corporation shall at
any time declare or pay any dividend on the Common Stock payable in shares
of Common Stock, or effect a subdivision or combination or consolidation of
the outstanding shares of Common Stock (by reclassification or otherwise
than by payment of a dividend in shares of Common Stock) into a greater or
lesser number of shares of Common Stock, then in each such case the amount
to which holders of shares of Series A Preferred Stock were entitled
immediately prior to such event under clause (b) of the preceding sentence
shall be adjusted by multiplying such amount by a fraction, the numerator
of which is the number of shares of Common Stock outstanding immediately
after such event and the denominator of which is the number of shares of
Common Stock that were outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on the
Units of Series A Preferred Stock as provided in paragraph (A) of this
Section immediately after it declares a dividend or distribution on the
Common Stock (other than a dividend payable in shares of Common Stock);
provided, however, that, in the event no dividend or distribution shall
have been declared on the Common Stock during the period between any
Quarterly Distribution Date and the next subsequent Quarterly Dividend
Payment Date, a dividend of $1.00 per Unit on the Series A Preferred Stock
shall nevertheless be payable on such
A-2
<PAGE>
subsequent Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on each
outstanding Unit of Series A Participating Preferred Stock from the
Quarterly Dividend Payment Date next preceding the date of issue of such
Unit of Series A Participating Preferred Stock, unless the date of issue of
such Unit is prior to the record date for the first Quarterly Dividend
Payment Date, in which case dividends on such Unit shall begin to accrue
from the date of issue of such Unit, or unless the date of issue is a
Quarterly Dividend Payment Date or is a date after the record date for the
determination of holders of Units of Series A Preferred Stock entitled to
receive a quarterly dividend and before such Quarterly Dividend Payment
Date, in either of which events such dividends shall begin to accrue and be
cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid
dividends shall not bear interest. Dividends paid on the Units of Series A
Preferred Stock in an amount less than the total amount of such dividends
at the time accrued and payable on such Units shall be allocated pro rata
on a Unit-by-Unit basis among all such Units at the time outstanding. The
Board of Directors may fix a record date for the determination of holders
of Units of Series A Preferred Stock entitled to receive payment of a
dividend or distribution declared thereon, which record date shall be not
more than 60 days prior to the date fixed for the payment thereof.
Section 3. VOTING RIGHTS. The holders of Units of Series A Preferred
Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth,
each Unit of Series A Preferred Stock shall entitle the holder thereof to
1,000 votes on all matters submitted to a vote of the stockholders of the
Corporation. In the event the Corporation shall at any time declare or pay
any dividend on the Common Stock payable in shares of Common Stock, or
effect a subdivision or combination or consolidation of the outstanding
shares of Common Stock (by reclassification or otherwise than by payment of
a dividend in shares of Common Stock) into a greater or lesser number of
shares of Common Stock, then in each such case the number of votes per Unit
to which holders of Units of Series A Preferred Stock were entitled
immediately prior to such event shall be adjusted by multiplying such
number by a fraction, the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator
of which is the number of shares of Common Stock that were outstanding
immediately prior to such event.
(B) Except as otherwise provided herein, in any other Certificate
of Designations creating a series of Preferred Stock or any similar stock,
or by law, the holders of Units of Series A Preferred Stock and the holders
of shares of Common Stock and any other capital stock of the Corporation
having general voting rights shall vote together as one class on all
matters submitted to a vote of stockholders of the Corporation.
A-3
<PAGE>
(C) Except as set forth herein, or as otherwise provided by law,
holders of Series A Preferred Stock shall have no special voting rights and
their consent shall not be required (except to the extent they are entitled
to vote with holders of Common Stock as set forth herein) for taking any
corporate action.
Section 4. CERTAIN RESTRICTIONS.
(A) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Preferred Stock as provided in
Section 2 are in arrears, thereafter and until all accrued and unpaid
dividends and distributions, whether or not declared, on Units of Series A
Preferred Stock outstanding shall have been paid in full, the Corporation
shall not:
(i) declare or pay dividends, or make any other distributions,
on any shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred
Stock;
(ii) declare or pay dividends, or make any other distributions,
on any shares of stock ranking on a parity (either as to dividends or
upon liquidation, dissolution or winding up) with the Series A
Preferred Stock, except dividends paid ratably on the Units of
Series A Preferred Stock and all such parity stock on which dividends
are payable or in arrears in proportion to the total amounts to which
the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred
Stock, provided that the Corporation may at any time redeem, purchase
or otherwise acquire shares of any such junior stock in exchange for
shares of any stock of the Corporation ranking junior (either as to
dividends or upon dissolution, liquidation or winding up) to the
Series A Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for consideration
any Units of Series A Preferred Stock, or any shares of stock ranking
on a parity with the Series A Preferred Stock, except in accordance
with a purchase offer made in writing or by publication (as determined
by the Board of Directors) to all holders of such shares upon such
terms as the Board of Directors, after consideration of the respective
annual dividend rates and other relative rights and preferences of the
respective series and classes, shall determine in good faith will
result in fair and equitable treatment among the respective series or
classes.
A-4
<PAGE>
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares
of stock of the Corporation unless the Corporation could, under paragraph
(A) of this Section 4, purchase or otherwise acquire such shares at such
time and in such manner.
Section 5. REACQUIRED UNITS. Any Units of Series A Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and cancelled promptly after the acquisition thereof. All such
Units shall upon their cancellation become authorized but unissued Units of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
subject to the conditions and restrictions on issuance set forth herein, in the
Certificate of Incorporation, or in any other Certificate of Designations
creating a series of Preferred Stock or any similar stock or as otherwise
required by law.
Section 6. LIQUIDATION, DISSOLUTION OR WINDING UP.
(A) Upon any liquidation, dissolution or winding up of the
Corporation, no distribution shall be made (1) to the holders of shares of
stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred Stock unless, prior
thereto, the holders of Units of Series A Preferred Stock shall have
received $1,000 per share, plus an amount equal to accrued and unpaid
dividends and distributions thereon, whether or not declared, to the date
of such payment, provided that the holders of Units of Series A Preferred
Stock shall be entitled to receive an aggregate amount per share, subject
to the provision for adjustment hereinafter set forth, equal to 1,000 times
the aggregate amount to be distributed per share to holders of shares of
Common Stock, or (2) to the holders of shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or winding up)
with the Series A Preferred Stock, except distributions made ratably on the
Series A Preferred Stock and all such parity stock in proportion to the
total amounts to which the holders of all such shares are entitled upon
such liquidation, dissolution or winding up. In the event the Corporation
shall at any time declare or pay any dividend on the Common Stock payable
in shares of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of
Common Stock) into a greater or lesser number of shares of Common Stock,
then in each such case the aggregate amount to which holders of Units of
Series A Preferred Stock were entitled immediately prior to such event
under the proviso in clause (1) of the preceding sentence shall be adjusted
by multiplying such amount by a fraction the numerator of which is the
number of shares of Common Stock outstanding immediately after such event
and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
(B) In the event, however, that there are not sufficient assets
available to permit payment in full to the Series A Liquidation Preference
and the liquidation preferences of all other series of Preferred Stock, if
any, which rank on a parity with the Series A Participating
A-5
<PAGE>
Preferred Stock, then such remaining assets shall be distributed ratably to
the holders of such parity shares in proportion to their respective
liquidation preferences.
Section 7. CONSOLIDATION, MERGER, ETC. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the Units of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each share of
Series A Preferred Stock shall at the same time be similarly exchanged or
changed into an amount per Unit, subject to the provision for adjustment
hereinafter set forth, equal to 1,000 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged.
In the event the Corporation shall at any time declare or pay any dividend on
the Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the amount set forth in the preceding sentence with respect to the
exchange or change of Units of Series A Preferred Stock shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 8. NO REDEMPTION. The Units of Series A Preferred Stock
shall not be redeemable.
Section 9. RANK. The Series A Preferred Stock shall rank, with
respect to the payment of dividends and the distribution of assets, junior to
all series of any other class of the Corporation's Preferred Stock.
Section 10. AMENDMENT. The Amended and Restated Certificate of
Incorporation of the Corporation shall not be amended in any manner which would
materially alter or change the powers, preferences or special rights of the
Series A Preferred Stock so as to affect them adversely without the affirmative
vote of the holders of at least a majority of the outstanding Units of Series A
Preferred Stock, voting together as a single class.
A-6
<PAGE>
IN WITNESS WHEREOF, this Certificate of Designation is executed on
behalf of the Corporation by its President and its corporate seal attested by
its Chief Financial Officer this 18th day of August, 1997.
----------------------------------------
Name:
Title:
Attest:
- ----------------------------------
Name:
Title:
A-7
<PAGE>
EXHIBIT B
Form of Rights Certificate
Certificate No. R- ________ Rights
NOT EXERCISABLE AFTER AUGUST 19, 2007 OR EARLIER IF
REDEMPTION OR EXCHANGE OCCURS. THE RIGHTS ARE SUBJECT TO
REDEMPTION AT THE OPTION OF THE COMPANY AT $.01 PER RIGHT
AND TO EXCHANGE ON THE TERMS SET FORTH IN THE RIGHTS
AGREEMENT. UNDER CERTAIN CIRCUMSTANCES, RIGHTS BENEFICIALLY
OWNED BY AN ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF
AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS
AGREEMENT) AND ANY SUBSEQUENT HOLDER OF SUCH RIGHTS
MAY BECOME NULL AND VOID. [THE RIGHTS REPRESENTED BY THIS
RIGHTS CERTIFICATE ARE OR WERE BENEFICIALLY OWNED BY A
PERSON WHO WAS OR BECAME AN ACQUIRING PERSON OR AN AFFILIATE
OR ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE
DEFINED IN THE RIGHTS AGREEMENT). ACCORDINGLY, THIS RIGHTS
CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY MAY BECOME
NULL AND VOID IN THE CIRCUMSTANCES SPECIFIED IN SUCH
AGREEMENT.]*/
Rights Certificate
OAK TECHNOLOGY, INC.
This certifies that , or registered assigns, is the
registered owner of the number of Rights set forth above, each of which entitles
the owner thereof, subject to the terms, provisions and conditions of the Rights
Agreement, dated as of August 19, 1997 (the "Rights Agreement"), between Oak
Technology, Inc., a Delaware corporation (the "Company"), and BankBoston, N.A.
(the "Rights Agent"), to purchase from the Company at any time after the
Distribution Date (as such term is defined in the Rights Agreement) and prior to
5:00 P.M., California
- ---------------------
*/ The portion of the legend in bracket shall be inserted only if applicable
and shall replace the preceding sentence.
B-1
<PAGE>
time, on August 19, 2007 at the office of the Rights Agent designated for such
purpose, or at the office of its successor as Rights Agent, one one-thousandth
(a "Unit") of a fully paid non-assessable share of Series A Junior Participating
Preferred Stock, par value $.001 per share (the "Series A Preferred Stock") of
the Company, at a purchase price of $60.00 per Unit of Series A Preferred Stock
(the "Purchase Price"), upon presentation and surrender of this Rights
Certificate with the Form of Election to Purchase duly executed. The number of
Rights evidenced by this Rights Certificate (and the number of Units of Series A
Preferred Stock which may be purchased upon exercise hereof) set forth above,
and the Purchase Price set forth above, are the number and Purchase Price as of
August 29, 1997 based on the Series A Preferred Stock as constituted at such
date. As provided in the Rights Agreement, the Purchase Price and the number of
Units of Series A Preferred Stock which may be purchased upon the exercise of
the Rights evidenced by this Rights Certificate are subject to modification and
adjustment upon the happening of certain events.
This Rights Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Rights Certificates. Copies of
the Rights Agreement are on file at the principal executive offices of the
Company.
This Rights Certificate, with or without other Rights Certificates,
upon surrender at the office of the Rights Agent designated for such purpose,
may be exchanged for another Rights Certificate or Rights Certificates of like
tenor and date evidencing Rights entitling the holder to purchase a like
aggregate number of Series A Preferred Stock as the Rights evidenced by the
Rights Certificate or Rights Certificates surrendered shall have entitled such
holder to purchase. If this Rights Certificate shall be exercised in part, the
holder shall be entitled to receive upon surrender hereof another Rights
Certificate or Rights Certificates for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights
evidenced by this Certificate may be redeemed by the Company at a redemption
price of $.01 per Rights.
No fractional shares of Series A Preferred Stock will be issued upon
the exercise of any Rights or Rights evidenced hereby (other than fractions
which are integral multiples of one one-thousandth of a share of Series A
Preferred Stock, which may, at the election of the Company, be evidenced by
depositary receipts), but in lieu thereof a cash payment will be made, as
provided in the Rights Agreement.
No holder of this Rights Certificate, as such, shall be entitled to
vote or receive dividends or be deemed for any purpose the holder of Units of
Series A Preferred Stock or of any other securities of the Company which may at
any time be issuable on the exercise hereof, nor shall anything contained in the
Rights Agreement or herein be construed to confer upon the holder hereof, as
such, any of the rights of a stockholder of the Company or any right to vote for
the
B-2
<PAGE>
election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action, or to
receive notice of meetings or other actions affecting stockholders (except as
provided in the Rights Agreement), or to receive dividends or subscription
rights, or otherwise, until the Rights or Rights evidenced by this Rights
Certificate shall have been exercised as provided in the Rights Agreement.
This Rights Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Rights Agent.
WITNESS the signature of the proper officers of the Company and its
corporate seal. Dated as of August 19, 1997
ATTEST: OAK TECHNOLOGY, INC.
By
- ------------------------- --------------------------------
Name: Name:
Title: Title:
Countersigned:
BANKBOSTON, N.A.,
as Rights Agent
By
---------------------------
Authorized Signatory
B-3
<PAGE>
Form of Reverse Side of Rights Certificate
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder
desires to transfer the Rights Certificate.)
FOR VALUE RECEIVED ______________________________ hereby sells,
assigns and transfers unto
________________________________________________________________________________
(Please print name and address of transferee)
this Rights Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ________________ Attorney,
to transfer the within Rights Certificate on the books of the within-named
Company, with full power of substitution.
Dated: ,
---------------------- ----
----------------------------------
Signature
Signature Guaranteed:
Signatures must be guaranteed by a participant in a Securities
Transfer Association Inc. recognized signature guarantee medallion program.
B-4
<PAGE>
CERTIFICATE
The undersigned hereby certifies that the Rights evidenced by this
Rights Certificate are not beneficially owned by an Acquiring Person or an
Affiliate or Associate thereof (as defined in the Rights Agreement).
-------------------------------------
Signature
-----------------------------------------------------
NOTICE
The signature in the foregoing Form of Assignment must conform to the name
as written upon the face of this Rights Certificate in every particular, without
alteration or enlargement or any change whatsoever.
In the event the certification set forth above in the Form of Assignment
is not completed, the Company and the Rights Agent will deem the beneficial
owner of the Rights evidenced by this Rights Certificate to be an Acquiring
Person or an Affiliate or Associate thereof (as defined in the Rights Agreement)
and such Assignment will not be honored.
B-5
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be executed if holder
desires to exercise the Rights Certificate.)
To OAK TECHNOLOGY, INC.
The undersigned hereby irrevocably elects to exercise _________________
Rights represented by this Rights Certificate to purchase the units of
Series A Preferred Stock issuable upon the exercise of such Rights and requests
that certificates for such Series A Preferred Stock be issued in the name of:
Please insert social security
or other identifying number
--------------------------------------------------
(Please print name and address)
If such number of Rights shall not be all the Rights evidenced by this Rights
Certificate, a new Rights Certificate for the balance remaining of such Rights
shall be registered in the name of and delivered to:
Please insert social security
or other identifying number
--------------------------------------------------
(Please print name and address)
Dated: ,
------------------ ----
-----------------------------------
Signature
Signature Guaranteed:
Signatures must be guaranteed by a participant in a Securities
Transfer Association Inc. recognized signature guarantee medallion program.
B-6
<PAGE>
CERTIFICATE
The undersigned hereby certifies that the Rights evidenced by this
Rights Certificate are not beneficially owned by an Acquiring Person or an
Affiliate or Associate thereof (as defined in the Rights Agreement).
-----------------------------------
Signature
-----------------------------------------------------
NOTICE
The signature in the foregoing Form of Election to Purchase must
conform to the name as written upon the face of this Rights Certificate in every
particular, without alteration or enlargement or any change whatsoever.
In the event the certification set forth above in the Form of Election
to Purchase, as the case may be, is not completed, the Company and the Rights
Agent will deem the beneficial owner of the Rights evidenced by this Rights
Certificate to be an Acquiring Person or an Affiliate or Associate thereof (as
defined in the Rights Agreement) and such Election to Purchase will not be
honored.
B-7
<PAGE>
EXHIBIT C
OAK TECHNOLOGY, INC.
SUMMARY OF RIGHTS TO PURCHASE
SHARES OF SERIES A PREFERRED STOCK
On August 19, 1997, the Board of Directors of Oak Technology, Inc.
(the "Company") declared a dividend of one preferred share purchase right (a
"Right") for each outstanding share of Common Stock (the "Common Stock"), par
value $.001 per share, of the Company. The dividend is payable on August 29,
1997 (the "Record Date") to the stockholders of record on that date. Each Right
entitles the registered holder to purchase from the Company one one-thousandth
of a share (a "Unit") of Series A Junior Participating Preferred Stock, par
value $.001 per share (the "Series A Preferred Stock"), of the Company at a
price of $60.00 per Unit (the "Purchase Price"), subject to adjustment. The
description and terms of the Rights are set forth in a Rights Agreement dated as
of August 19, 1997 (the "Rights Agreement") between the Company and BankBoston,
N.A., as Rights Agent (the "Rights Agent").
Until the earlier to occur of (i) 10 days following a public
announcement that a person or group of affiliated or associated persons (an
"Acquiring Person") have acquired beneficial ownership of 15% or more of the
outstanding Common Stock or (ii) 10 business days (or such later date as may be
determined by action of the Continuing Directors prior to such time as any
Person becomes an Acquiring Person) following the commencement of, or
announcement of an intention to make, a tender offer or exchange offer the
consummation of which would result in the beneficial ownership by a person or
group of 15% or more of such outstanding Common Stock (the earlier of such dates
being called the "Distribution Date"), the Rights will be evidenced, with
respect to any of the Common Stock certificates outstanding as of the Record
Date, by such Common Stock certificate with a copy of this Summary of Rights
attached thereto.
The Rights Agreement provides that, until the Distribution Date, the
Rights will be transferred with and only with the Common Stock. Until the
Distribution Date (or earlier redemption or expiration of the Rights), new
Common Stock certificates issued after the Record Date, upon transfer or new
issuance of Common Stock will contain a notation incorporating the Rights
Agreement by reference. Until the Distribution Date (or earlier redemption or
expiration of the Rights), the surrender for transfer of any certificates for
Common Stock, outstanding as of the Record Date, even without such notation or a
copy of this Summary of Rights being attached thereto, will also constitute the
transfer of the Rights associated with the Common Stock represented by such
certificate. As soon as practicable following the Distribution Date, separate
certificates evidencing the Rights ("Rights Certificates") will be mailed to
holders of record of the Common Stock as of the Close of Business on the
Distribution Date and such separate Rights Certificates alone will evidence the
Rights.
The Rights are not exercisable until the Distribution Date. The
Rights will expire at the close
C-1.
<PAGE>
of business on August 19, 2007 (the "Final Expiration Date"), unless the Final
Expiration Date is extended or unless the Rights are earlier redeemed or
exchanged by the Company, in each case as described below.
The Purchase Price payable, and the number of Units of Series A
Preferred Stock or other securities or property issuable, upon exercise of the
Rights are subject to adjustment from time to time to prevent dilution (i) in
the event of a stock dividend on, or a subdivision, combination or
reclassification of, the Series A Preferred Stock, (ii) upon the grant to
holders of the Units of Series A Preferred Stock of certain rights or warrants
to subscribe for or purchase Units of Series A Preferred Stock at a price, or
securities convertible into Units of Series A Preferred Stock with a conversion
price, less than the then current market price of the Units of Series A
Preferred Stock or (iii) upon the distribution to holders of the Units of Series
A Preferred Stock of evidences of indebtedness or assets (excluding regular
periodic cash dividends paid out of earnings or retained earnings or dividends
payable in Units of Series A Preferred Stock) or of subscription rights or
warrants (other than those referred to above).
The number of outstanding Rights and the number of Units of Series A
Preferred Stock issuable upon exercise of each Rights are also subject to
adjustment in the event of a stock split of the Common Stock or a stock dividend
on the Common Stock payable in Common Stock or subdivisions, consolidations or
combinations of the Common Stock occurring, in any such case, prior to the
Distribution Date.
Units of Series A PreFerred Stock purchasable upon exercise of the
Rights will not be redeemable. Each Unit of Series A PreFerred Stock will be
entitled to an aggregate dividend of 1,000 times the dividend declared per share
of Common Stock. In the event of liquidation, the holders of the Units of
Series A PreFerred Stock will be entitled to an aggregate payment of 1,000 times
the payment made per share of Common Stock. Each Unit of Series A PreFerred
Stock will have 1,000 votes, voting together with the Common Stock. Finally, in
the event of any merger, consolidation or other transaction in which shares of
Common Stock are exchanged, each Unit of Series A PreFerred Stock will be
entitled to receive 1,000 times the amount received per share of Common Stock.
These rights are protected by customary antidilution provisions.
Because of the nature of the dividend, liquidation and voting rights,
the value of the Series A PreFerred Stock, the Units of Series A PreFerred Stock
purchasable upon exercise of each Rights should approximate the value of one
share of Common Stock.
In the event that, after the Rights become exercisable, the Company is
acquired in a merger or other business combination transaction with an Acquiring
Person or an affiliate thereof, or 50% or more of its consolidated assets or
earning power are sold to an Acquiring Person or an affiliate thereof, proper
provision will be made so that each holder of a Rights will thereafter have the
right to receive, upon exercise thereof at the then current exercise price of
the Rights, that number of shares of common stock of the acquiring company which
at the time of such transaction will have a market value of two times the
exercise price of the Rights.
C-2.
<PAGE>
In the event that any person or group of affiliated or associated
persons becomes the beneficial owner of 15% or more of the outstanding shares of
Common Stock proper provision shall be made so that each holder of a Right,
other than Rights beneficially owned by the Acquiring Person (which will
thereafter be void), will thereafter have the right to receive upon exercise
that number of shares of Common Stock or Units of Series A PreFerred Stock (or
cash, other securities or property) having a market value of two times the
exercise price of the Rights.
At any time after the acquisition by a person or group of affiliated
or associated persons of beneficial ownership of 15% or more of the outstanding
shares of Common Stock and prior to the acquisition by such person or group of
50% or more of the outstanding Common Stock, the Continuing Directors of the
Company may exchange all or part of the Rights (other than Rights owned by such
person or group which have become void), for Units of Series A PreFerred Stock
at an exchange ratio (subject to adjustment) which shall equal, subject to
adjustment to reflect stock splits, stock dividends and similar transactions
occurring after the date hereof, that number obtained by dividing the Purchase
Price by the then current per share market price per Unit of Series A PreFerred
Stock on the earlier of (i) the date on which any Person becomes an Acquiring
Person and (ii) the date on which a tender or exchange offer is announced by any
Person, if upon consummation thereof such Person would be the Beneficial Owner
of 15% or more of the shares of Company Common Stock then outstanding.
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional shares of Series A PreFerred Stock will be
issued (other than fractions which are integral multiples of one one-thousandth
of a shares of Series A PreFerred Stock, which may, at the election of the
Company, be evidenced by depositary receipts) and, in lieu thereof, an
adjustment in cash will be made based on the market price of the Units of Series
A PreFerred Stock on the last trading day prior to the date of exercise.
At any time within ten (10) business days after a person or group of
affiliated or associated persons acquire beneficial ownership of 15% or more of
the outstanding Common Stock (unless the Continuing Directors extends such ten-
day period), the Board of Directors of the Company may redeem the Rights in
whole, but not in part, at a price of $.01 per Right (the "Redemption Price"),
upon the approval of a majority of the Continuing Directors. The redemption of
the rights may be made effective at such time on such basis and with such
conditions as the Directors, upon the approval of the Continuing Directors in
its sole discretion may establish. Immediately upon any redemption of the
Rights, the right to exercise the Rights will terminate and the only right of
the holders of Rights will be to receive the Redemption Price. The Rights are
also redeemable under other circumstances as specified in the Rights Agreement.
The terms of the Rights may be amended by the Board of Directors of
the Company without the consent of the holders of the Rights upon the approval
of a majority of the Continuing Directors except that from and after a
Distribution Date no such amendment may adversely affect the interests of the
holders of the Rights.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of
C-3.
<PAGE>
the Company, including, without limitation, the right to vote or to receive
dividends.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
on terms not approved by the Company's Board of Directors, except pursuant to an
offer conditioned on a substantial number of Rights being acquired. The Rights
should not interfere with any merger or other business combination approved by
the Board of Directors since the Rights may be redeemed by the Company at the
Redemption Price prior to the occurrence of a Distribution Date.
A copy of the Rights Agreement has been filed with the Securities and
Exchange Commission as an Exhibit to a Registration Statement on Form 8-A. A
copy of the Rights Agreement is available
free of charge from the Company. This summary description of the Rights does
not purport to be complete and is qualified in its entirety by reference to the
Rights Agreement, which is hereby incorporated herein by reference.
C-4.
<PAGE>
FIRST AMENDMENT TO
PLAN OF REORGANIZATION AND AGREEMENT OF MERGER
THIS FIRST AMENDMENT (the "AMENDMENT") to that certain Plan of
Reorganization and Agreement of Merger dated as of October 27, 1995 (the
"AGREEMENT") by and among OAK TECHNOLOGY, INC., a Delaware corporation
("OAK"), OAK ACQUISITION CORPORATION, a Massachusetts corporation, PIXEL
MAGIC, INC., a Massachusetts corporation ("PIXEL"), and the then shareholders
of Pixel (the "SHAREHOLDERS") is entered into as of June 25, 1996 by and
among Oak, Pixel and the Agents (as defined in the Agreement) appointed by
the Shareholders. All capitalized terms used but not defined in this
Amendment have the meanings attributed to them in the Agreement.
R E C I T A L S
Subject to the limitations set forth in the Agreement and pursuant to
Sections 2.4 and 2.6 thereof, Oak agreed to make a quarterly payment, defined in
the Agreement as the "CONTINGENT PAYMENT," to the Security Holders based on
Operating Income of Pixel for a calendar quarter determined on a calendar year
to date basis, which Operating Income expressly excludes operating income
attributable to any VCEP Products contributed by Oak to Pixel.
Oak and Pixel now desire that operating income attributable to New
VCEP Product Business be included in Operating Income.
Oak and Pixel desire that $312,500 attributable to VCEP Products be
included in Operating Income for calendar year 1996, but that such amount not be
subject to doubling as provided in Section 2.6 of the Agreement.
Oak and Pixel desire that all operating income attributable to New
VCEP Product Business for calendar years 1996,1997 and 1998 be included in
Operating Income in the applicable years and that such amounts be subject to
doubling as provided in Section 2.6 of the Agreement.
This Amendment is being executed by the Agents on behalf of the
Shareholders subject to the authority granted to the Agents pursuant to Section
9.1 of the Agreement.
NOW, THEREFORE, in reliance on the foregoing recitals and in consideration
of the mutual covenants and agreements contained herein, the parties hereto
agree as follows:
A G R E E M E N T
1. AMENDMENT OF SECTION 1.29 OF THE AGREEMENT. The first sentence of
Section 1.29 of the Agreement is hereby amended and restated in its entirety to
read as follows:
1.29 "OPERATING INCOME" means operating income of
Pixel (including operating income attributable to New VCEP
Product Business), as determined in accordance with GAAP
consistently applied with the Pixel Annual
<PAGE>
Oak Technology, Inc./Pixel Magic, Inc.
First Amendment to Agreement and Plan of
Reorganization for Merger
Page 2
Financials, adjusted to exclude for calendar year 1996 only
operating income attributable to any VCEP Products
contributed by Oak to Pixel; provided however, that
Operating Income for the third (3rd) quarter of calendar
year 1996 shall include the amount of One Hundred and Fifty-
Six Thousand Two Hundred and Fifty Dollars ($156,250) as
operating income for VCEP Products and that Operating Income
for the fourth (4th) quarter of calendar year 1996 shall
include the amount of One Hundred and Fifty-Six Thousand Two
Hundred and Fifty Dollars ($156,250) as operating income for
VCEP Products.
2. NEW SECTION OF THE AGREEMENT. A new Section 1.58 shall be
added as follows:
1.58 "New VCEP Product Business" means revenue
attributable to design wins for VCEP Product awarded in
calendar years 1996, 1997 and 1998. New VCEP Product
Business shall include designs which use the VCEP-30 (TSMC
30 Mhz Version of the VCEP) but will not include existing
VCEP designs which use and/or transistion to the TSMC 20 Mhz
version of the VCEP.
3. AMENDMENT OF SECTION 2.61 OF THE AGREEMENT. The first sentence of
Section 2.61 of the Agreement is hereby amended and restated in its entirety to
read as follows:
2.61 Subject to reduction pursuant to Section 7.4, Oak shall pay to
Security Holders, for calendar years 1996, 1997 and 1998 only, two
hundred percent (200%) of Operating Income in excess of the relevant
Threshold Amounts for such calendar years, up to a maximum aggregate
amount of Five Million Dollars ($5,000,000) for all three (3) calendar
years, except that for calendar year 1996, for purposes of this
section only, Operating Income shall be reduced by One Hundred and
Fifty-Six Thousand Two Hundred and Fifty Dollars ($156,250).
EFFECT OF THIS AMENDMENT. Except as expressly set forth in this
Amendment, all the provisions of the Agreement remain in full force and effect
in accordance with the terms of the Agreement.
GOVERNING LAW. It is the intention of the parties hereto that the
internal laws of the Commonwealth of Massachusetts (irrespective of its choice
of law principles) shall govern the validity of this Amendment, the construction
of its terms, and the interpretation and enforcement of the rights and duties of
the parties hereto.
<PAGE>
Oak Technology, Inc./Pixel Magic, Inc.
First Amendment to Agreement and Plan of
Reorganization for Merger
Page 3
COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first above written.
OAK: PIXEL:
OAK TECHNOLOGY, INC., PIXEL MAGIC, INC.,
a Delaware corporation a Massachusetts corporation
By:_____________________________ By:_____________________________
Title:__________________________ Title:__________________________
By:_____________________________
Title:__________________________
AGENTS:
________________________________
Peter D. Besen
________________________________
Don H. Shulsinger
<PAGE>
SECOND AMENDMENT TO
PLAN OF REORGANIZATION AND AGREEMENT OF MERGER
THIS SECOND AMENDMENT (the "AMENDMENT") to that certain Plan of
Reorganization and Agreement of Merger dated as of October 27, 1995 (the
"AGREEMENT") by and among OAK TECHNOLOGY, INC., a Delaware corporation
("OAK"), OAK ACQUISITION CORPORATION, a Massachusetts corporation, PIXEL
MAGIC, INC., a Massachusetts corporation ("PIXEL"), and the then shareholders
of Pixel (the "SHAREHOLDERS"), as amended by that certain First Amendment to
the Agreement entered into in June 1996 (the "FIRST AMENDMENT"), is entered
into effective as of June 13, 1997 by and among Oak, Pixel and the Agents (as
defined in the Agreement) appointed by the Shareholders. All capitalized
terms used but not defined in this Amendment have the meanings attributed to
them in the Agreement.
R E C I T A L S
A. Subject to the limitations set forth in the Agreement and pursuant to
Sections 2.4 and 2.6 thereof, Oak agreed to make certain quarterly payments up
to a maximum aggregate amount of Five Million Dollars ($5,000,000), originally
defined in the Agreement as the "Contingent Payment," to the Security Holders
based on Operating Income of Pixel for a calendar quarter determined on a
calendar year-to-date basis, excluding operating income attributable to any VCEP
Products contributed by Oak to Pixel.
B. Pursuant to the terms of the First Amendment, Oak and Pixel agreed to
include in Operating Income, commencing in calendar year 1996, operating income
attributable to New VCEP Product Business contributed by Oak to Pixel (with
certain additional operating income attributable to VCEP Products to be included
in calendar year 1996 in accordance with the terms of the First Amendment).
C. Oak, Pixel and the Agents now desire to modify the Agreement, as
amended by the First Amendment, to provide for payment of the Contingent Payment
in two installments and to eliminate all contingencies affecting payment of the
amounts provided for under the original terms of the Contingent Payment, in
accordance with the terms set forth in this Amendment.
D. In consideration of the elimination of all contingencies affecting
payment of the amounts provided for under the original terms of the Contingent
Payment, Peter D. Besen and Don H. Shulsinger have agreed to an early
termination of their respective Employment Agreements, each dated as of
November 6, 1995, and Peter D. Besen has agreed to be bound by the terms of his
Non-Compete and Technology Transfer Agreements dated as of October 27, 1995, for
an additional two years.
E. This Amendment is being executed by the Agents on behalf of the
Shareholders subject to the authority granted to the Agents pursuant to Section
9.1 of the Agreement.
NOW, THEREFORE, in reliance on the foregoing recitals and in consideration
of the mutual covenants and agreements contained herein, the parties hereto
agree as follows:
<PAGE>
Oak Technology, Inc./Pixel Magic, Inc.
Second Amendment to Agreement and Plan of
Reorganization for Merger
Page 2
A G R E E M E N T
1. DELETION OF CERTAIN DEFINITIONS. Sections 1.2, 1.6, 1.18, 1.29, 1.33,
1.47 and 1.55 are hereby deleted in their entirety.
2. DELETION OF SECTION 2.1.3 OF THE AGREEMENT. Section 2.1.3 of the
Agreement is hereby deleted in its entirety.
3. AMENDMENT AND RESTATEMENT OF SECTION 2.4 OF THE AGREEMENT. Section
2.4 of the Agreement is hereby amended and restated in its entirety to read as
follows:
2.4 EXCHANGE CONSIDERATION. Subject to adjustment as set forth
in Section 7.4 hereof, and subject to the terms and conditions stated
herein, the Shareholders and Option Holders will receive cash in the
aggregate amount of up to Ten Million Five Hundred Thousand Dollars
($10,500,000), consisting of a non-contingent payment (the
"NON-CONTINGENT PAYMENT") of Five Million Five Hundred Thousand Dollars
($5,500,000), plus installment payments (individually, an "INSTALLMENT
PAYMENT" and collectively, the "INSTALLMENT PAYMENTS") in the aggregate
amount of Five Million Dollars ($5,000,000), payable as provided in Section
2.6 below. All amounts payable pursuant to this Section 2.4 are
collectively referenced hereafter as the "EXCHANGE CONSIDERATION."
4. AMENDMENT AND RESTATEMENT OF SECTION 2.6 OF THE AGREEMENT. Section
2.6 of the Agreement is hereby amended and restated in its entirety to read as
follows:
2.6 TERMS OF INSTALLMENT PAYMENTS. Subject to the provisions of
this Agreement, Oak shall make Installment Payments to the Security
Holders as set forth in this Section 2.6. On January 1, 1998, Oak
shall pay to the Security Holders, subject to Oak's right of set-off
under Section 7.4 of this Agreement, an Installment Payment in an
aggregate amount equal to Three Million Dollars ($3,000,000). On
December 31, 1998, Oak shall pay to the Security Holders, subject to
Oak's right of set-off under Section 7.4 of this Agreement, an
Installment Payment in an aggregate amount equal to Two Million
Dollars ($2,000,000). The amounts payable to the Security Holders
pursuant to this Section 2.6 shall be allocated among the Security
Holders in accordance with the provisions set forth in Section 2.7
below.
5. DEFINITION OF "CONTINGENT PAYMENT". The term "Contingent Payment,"
wherever used in the Agreement or in the Transaction Documents, shall mean any
Installment Payment or the Installment Payments as the context may require.
<PAGE>
Oak Technology, Inc./Pixel Magic, Inc.
Second Amendment to Agreement and Plan of
Reorganization for Merger
Page 3
6. AMENDMENT OF SECTION 10.13 OF THE AGREEMENT. The first sentence of
Section 10.13 of the Agreement is hereby amended and restated in its entirety to
read as follows:
From and after the Effective Date, Pixel hereby
unconditionally guarantees payment by Oak of any and all
amounts due under this Agreement and Oak hereby
unconditionally guarantees payment by Pixel of any and all
amounts due under this Agreement.
7. DELETION OF SECTION 10.14 OF THE AGREEMENT. Section 10.14. of the
Agreement is hereby deleted in its entirety.
8. DELIVERY OF AGREEMENTS. The obligations of Oak hereunder shall be
conditioned upon execution and delivery by Peter D. Besen and Don H. Shulsinger
of agreements terminating their respective Employment Agreements in the forms
attached hereto as Exhibits "A-1" and "A-2," and execution and delivery by Peter
D. Besen of an amendment to his respective Non-Compete and Technology Transfer
Agreement in the form attached hereto as Exhibit "B-1".
9. EFFECT OF THIS AMENDMENT. Except as expressly set forth in this
Amendment, all the provisions of the Agreement and the Transaction Documents,
and any amendments thereto, remain in full force and effect in accordance with
the terms thereof. In this regard, this Amendment supersedes in its entirety
the provisions of the First Amendment.
10. GOVERNING LAW. It is the intention of the parties hereto that the
internal laws of the Commonwealth of Massachusetts (irrespective of its choice
of law principles) shall govern the validity of this Amendment, the construction
of its terms, and the interpretation and enforcement of the rights and duties of
the parties hereto.
11. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
<PAGE>
Oak Technology, Inc./Pixel Magic, Inc.
Second Amendment to Agreement and Plan of
Reorganization for Merger
Page 4
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first above written.
OAK: PIXEL:
OAK TECHNOLOGY, INC., PIXEL MAGIC, INC.,
a Delaware corporation a Massachusetts corporation
By:_______________________________ By:________________________________
Title:____________________________ Title:_____________________________
AGENTS: By:________________________________
Title:_____________________________
__________________________________
Peter D. Besen
__________________________________
Don H. Shulsinger
<PAGE>
FIRST AMENDMENT TO
NON-COMPETE AND TECHNOLOGY TRANSFER AGREEMENT
THIS FIRST AMENDMENT (the "AMENDMENT") to that certain Non-Compete and
Technology Transfer Agreement (the "AGREEMENT") by and among Oak Technology,
Inc., a Delaware corporation ("OAK"), Pixel Magic, Inc., a Massachusetts
corporation ("PIXEL"), and Peter D. Besen, a resident of Massachusetts
("SELLER"), is entered into as of June ___, 1997 by and among Oak, Pixel and
Seller. All capitalized terms used but not defined in this Amendment have the
meanings attributed to them in that certain Plan of Reorganization and Agreement
of Merger (the "PLAN OF REORGANIZATION").
R E C I T A L S
A. Pursuant to the Plan of Reorganization entered into by and among
Seller, Oak, Pixel and others, all of Pixel's capital stock held by Seller was
converted into cash and a contingent right to receive cash, subject to and in
accordance with the Plan of Reorganization. Seller, an employee of Pixel,
entered into the Agreement in connection with the transactions consummated
pursuant to the Plan of Reorganization.
B. Concurrent with the execution and delivery of this Amendment, Oak,
Pixel and the Agents of the Shareholders have entered into that certain Second
Amendment to Plan of Reorganization and Agreement of Merger, which provides for
the elimination of any contingencies affecting the rights of Seller and others
to receive additional cash payments pursuant to the provisions of Section 2.6 of
the Plan of Reorganization.
C. In consideration of the removal of the contingencies limiting the
right of Seller to receive additional cash payments, subject to and in
accordance with the Plan of Reorganization, Seller has agreed to enter into this
Amendment.
A G R E E M E N T
1. AMENDMENT OF SECTION 1.6 OF THE AGREEMENT. Section 1.6 of the
Agreement is hereby amended and restated in its entirety to read as follows:
1.6. "TERM" means [ * ] from [ * ].
2. EFFECT OF THIS AMENDMENT. Except as expressly set forth in this
Amendment, all the provisions of the Agreement remain in full force and effect
in accordance with the terms of the Agreement.
3. GOVERNING LAW. It is the intention of the parties hereto that
the internal laws of the Commonwealth of Massachusetts (irrespective of its
choice of law principles) shall govern the validity of this Amendment, the
construction of its terms, and the interpretation and enforcement of the rights
and duties of the parties hereto.
- --------------------
[*] Confidential treatment has been requested for redacted portions which
have been filed separately with the Commission.
<PAGE>
First Amendment to Non-Compete and
Technology Transfer Agreement
Page 2
4. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first above written.
SELLER:
_______________________________
Peter D. Besen
PIXEL:
PIXEL MAGIC, INC.,
a Massachusetts corporation
By: __________________________
Its: __________________________
OAK:
OAK TECHNOLOGY, INC.,
a Delaware corporation
By: __________________________
Its: __________________________
<PAGE>
AGREEMENT OF TERMINATION OF
EMPLOYMENT AGREEMENT
THIS AGREEMENT OF TERMINATION OF EMPLOYMENT AGREEMENT ("TERMINATION
AGREEMENT") is entered into as of June ___, 1997 by and between Pixel Magic,
Inc., a Massachusetts corporation (the "COMPANY"), and Peter D. Besen (the
"EMPLOYEE"). All capitalized terms used but not defined in this Termination
Agreement have the meanings attributed to them in that certain Plan of
Reorganization and Agreement of Merger (the "PLAN OF REORGANIZATION").
R E C I T A L S
A. Pursuant to the Plan of Reorganization entered into by and among Oak
Technology, Inc., a Delaware corporation ("OAK"), the Company, the Employee and
others, Oak agreed to make certain quarterly payments up to a maximum aggregate
amount of Five Million Dollars ($5,000,000), originally defined in the Plan of
Reorganization as the "Contingent Payment," to the Security Holders based on
Operating Income of the Company for a calendar quarter determined on a calendar
year-to-date basis, excluding operating income attributable to any VCEP Products
contributed by Oak to the Company.
B. In connection with the consummation of the merger transaction pursuant
to the Plan of Reorganization, the Company and the Employee entered into that
certain Employment Agreement dated as of November 6, 1995 (the "EMPLOYMENT
AGREEMENT"), pursuant to the terms of which the Employee was granted the right
to control the strategic, tactical and operating decisions of the Company,
subject to the limitations described therein, until such time as Oak had
satisfied in full its Contingent Payment obligations under the Plan of
Reorganization.
C. Concurrent with the execution and delivery of this Termination
Agreement, Oak, the Company and the Agents of the Shareholders are entering into
an amendment to the Plan of Reorganization providing for the elimination of all
contingencies affecting payment of the amounts provided for under the original
terms of the Contingent Payment.
D. In consideration of the elimination of all contingencies affecting
payment of the amounts provided for under the original terms of the Contingent
Payment, the Company and the Employee have agreed to terminate the Employment
Agreement effective as of the date first above written.
E. This Termination Agreement is being executed by the Company and the
Employee in accordance with the provisions of Section 7.2 of the Employment
Agreement, which provides for modification of the Employment Agreement by a
writing signed by the parties to be bound thereby.
NOW, THEREFORE, in reliance on the foregoing recitals and in consideration
of the mutual covenants and agreements contained herein, the parties hereto
agree as follows:
<PAGE>
Pixel Magic, Inc./Peter D. Besen
Agreement of Termination of
Employment Agreement
Page 2
A G R E E M E N T
1. TERMINATION OF EMPLOYMENT. Notwithstanding anything to the contrary
contained in the Employment Agreement, including without limitation Section 6
thereof, the Employment Agreement is terminated effective as of the date first
above written and shall be of no further force or effect after said date.
2. EMPLOYMENT. Effective as of the date first above written, the
Employee shall become an employee at will of the Company, and either the Company
or the Employee may terminate the Employee's employment with the Company at any
time, with or without cause.
3. GOVERNING LAW. It is the intention of the parties hereto that the
internal laws of the Commonwealth of Massachusetts (irrespective of its choice
of law principles) shall govern the validity of this Amendment, the construction
of its terms, and the interpretation and enforcement of the rights and duties of
the parties hereto.
4. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Termination
Agreement as of the date first above written.
EMPLOYEE: COMPANY:
PIXEL MAGIC, INC.,
a Massachusetts corporation
____________________________________
Peter D. Besen
By: _________________________________
Its: _________________________________
<PAGE>
AGREEMENT OF TERMINATION OF
EMPLOYMENT AGREEMENT
THIS AGREEMENT OF TERMINATION OF EMPLOYMENT AGREEMENT ("TERMINATION
AGREEMENT") is entered into as of June 13, 1997 by and between Pixel Magic,
Inc., a Massachusetts corporation (the "COMPANY"), and Don H. Shulsinger (the
"EMPLOYEE"). All capitalized terms used but not defined in this Termination
Agreement have the meanings attributed to them in that certain Plan of
Reorganization and Agreement of Merger (the "PLAN OF REORGANIZATION").
R E C I T A L S
A. Pursuant to the Plan of Reorganization entered into by and among Oak
Technology, Inc., a Delaware corporation ("OAK"), the Company, the Employee and
others, Oak agreed to make certain quarterly payments up to a maximum aggregate
amount of Five Million Dollars ($5,000,000), originally defined in the Plan of
Reorganization as the "Contingent Payment," to the Security Holders based on
Operating Income of the Company for a calendar quarter determined on a calendar
year-to-date basis, excluding operating income attributable to any VCEP Products
contributed by Oak to the Company.
B. In connection with the consummation of the merger transaction pursuant
to the Plan of Reorganization, the Company and the Employee entered into that
certain Employment Agreement dated as of November 6, 1995 (the "EMPLOYMENT
AGREEMENT"), pursuant to the terms of which the Employee was granted the right
to control the strategic, tactical and operating decisions of the Company,
subject to the limitations described therein, until such time as Oak had
satisfied in full its Contingent Payment obligations under the Plan of
Reorganization.
C. Concurrent with the execution and delivery of this Termination
Agreement, Oak, the Company and the Agents of the Shareholders are entering into
an amendment to the Plan of Reorganization providing for the elimination of all
contingencies affecting payment of the amounts provided for under the original
terms of the Contingent Payment.
D. In consideration of the elimination of all contingencies affecting
payment of the amounts provided for under the original terms of the Contingent
Payment, the Company and the Employee have agreed to terminate the Employment
Agreement effective as of the date first above written.
E. This Termination Agreement is being executed by the Company and the
Employee in accordance with the provisions of Section 7.2 of the Employment
Agreement, which provides for modification of the Employment Agreement by a
writing signed by the parties to be bound thereby.
NOW, THEREFORE, in reliance on the foregoing recitals and in consideration
of the mutual covenants and agreements contained herein, the parties hereto
agree as follows:
<PAGE>
Pixel Magic, Inc./Don H. Shulsinger
Agreement of Termination of
Employment Agreement
Page 2
A G R E E M E N T
1. TERMINATION OF EMPLOYMENT. Notwithstanding anything to the contrary
contained in the Employment Agreement, including without limitation Section 6
thereof, the Employment Agreement is terminated effective as of the date first
above written and shall be of no further force or effect after said date.
2. EMPLOYMENT. Effective as of the date first above written, the
Employee shall become an employee at will of the Company, and either the Company
or the Employee may terminate the Employee's employment with the Company at any
time, with or without cause.
3. GOVERNING LAW. It is the intention of the parties hereto that the
internal laws of the Commonwealth of Massachusetts (irrespective of its choice
of law principles) shall govern the validity of this Amendment, the construction
of its terms, and the interpretation and enforcement of the rights and duties of
the parties hereto.
4. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Termination
Agreement as of the date first above written.
EMPLOYEE: COMPANY:
PIXEL MAGIC, INC.,
a Massachusetts corporation
- ----------------------------------
Don H. Shulsinger
By: __________________________________
Its: __________________________________
<PAGE>
RELEASE AND SETTLEMENT AGREEMENT
This Release and Settlement Agreement ("AGREEMENT") is effective this 31st
day of July, 1997, hereinafter the date of this AGREEMENT, between Oak
Technology, Inc. ("OAK TECHNOLOGY"), a corporation organized and existing under
the laws of the State of Delaware with its principal place of business in
Sunnyvale, California, U.S.A., and United Microelectronics Corporation ("UMC"),
an entity organized and existing under the laws of the Republic of China
(Taiwan) with its headquarters at No. 13 Innovation Road 1, Science-Based
Industrial Park, Hsinchu, Taiwan.
WHEREAS, OAK TECHNOLOGY owns by assignment the entire right, title, and
interest in and to U.S. Patent No. 5,581,715 ("the '715 patent") entitled
"IDE/ATA CD Drive Controller Having a Digital Signal Processor Interface,
Dynamic Random Access Memory, Data Error Detection and Correction, and a Host
Interface" issued December 3, 1996;
WHEREAS, OAK TECHNOLOGY requested the United States International Trade
Commission to commence an investigation of unlawful activity in violation of
OAK TECHNOLOGY'S patent, pursuant to the provisions of section 337 of the Tariff
Act 1930 as amended, and named UMC as a proposed respondent to the investigation
alleging that UMC has engaged and continues to engage in the unlicensed
manufacture, importation, sale for importation, and/or sale within the United
States after importation of CD-ROM Controller devices within the scope of one or
more of the apparatus claims 1 through 10 of the '715 patent, and products
containing same, including, but not necessarily limited to CD-ROM Controller
devices UM1101, UM1101A, UM1101AF,
Page 1
confidential
<PAGE>
UM1101B and UM1102;
WHEREAS, OAK TECHNOLOGY and UMC desire now to address the question of UMC's
alleged use of the invention of the '715 patent;
NOW, THEREFORE, in consideration of the recitals, covenants and promises
set forth herein, the parties, intending to be bound, hereby agree as follows:
1.0 DEFINITIONS
1.1 "CD-ROM Controller Devices" shall mean semiconductor products, whether
integrated or otherwise, that control access to data stored on a CD-ROM mass
data storage device and that control communications between the CD-ROM mass data
storage device and a host computer.
1.2 "Agreement Product" shall mean CD-ROM Controller Devices manufactured
by or on behalf of UMC, or any entity in which UMC directly or indirectly has an
ownership interest of twenty-five percent (25%) or more, on which any claim of
the '715 patent reads literally or covers through equivalence, except that
Agreement Product shall not include any products which are CD-ROM Controller
Devices made in a foundry relationship (including a foundry joint venture) for a
customer in which UMC does not directly or indirectly have an ownership interest
of twenty-five percent (25%) or more so long as (i)[ *
] and/or (ii) [
* ]
1.3 "Limited Basis" shall mean UMC's manufacture and/or sale of Agreement
Products in production lots of no more than 50,000 units per lot, for a time
period ending six months after the date of this AGREEMENT.
Page 2
confidential
* Confidential treatment has been requested for redacted portions which have
been filed separately with the Commission
<PAGE>
2.0 PAYMENT
2.1 [ *
]
2.2 [ *
]
3.0 RELEASE, COVENANT NOT TO SUE, WITHDRAWAL OF COMPLAINT, COVENANT OF NON-
INFRINGEMENT, AND WARRANTY OF NO IMPORTATION
3.1 Except for Agreement Products manufactured on a Limited Basis, UMC
agrees to cease and desist its manufacture of any Agreement Product as of the
date of this AGREEMENT.
3.2 For so long as and to the extent that UMC is in compliance with the
terms of this AGREEMENT, OAK TECHNOLOGY covenants and agrees that it shall not
assert against UMC, or its officers, directors, employees, or direct and/or
downstream customers, any claim that Agreement Products manufactured prior to
the date of this AGREEMENT or that Agreement Products manufactured on a Limited
Basis infringe the '715 patent. In the event that UMC is in breach of this
AGREEMENT, as to Agreement Products not made and sold in compliance with this
AGREEMENT, UMC agrees that this covenant not to sue shall terminate and that OAK
TECHNOLOGY shall have available to it all remedies under this AGREEMENT and
otherwise, at law and equity, including monetary damages and injunctive relief.
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been filed separately with the Commission
<PAGE>
3.3 Upon [ * ] and provided further that UMC is in
compliance with the terms of this AGREEMENT, (a) OAK TECHNOLOGY covenants and
agrees that is shall promptly seek withdrawal of its aforementioned complaint
against UMC, Lite-On Group, Lite-On Technology Corp., Behavior Tech Computer
Corp. and Behavior Tech Computer (USA) Corp. filed with the United States
International Trade Commission based upon UMC CD-ROM Controller Devices, and (b)
OAK TECHNOLOGY further agrees that UMC and its customers are released from all
claims based on manufacture and sale of Agreement Products after the date this
AGREEMENT.
3.4 Except as expressly set forth in this AGREEMENT, no license or
immunity is granted by OAK TECHNOLOGY to UMC either directly or by implication,
estoppel or otherwise under the '715 patent or otherwise. No release of
liability for claims of infringement of the '715 patent, other than the above
covenant not to sue and withdrawal of the complaint, is granted by OAK
TECHNOLOGY to UMC, for its own behalf or for its customers, mediate and
immediate, with respect to any items manufactured, used, sold, imported, or
otherwise transferred by UMC.
3.5 UMC covenants not to hereafter infringe the '715 patent with
unlicensed Agreement Products and warrants that no Agreement Product shall be
imported by anyone into the United States after the date of this AGREEMENT and
before the expiration of the '715 patent, unless such Agreement Products are
manufactured on a Limited Basis; and/or were [ * ]
3.6 In the event UMC infringes the '715 patent with unlicensed Agreement
Products, or in the event any Agreement Product not manufactured on a Limited
Basis is
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been filed separately with the Commission
<PAGE>
imported into the United States after the date of this AGREEMENT and before the
expiration of the '715 patent, UMC agrees [ *
]
4.0 AUDIT PROVISIONS
4.1 UMC shall keep records in sufficient detail [ *
], and, at the request and expense of OAK TECHNOLOGY,
except as provided below, will permit an auditor acceptable to UMC and OAK
TECHNOLOGY to examine such records and other materials as may be reasonably
required by the auditor to verify UMC's compliance with this AGREEMENT.
The auditor shall be instructed to report to OAK TECHNOLOGY only the fact
of compliance or the extent and nature of non-compliance.
4.2 [ *
]
4.3 The auditor's examination shall occur during ordinary business hours
and shall not unreasonably interfere with UMC's business operations. The
auditor shall have the right to examine UMC's records and other materials
each six months for the first three years after the date of this AGREEMENT,
and once in each calendar year thereafter until six years after the date of
this AGREEMENT.
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been filed separately with the Commission
<PAGE>
5.0 OTHER CONDITIONS OF SETTLEMENT AND RELEASE
5.1 Although UMC does not admit infringement, validity or enforceability
of the '715 patent, [ *
]
5.2 UMC agrees not to assert any legal claims, known or unknown,
arising out of or related to OAK TECHNOLOGY'S above request to commence an
investigation by the United States International Trade Commission or arising out
of this Settlement Agreement (unless based on a breach thereof).
5.3 Upon the advice of legal counsel, each party waives against the other
all rights under California Civil Code section 1542, which provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE
WHICH, IF KNOWN BY HIM, MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE
DEBTOR.
5.4 The parties agree that either may issue the press release attached to
this AGREEMENT on or about the date of this AGREEMENT.
6.0 ACKNOWLEDGMENTS
6.1 For at least the following reasons, UMC acknowledges [ *
] pursuant to this AGREEMENT [ * ]without
regard to whether such Agreement Products were implicated in infringement or
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been filed separately with the Commission
<PAGE>
importation:
a. [ *
];
b. It is burdensome to determine the actual destination of Agreement
Products;
c. To the extent that manufacture of Agreement Products is permitted
in the future, flexibility as to where such Agreement Products may be sold is
advantageous to UMC;
d. Oak hereby waives any claim for attorney fees and claims for
enhanced damages for past infringement; and
e. [ *
]
7.0 REPRESENTATIONS, DISCLAIMERS AND WARRANTIES
7.1 Each of the parties hereto represents, warrants, and agrees that it
has received independent legal advice from its attorneys with respect to the
advisability of making this settlement and release provided for herein and with
respect to the advisability of executing this AGREEMENT.
7.2 Each of the parties hereto represents, warrants, and agrees that it
has not assigned or otherwise transferred to any third party any interest in any
claim it may have against another party to this AGREEMENT, and agrees to
indemnify and hold other parties hereto harmless from any liability, including
but not limited to attorneys' fees,
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been filed separately with the Commission
<PAGE>
costs, and expenses resulting from its having assigned or transferred such an
interest to a third party.
7.3 Each of the parties hereto represents, warrants, and agrees that it
has the full right and authority to enter into this AGREEMENT, and that the
officer executing this AGREEMENT on behalf of it has the full right and
authority to commit and bind it to this AGREEMENT.
7.4 This is a compromise of disputed claims and not an admission of
anything.
7.5 Except as required by law, the terms of this AGREEMENT are
Confidential, provided however that the parties may disclose the attached press
release, and the attached form of this AGREEMENT (or such other required form)
as may be reasonably necessary for compliance with public filing requirements.
8.0 SUCCESSORS AND ASSIGNS
8.1 This AGREEMENT is binding on OAK TECHNOLOGY and UMC and their
successors and assigns under this AGREEMENT.
8.2 Notwithstanding section 8.1, this AGREEMENT and any other rights or
obligations arising under this AGREEMENT may not be assigned by UMC unless
assigned in connection with the acquisition of a controlling interest in UMC or
substantially all the assets of UMC.
9.0 COMPLETE AGREEMENT
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<PAGE>
This AGREEMENT constitutes the final written expression and the complete
and exclusive statement of all the agreements, conditions, promises, and
covenants between the parties with respect to the subject matter hereof. This
AGREEMENT supersedes any prior agreement between the parties, oral or written.
Any amendment to this AGREEMENT must be in writing specifically referring to
this AGREEMENT and signed by the duly authorized representative of each party to
be bound by such amendment.
10.0 INTERPRETATION
This AGREEMENT will be construed without regard to the party or parties
responsible for its preparation, and will be deemed to have been prepared
jointly by the parties hereto. In resolving any ambiguity or uncertainty
existing herein, the OAK TECHNOLOGY and UMC agree that no consideration or
weight shall be given to the identity of the party drafting all or any portion
of this AGREEMENT.
11.0. HEADINGS AND SEVERABILITY
11.1 The Article headings herein are for convenience only and shall not be
deemed to affect in any way the language of the provisions to which they refer.
11.2 In the event that any of the terms of this AGREEMENT are in conflict
with any rule of law or statutory provision or otherwise are unenforceable under
the laws or regulations of any government or subdivision thereof, such terms
shall be deemed stricken from this AGREEMENT, but such invalidity or
unenforceability shall not invalidate any of the other terms of this AGREEMENT,
and this AGREEMENT shall
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<PAGE>
continue in full force and effect.
12.0 APPLICABLE LAW
This AGREEMENT shall be construed, interpreted, and applied in accordance
with the laws of the State of California, in the United States of America, as
applied to contracts made and performed entirely within the State of California.
Both parties agree that if it is necessary to enforce this AGREEMENT by legal
action, the prevailing party in any such action will be entitled to any attorney
fees and costs required to enforce this AGREEMENT in addition to all other
relief to which it may be entitled.
13.0 VENUE AND JURISDICTION
The exclusive venue for any action relating to or arising out of this
AGREEMENT, including the enforcement thereof, shall be courts in the State of
California with preference for the United States District Court for the Northern
District of California, San Jose Division, and the parties hereto expressly
submit to the jurisdiction of said courts.
14.0 NOTICES
All notices under this AGREEMENT shall be deemed to have been fully given
when done in writing and deposited in the United States mail, registered or
certified, and addressed as follows (with a copy by fax):
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<PAGE>
To OAK TECHNOLOGY: Shawn Soderberg, Esq.
General Counsel
Oak Technology, Inc.
139 Kifer Court
Sunnyvale, California 94086
Fax: (408) 737-3838
TO UMC: M.K. Tsai
United Microelectronics Corp.
No. 13 Innovation Road I
Science Based Industrial Park
Hsin Chu City Taiwan R.O. C.
Fax: 86-03-577-4767
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<PAGE>
Either party may change its designated address for notices provided under this
AGREEMENT upon written notice to the other.
IN WITNESS WHEREOF, the parties hereto have caused this AGREEMENT to be executed
by their duly authorized representatives.
OAK TECHNOLOGY, INC. UNITED MICROELECTRONICS CORP.
By:_________________________ By:____________________________
Title:______________________ Title: ________________________
Date: ______________________ Date:__________________________
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<PAGE>
EXHIBIT 11.01
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
June 30,
---------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Statement of Operations data:
Net income . . . . . . . . . . . . . . . . . . . . $ 23,719 $ 37,133 $ 21,222
--------- --------- ---------
--------- --------- ---------
Weighted average number of common and
dilutive common equivalent shares
used in computations:
Common stock. . . . . . . . . . . . . . . . . 40,751 39,262 17,390
Preferred stock . . . . . . . . . . . . . . . - - 8,028
Stock options and other
common stock equivalents . . . . . . . . 2,006 3,352 4,136
--------- --------- ---------
Subtotal 42,757 42,614 29,554
Preferred stock granted subject to
Staff Accounting Bulletin No. 83 . . . . - - 1,058
Stock options and other common stock
equivalents granted subject to Staff
Accounting Bulletin No. 83 . . . . . . . - - 862
Shares used in computing net income per share (1). . . 42,757 42,614 31,474
--------- --------- ---------
Net income per share (2) . . . . . . . . . . . . . . . $ 0.55 $ 0.87 $ 0.67
--------- --------- ---------
--------- --------- ---------
</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 Board of Directors in January 1996.
(2) The difference between primary and fully diluted net income per share is
not material.
<PAGE>
EXHIBIT 23.01
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Oak Technology, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
33-89446 and 333-04334) on Form S-8 of Oak Technology, Inc. of our report
dated July 29, 1997 except as to Note 13, which is as of August 19, 1997,
relating to the consolidated balance sheets of Oak Technology, Inc. and
subsidiaries as of June 30, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of
the years in the three-year period ended June 30, 1997, and related schedule,
which report appears in the June 30, 1997 annual report on Form 10-K of Oak
Technology, Inc.
KPMG Peat Marwick LLP
Palo Alto, California
September 23, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS AS
FOUND ON PAGES 34 AND 35 OF THE COMPANY'S FORM 10K FOR FISCAL YEAR ENDED JUNE
30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 87,609
<SECURITIES> 57,660
<RECEIVABLES> 25,535
<ALLOWANCES> 663
<INVENTORY> 12,322
<CURRENT-ASSETS> 205,935
<PP&E> 30,955
<DEPRECIATION> 10,997
<TOTAL-ASSETS> 287,595
<CURRENT-LIABILITIES> 37,767
<BONDS> 2,496
0
0
<COMMON> 41
<OTHER-SE> 238,656
<TOTAL-LIABILITY-AND-EQUITY> 287,595
<SALES> 167,395
<TOTAL-REVENUES> 167,395
<CGS> 73,214
<TOTAL-COSTS> 73,214
<OTHER-EXPENSES> 61,333
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 468
<INCOME-PRETAX> 38,256
<INCOME-TAX> 14,537
<INCOME-CONTINUING> 23,719
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,719
<EPS-PRIMARY> .55
<EPS-DILUTED> .55
</TABLE>
