<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from __________ to __________
COMMISSION FILE NO. 0-25298
OAK TECHNOLOGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0161486
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
139 KIFER COURT
SUNNYVALE, CALIFORNIA 94086
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(408) 737-0888
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES X NO .
--- ---
As of March 31, 1998, there were outstanding 42,192,509 shares of the
Registrant's Common Stock, par value $0.001 per share.
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1998
and June 30, 1997 . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the
Three Months and Nine Months ended
March 31, 1998 and 1997 . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the
Nine Months Ended March 31, 1998 and 1997 . . . . . . . . . . 5
Notes to Consolidated Financial Statements. . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 32
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . 35
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
----------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................ $ 71,508 $ 87,609
Short-term investments............................................... 57,754 57,660
Accounts receivable, net of allowance for doubtful accounts of
$647 and $663, respectively....................................... 20,624 24,872
Inventories.......................................................... 9,137 12,322
Current portion of foundry deposits.................................. 10,098 15,015
Deferred tax assets.................................................. 4,350 4,350
Prepaid expenses and other current assets............................ 7,708 4,107
----------- ------------
Total current assets.............................................. 181,179 205,935
Property and equipment, net............................................ 24,342 19,958
Foundry deposits....................................................... 18,231 19,145
Investment in foundry venture.......................................... 51,234 39,618
Other assets........................................................... 2,893 2,939
----------- ------------
Total assets...................................................... $ 277,879 $ 287,595
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt.................. $ 7,766 $ 7,264
Accounts payable..................................................... 6,287 16,144
Accrued expenses..................................................... 8,484 9,882
Income taxes payable................................................. - 3,893
Deferred revenue..................................................... 320 584
----------- ------------
Total current liabilities......................................... 22,857 37,767
Long-term debt......................................................... 49 2,496
Deferred income taxes.................................................. 4,151 6,344
Other long-term liabilities............................................ 203 2,291
----------- ------------
Total liabilities................................................. 27,260 48,898
----------- ------------
Stockholders' equity:
Preferred stock, $0.001 par value; 2,000,000 shares authorized;
none issued and outstanding as of March 31, 1998 and
June 30, 1997...................................................... - -
Common stock, $0.001 par value; 60,000,000 shares authorized;
42,192,509 and 41,086,754 shares issued and outstanding as of
March 31, 1998 and June 30, 1997, respectively..................... 42 41
Additional paid-in capital........................................... 161,031 159,901
Retained earnings.................................................... 89,546 78,755
----------- ------------
Total stockholders' equity........................................ 250,619 238,697
----------- ------------
Total liabilities and stockholders' equity........................ $ 277,879 $ 287,595
----------- ------------
----------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------ -------------------------
1998 1997 1998 1997
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues....................................... $ 35,550 $ 50,634 $ 128,196 $ 117,171
Cost of revenues................................... 21,145 22,829 65,133 48,270
----------- ---------- ----------- -----------
Gross profit.................................. 14,405 27,805 63,063 68,901
Research and development expenses.................. 12,394 8,552 35,400 24,506
Selling, general and administrative expenses....... 8,823 5,720 22,970 15,100
Restructuring charges.............................. 1,766 - 1,766 -
----------- ---------- ----------- -----------
Operating income (loss)....................... (8,578) 13,533 2,927 29,295
Nonoperating income, net........................... 2,342 1,143 12,060 3,127
----------- ---------- ----------- -----------
Income (loss) before income taxes.............. (6,236) 14,676 14,987 32,422
Income taxes expense (benefit)..................... (3,232) 5,136 4,196 11,347
----------- ---------- ----------- -----------
Net income (loss).............................. $ (3,004) $ 9,540 $ 10,791 $ 21,075
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
Net income (loss) per share:
Basic.......................................... $ (0.07) $ 0.24 $ 0.26 $ 0.52
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
Diluted........................................ $ (0.07) $ 0.22 $ 0.25 0.49
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
Shares used in computing net income (loss)
per share:
Basic.......................................... 42,000 40,532 41,809 40,469
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
Diluted........................................ 42,000 42,801 42,644 42,630
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
--------------------------
1998 1997
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................ $ 10,791 $ 21,075
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization...................................... 5,309 4,020
Inventory-related adjustments...................................... 3,630 (20,154)
Equity in loss of unconsolidated affiliates........................ - 292
Restructuring charges.............................................. 1,766
Deferred income taxes.............................................. (2,193) 277
Foundry deposits utilized.......................................... 5,831 3,364
Changes in operating assets and liabilities:
Accounts receivable............................................. 4,248 (4,086)
Inventories..................................................... (445) 19,002
Prepaid expenses and other current assets....................... (1,418) (805)
Accounts payable and accrued expenses........................... (13,962) 11,308
Income taxes payable, deferred revenue and other liabilities.... (7,165) 11,704
---------- -----------
Net cash provided by operating activities.................... 6,392 45,997
---------- -----------
Cash flows from investing activities:
Purchases of short-term investments................................ (57,235) (31,022)
Proceeds from matured short-term investments....................... 57,141 41,037
Additions to property and equipment, net........................... (9,450) (4,456)
Investment in foundry venture...................................... (11,616) (25,922)
Other assets....................................................... (97) 26
---------- -----------
Net cash used in investing activities........................ (21,257) (20,337)
---------- -----------
Cash flows from financing activities:
Issuance of debt...................................................... 12,497 31,976
Repayment of debt..................................................... (14,442) (34,121)
Issuance of common stock.............................................. 2,496 1,533
Treasury stock acquisitions........................................... (1,787) -
---------- -----------
Net cash used in financing activities........................... (1,236) (612)
---------- -----------
Net increase (decrease) in cash and cash equivalents.................... (16,101) 25,048
Cash and cash equivalents, beginning of period.......................... 87,609 44,934
Cash and cash equivalents, end of period................................ $ 71,508 $ 69,982
---------- -----------
---------- -----------
Supplemental information:
Cash paid during the period:
Interest........................................................... $ 246 $ 102
---------- -----------
---------- -----------
Income taxes....................................................... $ 13,654 $ 1,508
---------- -----------
---------- -----------
Noncash investing and financing activities:
Benefit related to stock plans........................................ $ 422 $ 1,530
---------- -----------
---------- -----------
Adjustment to foundry commitments..................................... $ 5,342 $ (14,400)
---------- -----------
---------- -----------
Utilization of foundry deposits....................................... $ 489 $ 3,364
---------- -----------
---------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PREPARATION
The accompanying unaudited consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission (the "Commission"). In the opinion of management, the
consolidated financial statements reflect all adjustments considered
necessary for a fair presentation of the consolidated financial position,
operating results and cash flows for those periods presented. The results of
operations for the interim periods presented are not necessarily indicative
of the results that may be expected for the full fiscal year or in any future
period. This quarterly report on Form 10-Q should be read in conjunction
with the audited consolidated financial statements and notes thereto for the
year ended June 30, 1997, included in the Oak Technology, Inc. (the
"Company") 1997 Annual Report on Form 10-K filed with the Commission.
2. NET INCOME (LOSS) PER SHARE
Basic and diluted net income (loss) per share have been computed using
the weighted average number of shares of common stock and dilutive common
equivalent shares from stock options and warrants outstanding in accordance
with Statement of Financial Accounting Standards No. 128, "Earnings per
Share." The following table provides a reconciliation of the components of
the basic and diluted earnings per share computations:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------- --------------------
1998 1997 1998 1997
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net income (loss)....................... $ (3,004) $ 9,540 $ 10,791 $ 21,075
--------- -------- --------- --------
--------- -------- --------- --------
Weighted average shares used in
computing basic net income (loss)
per share............................. 42,000 40,532 41,809 40,469
--------- -------- --------- --------
Weighted average number of dilutive
common equivalent shares used in
computing diluted net income (loss)
per share:
Options............................ - 2,108 756 2,005
Warrants........................... - 161 79 156
--------- -------- --------- --------
Weighted average shares used in
computing diluted net income (loss)
per share............................. 42,000 42,801 42,644 42,630
--------- -------- --------- --------
--------- -------- --------- --------
Net income (loss) per share:
Basic.............................. $ (0.07) $ 0.24 $ 0.26 $ 0.52
--------- -------- --------- --------
--------- -------- --------- --------
Diluted............................ $ (0.07) $ 0.22 $ 0.25 $ 0.49
--------- -------- --------- --------
--------- -------- --------- --------
</TABLE>
6
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
3. INVENTORIES
Inventories are stated at the lower of cost (first in, first out) or market
and consisted of the following (in thousands):
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
----------- ----------
<S> <C> <C>
Purchased parts and work in process.............. $ 4,243 $ 5,521
Finished goods................................... 4,894 6,801
----------- ----------
$ 9,137 $ 12,322
----------- ----------
----------- ----------
</TABLE>
The decrease in inventory is primarily due to a $3.5 million write-off
of inventory related to the discontinuation of the graphics and
audio/communications businesses during the quarter ended March 31, 1998.
4. 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
plaintiffs' Second Amended Consolidated Complaint was filed on August 1,
1997. On December 3, 1997, the state court judge sustained the Oak
defendants' demurrer to plaintiffs' Second Amended Consolidated Complaint
without leave to amend to the causes of action for breach of fiduciary duty
and abuse of control, and to the California Corporations Code Sections
25400/25500 claims with respect to the Company, a number of the individual
officers and directors, and the venture capital investors. The judge also
sustained the demurrer with leave to amend to the California Civil Code
Sections 1709/1710 claims, however plaintiffs elected not to amend this
claim. Accordingly, the only remaining claim in the state court, IN RE OAK
TECHNOLOGY SECURITIES LITIGATION, is the California Corporations Code
Sections 25400/25500 cause of action against four officers of the Company and
the Company's investment bankers.
7
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
4. CONTINGENCIES (CONTINUED)
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. Defendants Motion to Dismiss was
heard on December 17, 1997. The federal court judge took the matter under
submission and has not yet issued a ruling.
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. 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.
8
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
5. FOUNDRY AGREEMENTS
In June and November 1995, the Company entered into agreements with
Taiwan Semiconductor Manufacturing Company ("TSMC") and Chartered
Semiconductor Manufacturing Pte. Ltd. ("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 and the elimination of required future cash
prepayments of approximately $73 million. Under the amended agreement, no
additional prepayment is required; however the Company must utilize the
entire amount of the prepayment paid as of October 1996 through a certain
committed amount of wafer purchases in calendar years 1997, 1998, and 1999 or
a portion of the prepayment will be forfeited. In March 1998, the Company
further amended its agreement with TSMC allowing the Company to utilize
excess wafer purchases in 1997 and 1998 to reduce the Company's committed
wafer purchases in the following years. This amendment resulted in the
Company utilizing calendar 1998 committed wafer purchases beginning in
calendar 1997 after the committed wafer purchases for calendar 1997 were met.
As a result of this amendment, the Company recorded a credit to foundry
deposits of approximately $5.3 million which was used to offset payables to
TSMC in the quarter ended March 31, 1998. In addition, the Company received
an additional credit of $7.1 million which will be used to offset future
payments to TSMC. The Company currently believes the terms and conditions of
the agreement, as amended, will be met although no assurance can be given in
this regard.
In September 1996, April 1997 and September 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 deposits and prepayments under the amended foundry agreements described
above are recorded at cost and total approximately $28.3 million as of March 31,
1998. 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 although no assurance can be given in this regard.
9
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
6. INVESTMENT IN FOUNDRY VENTURES
In October 1995, the Company entered into a series of agreements with
United Microelectronics Corporation ("UMC") 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. As an investor in this venture, the
Company has rights to a portion of the total wafer capacity for the
manufacture of its proprietary products. The Company paid approximately
$51.2 million for approximately 9.3% of the total outstanding shares of the
foundry venture. The investment in UICC has been accounted for under the
cost method of accounting.
In October 1997, a fire damaged the UICC facility. UICC management has
advised the Company that a majority of the equipment, majority of the
inventory and a significant portion of the building were completely destroyed
at an estimated loss of approximately $331 million (based on current exchange
rates). UICC management has also advised the Company that approximately 10%
of the loss to the facility will not be covered by insurance and that there
is a deductible amount that UICC must pay with respect to the insured
portion. Despite any unreimburseable loss, UICC management has represented
to the Company that it is rebuilding the facility and expects the facility to
be fully rebuilt and operational by April of 1999. Given the fire, the
Company has evaluated its investment in the UICC facility and the potential
impact of the Company's portion of the unreimburseable loss to determine
whether there has been an impairment and as the Company believes that
estimated future cash inflows expected to be generated by the facility and/or
disposition of the investment are in excess of the carrying amount of the
investment, no impaired loss has been recognized as of March 31, 1998.
Representations have been made by UICC management that the facility's foundry
capacity that has been guaranteed to the Company will be available through
substitute capacity arrangements. To date, the Company has not requested
that UICC make such substitute capacity available to the Company. Therefore,
there can be no assurance that such substitute foundry capacity will be
available to the Company should the Company require it. Additionally, 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.
7. SETTLEMENT AWARDS
In September 1997, October 1997 and February 1998, the Company received
$2.6 million, $4.8 million and $0.7 million, respectively, pursuant to a
Settlement Agreement entered into on July 31, 1997 between the Company and
United Microelectronics Corporation ("UMC") in connection with a complaint
the Company had filed with the International Trade Commission on July 21,
1997 based on the Company's belief that certain UMC CD-ROM controllers
infringed one of the Company's patents. Proceeds from this settlement were
recorded as miscellaneous income and are included in nonoperating income for
the periods ended September 30, 1997, December 31, 1997 and March 31, 1998,
respectively.
10
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
8. BUSINESS REORGANIZATION
In January 1998, the Company announced its intention to discontinue its
graphics and audio/communications businesses and focus on three core markets:
optical storage, consumer electronics and digital office equipment. Unable
to locate a buyer for either its graphics or its audio/communications
businesses, the Company discontinued all product development, marketing,
selling and other efforts related to these businesses during the quarter
ended March 31, 1998. As a result of the discontinuation of these
businesses, the Company laid-off 30 employees and recorded a restructuring
charge to operations related to this reorganization of $1.8 million and an
inventory-related charge of $3.5 million to cost of revenues during the
quarter ending March 31, 1998.
The following represents the Company's restructuring activities for the
quarter ended March 31, 1998:
<TABLE>
<CAPTION>
Prepaid
Royalties Severance Other Total
----------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Restructuring charges................. $ 948,322 $ 611,549 $ 206,496 $ 1,766,367
Noncash items......................... (948,322) - (111,496) (1,059,818)
----------- ---------- ---------- ------------
Balance at March 31, 1998............... $ - $ 611,549 $ 95,000 $ 706,549
----------- ---------- ---------- ------------
----------- ---------- ---------- ------------
</TABLE>
The remaining restructuring accrual of $0.7 million is included in accrued
expenses as of March 31, 1998. Of the remaining restructuring accrual of
$0.7 million, the Company made $0.6 million in cash payments in April 1998
and the remaining balance of $0.1 million is anticipated to be paid in the
first quarter of fiscal year 1999.
9. BUSINESS ACQUISITIONS
On January 29, 1998, the Company and its wholly-owned subsidiary Pixel
Magic, Inc. signed a Plan of Reorganization and Agreement of Merger ("The
Merger Agreement") with Xerographic Laser Images Corporation ("XLI"), a
developer of resolution enhancement technology. Pursuant to the Merger
Agreement, XLI will become a wholly-owned subsidiary of Pixel Magic. The
Merger Agreement provides for a cash payment of approximately $3.7 million to
XLI shareholders on the effective date of the merger and the right to receive
additional payments up to a maximum of approximately $11.3 million subject to
the achievement of certain milestones by XLI over a three year period ending
on December 31, 2000. The merger is subject to the approval of XLI
shareholders. The transaction will be accounted for as a purchase
transaction. The Company currently anticipates that it will expense a
significant portion of the purchase price in the period during which the
acquisition is closed.
11
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
9. BUSINESS ACQUISITIONS (CONTINUED)
On March 20, 1998, the Company entered into an asset purchase agreement
with Odeum Microsystems, Inc. ("Odeum") and Hyundai Electronics America
("HEA") pursuant to which the Company agreed to acquire certain assets of
Odeum for approximately $4.0 million. With this acquisition, the Company
acquired two products currently in production, an integrated MPEG-2
audio/video decoder and transport demultiplexer and a DVD-5 compliant QPSK
demodulator. Both products are used predominantly in "free to air" satellite
and cable set-top boxes for MPEG-2 encoded digital television broadcasting.
The transaction was consummated on April 2, 1998. This transaction will be
accounted for as a purchase transaction. The Company anticipates that it
will expense a significant portion of the purchase price for this acquisition
in the period ended June 30, 1998.
10. STOCK REPURCHASE PLAN
On January 22, 1998, the Company announced that its Board of Directors
had authorized the repurchase of up to 2.0 million shares of its common
stock, either in the open market or in private transactions. The repurchase
program is authorized for one year, unless further extended by the Company's
Board of Directors. As of March 31, 1998, the Company has purchased 287,500
shares for approximately $1.8 million.
11. SUBSEQUENT EVENTS
On April 30, 1998, the Company entered into several agreements with Omni
Peripherals Pte. Ltd., a private Singaporean company ("Omni") and two other
investors pursuant to which the Company acquired a preferred equity interest
in Omni. Omni was incorporated in Singapore on January 2, 1996, and is in
the business of designing, developing and marketing mechatronics modules for
optical storage drives. The Company paid $802,124, for its interest,
representing approximately 20% of the issued stock of Omni. As a group, the
three preferred investors own 51% of the issued stock of Omni. 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 nor can there be any
assurance that Omni will successfully develop its products or that if
developed, its products will be competitive and achieve market acceptance.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
EXCEPT FOR THE HISTORICAL FINANCIAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS QUARTERLY REPORT ON FORM 10-Q MAY BE CONSIDERED
"FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES ACT OF
1934, AS AMENDED. SUCH STATEMENTS INCLUDE DECLARATIONS REGARDING THE INTENT,
BELIEF OR CURRENT EXPECTATIONS OF THE COMPANY AND ITS MANAGEMENT AS OF THE
DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE
RESULTS OF ANY REVISION TO THESE FORWARD-LOOKING STATEMENTS WHICH MAY BE MADE
TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE
OCCURRENCE OF UNANTICIPATED EVENTS. PROSPECTIVE INVESTORS ARE CAUTIONED THAT
ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE
AND INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS. AMONG
THE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS ARE: (i) THAT THE
INFORMATION IS OF A PRELIMINARY NATURE AND MAY BE SUBJECT TO FURTHER
ADJUSTMENT, (ii) VARIABILITY IN THE COMPANY'S QUARTERLY OPERATING RESULTS,
(iii) GENERAL CONDITIONS IN THE SEMICONDUCTOR INDUSTRY, (iv) RISKS RELATED TO
PENDING LEGAL PROCEEDINGS, (v) DEVELOPMENT BY COMPETITORS OF NEW OR SUPERIOR
PRODUCTS OR 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) THE COMPANY'S CURRENT DEPENDENCE ON SALES OF CD-ROM
CONTROLLER PRODUCTS AND THE PC MARKET, (xiv) RISKS RELATED TO INTERNATIONAL
BUSINESS OPERATIONS AND THE COMPANY'S CURRENT DEPENDENCE ON SALES TO THE
ASIAN MARKETS, (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 RESTRUCTURING AND MANAGEMENT CHANGES
ANNOUNCED ON JANUARY 22, 1998, (xvii) RISKS RELATED TO ACQUISITIONS (xviii)
THE ABILITY TO ATTRACT AND RETAIN QUALIFIED MANAGEMENT AND TECHNICAL
PERSONNEL AND OTHER RISKS IDENTIFIED FROM TIME TO TIME IN THE COMPANY'S
REPORTS AND REGISTRATION STATEMENTS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION, INCLUDING THE ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JUNE
30, 1997.
The Company designs, develops and markets high performance integrated
semiconductors and related software to original equipment manufacturers
worldwide that serve the optical storage, consumer electronics and digital
office equipment markets. 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 hardware products, enabling the Company to focus on its design strengths,
minimize fixed costs and capital expenditures and gain access to advanced
manufacturing facilities. Except pursuant to its agreements with TSMC,
Chartered and UICC, the Company's foundries generally are not
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obligated to supply products to the Company for any specific period, in any
specific quantity or at a specific price.
During the quarter ending March 31, 1998, the Company implemented a
strategy of concentrating its efforts on the markets for optical storage,
consumer electronics and digital office equipment. As part of this strategy,
the Company sought to discontinue its graphics and audio/communications
businesses and restructure its business to leverage its three core
technologies: optical storage, MPEG imaging and digital imaging. Unable to
locate a buyer for either its graphics or its audio/communications
businesses, the Company discontinued all product development, marketing,
selling and other efforts related to these businesses during the quarter
ended March 31, 1998. As a result of the discontinuation of these
businesses, the Company laid-off 30 employees and recorded a restructuring
charge of $1.8 million to operations and a $3.5 million inventory-related
charge to cost of revenues related to this restructuring during the quarter
ended March 31, 1998. The $1.8 million charge consisted of $1.0 million
charges related to a write-off of prepaid royalties, approximately $0.6
million for severance pay and $0.2 in miscellaneous charges.
On April 22, 1998, the Company announced that it expects to incur a loss
from operations in the quarter ending June 30, 1998 due to a number of
factors currently affecting its optical storage business, including, but not
limited to, new competitors entering the market, a maturation of the CD-ROM
controller market, pressure from the sub-$1000 PC segment for low-cost
components, uncertain demand for personal computers and delays in new product
releases. Through the restructuring efforts described above, the Company
intends to direct and focus Company resources and management time on the
optical storage, consumer electronics and digital office equipment markets
with primary emphasis on the optical storage market. However, there can be
no assurance that these actions will enable the Company to diminish the
pressures currently affecting its optical storage business and/or enable the
Company to successfully transition the business to the emerging CD-R/W and
DVD markets.
On January 29, 1998, the Company and its wholly-owned subsidiary
Pixel Magic, Inc. signed a Plan of Reorganization and Agreement of Merger
("The Merger Agreement") with Xerographic Laser Images Corporation ("XLI"), a
developer of resolution enhancement technology. Pursuant to the Merger
Agreement, XLI will become a wholly-owned subsidiary of Pixel Magic. The
Merger Agreement provides for a cash payment of approximately $3.7 million to
XLI shareholders on the effective date of the merger and the right to receive
additional payments up to a maximum of approximately $11.3 million subject to
the achievement of certain milestones by XLI over a three year period ending
on December 31, 2000. The merger is subject to the approval of XLI
shareholders. The transaction will be accounted for as a purchase
transaction. The Company currently anticipates that it will expense a
significant portion of the purchase price in the period during which the
acquisition is closed.
On March 20, 1998, the Company entered into an asset purchase
agreement with Odeum Microsystems, Inc. ("Odeum") and Hyundai Electronics
America ("HEA") pursuant to which the Company agreed to acquire certain
assets of Odeum for approximately $4.0 million. With this acquisition, the
Company acquired two products currently in production, an integrated MPEG-2
audio/video decoder and transport demultiplexer and a DVD-5 compliant QPSK
demodulator. Both products are used predominantly in "free to air" satellite
and cable set-top boxes for MPEG-2 encoded digital television broadcasting.
The transaction was consummated
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on April 2, 1998. This transaction will be accounted for as a purchase
transaction. The Company anticipates that it will expense a significant
portion of the purchase price for this acquisition in the period ended June
30, 1998.
On April 30, 1998, the Company entered into several agreements with
Omni Peripherals Pte. Ltd., a private Singaporean company ("Omni") and two
other investors pursuant to which the Company acquired a preferred equity
interest in Omni. Omni was incorporated in Singapore on January 2, 1996, and
is in the business of designing, developing and marketing mechatronics
modules for optical storage drives. The Company paid $802,124, for its
interest, representing approximately 20% of the issued stock of Omni. As a
group, the three preferred investors own 51% of the issued stock of Omni.
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 nor
can there be any assurance that Omni will successfully develop its products
or that if developed, its products will be competitive and achieve market
acceptance.
On February 27, 1998, the Company incorporated a wholly-owned
subsidiary, Oak Technology, Ltd. in Bristol, England. The subsidiary will
employ primarily technical personnel who will develop products for the
Company's consumer products business.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31,
1997
NET REVENUES. The Company's net revenues in the comparison periods were
primarily derived from sales of its CD-ROM controller products which
comprised 77% and 86% of the Company's net revenues in the three months ended
March 31, 1998 and 1997 respectively. Net revenues decreased 29.8% to $35.6
million in the three months ended March 31, 1998 from $50.6 million in the
comparable period of fiscal 1997. This decrease was primarily attributable
to a decrease in unit sales and overall average selling price ("ASP") of
CD-ROM controllers, in relatively equal proportion, partially offset by an
increase in sales of digital office equipment controllers. In the three
months ended March 31, 1998 and 1997, sales to the Company's top ten
customers accounted for approximately 76% and 78%, respectively, of the
Company's net revenues. International sales, principally to Japan, Taiwan,
Korea and Belgium accounted for approximately 87% and 98% of the Company's
net revenues in the three months ended March 31, 1998 and 1997, respectively.
This decrease in international sales, as a percentage of total sales, is
primarily attributable to a decrease in international revenues as well as an
increase in domestic revenues in the comparison quarters. Sales of products
related to the graphics and audio/communications businesses which the Company
discontinued in the quarter ended March 31, 1998 accounted for less than 3%
and 1% of the Company's net revenues in each of the three months ended March
31, 1998 and 1997, respectively. Although the Company is attempting to
diversify its revenue product base in the three core markets of optical
storage, consumer electronics and digital office equipment, it anticipates
that CD-ROM controller sales will continue to account for a substantial
majority of its revenue in the foreseeable future. As the Company has been
experiencing continued pressure on CD-ROM controller ASPs, increased
competition, a maturation of the CD-ROM controller market and development
delays in the Company's next generation CD-ROM product, the Company does not
anticipate year over year growth in CD-ROM controller unit sales and revenue
to continue at the same rate, if at all, in the foreseeable future. See
"Factors That May Affect Future Results" below.
GROSS MARGIN. Cost of revenues includes the cost of wafer fabrication,
assembly and testing performed by third-party vendors and direct and indirect
costs associated with the procurement, scheduling and quality assurance
functions performed by the Company. The
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Company's gross margin decreased to 40.5% in the three month period ended
March 31, 1998 as compared to 54.9% during the comparable period in the prior
year. Gross margin in the three month period ended March 31, 1998 includes
the impact of a $3.5 million inventory-related charge to cost of revenues
related to the discontinuation of the graphics and audio/communications
businesses. Excluding the impact of the discontinuation of these businesses,
gross margin in the three months ended March 31, 1998 would have been 50.5%.
Gross margin in the three month period ended March 31, 1997 included the
impact of favorable adjustments of approximately $5.2 million to cost of
revenues associated with the sale of products which had been fully reserved
in a prior period. Excluding the effect of this adjustment, gross margin in
the three month period ended March 31, 1997 would have been 44.7%. The
increase in gross margin during the comparison periods, excluding the impact
of the adjustments recorded during the three months ended March 31, 1998 and
March 31, 1997, is primarily the result of a product mix shift to higher
margin CD-ROM controllers and the CD-R/W controller. Gross margins related to
the graphics and audio/communications businesses which the Company
discontinued in the quarter ended March 31, 1998 accounted for approximately
2% and less than 1% of the Company's total gross margin contribution in each
of the three months ended March 31, 1998 and 1997, respectively. 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, product design changes 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. The Company is currently experiencing severe price
pressure on its CD-ROM controller and MPEG products and expects such price
erosion to continue. A decline in ASPs that is not offset by cost
reductions through product design changes, manufacturing process changes,
yield improvement, savings negotiated with its manufacturing subcontractors
or by sales of new products with higher gross margins would decrease the
Company's overall gross margin and could materially adversely affect the
Company's operating results. The Company does not believe that it can
achieve cost reductions or sales of new products with higher gross margins
which fully offset the expected price declines of its CD-ROM and MPEG
products and therefore, it expects gross margin percentages to decline for
such products. In addition, the Company believes that gross margins for new
products in its optical storage and consumer markets 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
expensed as incurred. Research and development expenses increased 44.9% to
$12.4 million in the three months ended March 31, 1998 from $8.6 million in
the comparable period in the prior year. Additionally, research and
development expenses increased as a percentage of net revenues to 34.9%
during the three months ended March 31, 1998 from 16.9% in the comparable
period in the prior year. The increased spending related to research and
development activities was principally the result of the hiring of additional
technical personnel and associated expenses during the comparison periods.
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 optical storage market and
diversify its product development in its other core markets: consumer
electronics and digital office equipment. Although the Company expects
research and development expenses to decrease as a result of the
discontinuation of its graphics and audio/communications businesses, the
increase in the investment in the remaining core businesses may partially, if
not fully, offset this decrease. As a result, no assurance can be given that
absolute research and development expenses for the remainder of fiscal 1998
will decrease.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses include costs related to salaries, commissions, legal
fees, consulting and other costs related to the sales, marketing and
administrative functions of the Company. Selling, general and administrative
expenses increased 54.2% to $8.8 million in the three months ended March 31,
1998 from $5.7 million in the comparable period in the prior year.
Additionally, selling, general and administrative expenses increased as a
percentage of net revenues to 24.8% in the three months ended March 31, 1998
from 11.3% during the comparable period in fiscal 1997. This increase was
principally the result of the hiring of additional management and
administrative personnel and associated expenses, an increase in legal
expenses as well as a decrease in the Company revenues in the comparison
periods. The increase in legal expenses relates primarily to a complaint the
Company filed with the International Trade Commission on July 21, 1997 ("ITC
Complaint") and additional litigation related to a settlement agreement with
one of the parties in the ITC Complaint. See "Legal Proceedings". Although
the Company may experience a decrease in selling, general and administrative
expenses as a result of the discontinuation of its graphics and
audio/communications businesses, any such decrease is expected to be offset
by the continuing efforts to develop the Company's support infrastructure and
hire additional senior management personnel. As a result, the Company expects
to incur higher absolute selling, general and administrative expenses in the
remainder of fiscal 1998.
RESTRUCTURING CHARGES. During the three months ended March 31, 1998,
the Company discontinued its graphics and audio/communications businesses and
incurred a charge to operations of $1.8 million related to these discontinued
businesses. The $1.8 million charge consisted of $1.0 million related to a
write-off of prepaid royalties, approximately $0.6 million for severance pay
and $0.2 for miscellaneous charges.
NONOPERATING INCOME. During the three months ended March 31, 1998,
nonoperating income increased to $2.3 million from $1.1 million during the
comparable three months of fiscal 1997. This increase was primarily the
result of the receipt of approximately $0.7 million related to the settlement
agreement between the Company and United Microelectronics Corporation in
connection with a complaint the Company filed with the International Trade
Commission on July 21, 1997. See "Legal Proceedings".
INCOME TAXES. The overall effective tax rate for the three months ended
March 31, 1998 was 52% and 35% for the period ended March 31, 1997. The
change in the tax rate was the result of the loss recorded in the quarter
ended March 31, 1998 and the resultant impact on total anticipated fiscal
1998 net income.
NINE MONTHS ENDED MARCH 31, 1998 COMPARED TO NINE MONTHS ENDED MARCH 31, 1997
NET REVENUES. The Company's net revenues in the comparison periods were
primarily derived from sales of its CD-ROM controller products which
comprised 81% and 86% of the Company's net revenues in the nine months ended
March 31, 1998 and 1997 respectively. Net revenues increased 9.4% to $128.2
million in the nine months ended March 31, 1998 from $117.2 million in the
comparable period of fiscal 1997. This increase was primarily attributable to
an increase in unit sales of CD-ROM controllers from the comparable period of
fiscal 1997 partially offset by a decline in the average selling price
("ASP") of the CD-ROM controllers. The increase in unit sales of the CD-ROM
controllers is primarily the result of the relatively low unit sales in the
comparable period of fiscal 1997 resulting from customer decisions to reduce
inventory, an overall slowdown in the PC market and a shift in the CD-ROM
industry from 4x
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speed drives to 6x and 8x speed drives. In the nine months ended March 31,
1998 and 1997, sales to the Company's top ten customers accounted for
approximately 80% and 77%, respectively, of the Company's net revenues.
International sales, principally to Japan, Taiwan, Korea and Belgium
accounted for approximately 93% and 98% of the Company's net revenues in the
nine months ended March 31, 1998 and 1997, respectively. Sales of products
related to the graphics and audio/communications businesses that the Company
discontinued accounted for approximately 3% of the Company's net revenues in
the nine months ended March 31, 1998 and approximately 2% in the nine months
ended March 31, 1997.
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
49.2% in the nine month period ended March 31, 1998 as compared to 58.8%
during the comparable period in the prior year. Gross margin in the nine
month period ended March 31, 1998 includes the impact of a $3.5 million
inventory-related charge to cost of revenues related to the discontinuation
of the graphics and audio/communications businesses. Excluding the impact of
these discontinued businesses, gross margin in the nine month period ended
March 31, 1998 would have been 52.0%. Margins for the nine month period
ended March 31, 1997 were favorably affected by adjustments of approximately
$18.7 million to cost of revenues associated with the sale of products which
had been fully reserved in a prior period as well as manufacturing cost
adjustments of $3.0 million related to foundry agreements. Excluding the
impact of these adjustments, gross margin for the nine month period ended
March 31, 1997 would have been 40.0%. The increase in gross margin during
the comparison periods, excluding the impact of the adjustments recorded
during the nine months ended March 31, 1998 and the nine months ended March
31, 1997, is primarily the result of a product mix shift to higher margin
CD-ROM controllers and the CD-R/W controller. Gross margins related to the
graphics and audio/communications businesses that the Company discontinued
accounted for approximately 2% and (4%) of the Company's total gross margin
contribution in the nine months ended March 31, 1998 and 1997, respectively.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development costs are
expensed as incurred. Research and development expenses increased 44.4% to
$35.4 million in the nine months ended March 31, 1998 from $24.5 million in
the comparable period in the prior year. This increase was principally the
result of the hiring of additional personnel and associated expenses.
Research and development expenses increased as a percentage of net revenues
to 27.6% during the nine months ended March 31, 1998 from 20.9% in the
comparable period in the prior year. This increase was principally the result
of the hiring of additional technical personnel and associated expenses
during the comparison periods.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses include costs related to salaries, commissions, legal
fees, consulting and other costs related to the sales, marketing and
administrative functions of the Company. Selling, general and administrative
expenses increased 52.1% to $23.0 million in the nine months ended March 31,
1998 from $15.1 million in the comparable nine months in fiscal 1997.
Additionally, selling, general and administrative expenses increased as a
percentage of net revenues to 17.9% in the nine months ended March 31, 1998
from 12.9% during the comparable period in fiscal 1997. This increase was
principally the result of the hiring of additional management and
administrative personnel and associated expenses as well as increases in
legal expenses. The increase in legal expenses relates primarily to a
complaint the Company filed with the
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International Trade Commission on July 21, 1997 ("ITC Complaint") and
additional litigation related to a settlement agreement with one of the
parties in the ITC Complaint. See "Legal Proceedings."
NONOPERATING INCOME. During the nine months ended March 31, 1998,
nonoperating income increased to $12.1 million from $3.1 million during the
comparable nine months in fiscal 1997. This increase was primarily the result
of the receipt of approximately $8.1 million related to the settlement
agreement between the Company and United Microelectronics Corporation in
connection with a complaint the Company had filed with the International
Trade Commission on July 21, 1997. See "Legal Proceedings".
INCOME TAXES. The overall effective tax rate for the nine months ended
March 31, 1998 was 28% and 35% for the nine months ended March 31, 1997. The
change in the tax rate was the result of the loss recorded in the quarter
ended March 31, 1998 and the resultant impact on total anticipated fiscal
1998 net income.
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 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 other
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 and order
cancellations or rescheduling, 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. These factors are difficult to
forecast, and these or other factors could materially affect the Company's
quarterly or annual operating results. The Company's operating results in
the remainder of fiscal 1998 are likely to be affected by these factors as
well as others. Accordingly, 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 through the end of calendar 1999, 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
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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
fiscal year would be materially adversely affected.
The semiconductor industry has historically been characterized by rapid
technological change, cyclical market patterns, significant price erosion,
periods of over-capacity and production shortages, variations in
manufacturing costs and yields and significant expenditures for capital
equipment and product development. In addition, the industry has experienced
significant economic downturns at various times, characterized by diminished
product demand and accelerated erosion of product prices. The Company may
experience substantial period-to-period fluctuations in operating results due
to conditions affecting the Company's specific markets or to general
semiconductor industry conditions.
The Company's success is highly dependent upon its ability to develop
new, technically advanced products, to introduce them to the marketplace
ahead of the competition, and to have them selected for design into products
of leading OEM manufacturers. Both revenues and margins may be affected
quickly if new product introductions are delayed or if the Company's products
are not designed into successive generations of products of the Company's
customers. These factors have become increasingly important to the Company's
results of operations because the rate of change in the markets served by the
Company continues to accelerate. In an effort to attempt to increase its
competitiveness in the Company's core markets, the Company recently
implemented a strategy to concentrate its efforts on the markets for optical
storage, consumer electronics and digital office equipment. As part of this
strategy, the Company discontinued its graphics and audio/communications
businesses and is restructuring its business to leverage its three core
technologies: optical storage, MPEG imaging and digital imaging. As a result
of the decision to discontinue its graphics and audio/communications
businesses the Company recorded a charge to operations related to this
restructuring during the quarter ended March 31, 1998 of $1.8 million and an
inventory-related charge to cost of revenues of $3.5 million. See "Notes to
Consolidated Financial Statements".
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. 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 has been made in the Company's Consolidated Financial Statements. In
connection with these legal proceedings, the Company has incurred, and
expects to continue to incur, substantial legal and other expenses.
Shareholder suits of this kind are highly complex and can extend for a
protracted period of time, which can substantially increase the cost of such
litigation and divert the attention of the Company's management.
The markets in which the Company competes are intensely competitive and
are characterized by rapid technological change, declining unit ASPs and
rapid product obsolescence. The Company expects competition to increase in
the future from existing competitors and from other companies that may enter
the Company's existing or future markets with solutions that may be less
costly or provide higher performance or additional features. Competition
typically occurs at the design stage, where the customer evaluates
alternative design approaches that require integrated circuits such as those
offered by the Company. Because of shortened product life cycles and even
shorter design-in cycles, particularly in the CD-ROM controller market, the
Company's competitors have increasingly frequent opportunities to
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achieve design wins in next generation systems or, in the CD-ROM controller
market, in the next generation drive. In the event that competitors succeed
in supplanting the Company's products, the Company's market share may not be
sustainable and revenue, gross margin and earnings would be adversely
affected. 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. 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 and other market 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 Company's customer's products, 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 optical storage 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. The Company has
recently experienced some product development delays in this area. 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 for the consumer and digital office equipment markets. 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 products and markets, and thereby revenue
diversification. The failure of the Company to introduce new products
successfully or the failure of new products to achieve market acceptance
would have a
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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 or changing industry standards will not
render the Company's products or technologies obsolete or noncompetitive.
The failure of the Company's new product development efforts or the failure
of the Company to achieve market acceptance of its new products would have a
material adverse effect on the Company's business, financial condition and
operating results.
The Company has begun to pursue, and will continue to pursue,
opportunities to acquire key technology to augment its technical capabilities
or to achieve faster time to market as alternatives to internally developing
such technology. Acquisitions involve numerous risks, including difficulties
in integration of the operations, technologies, and products of the acquired
companies; the risk of diverting management's attention from normal daily
operations of the business; risks of entering markets in which the Company
has no or limited direct prior experience and where competitors in such
markets have stronger market positions; the coordination of sales, marketing
and research and development; and the potential loss of key employees of the
acquired company. The Company must also maintain its ability to manage any
such growth effectively. Failure to manage growth effectively and
successfully integrate acquisitions made by the Company could adversely
affect the Company's business and operating results. In addition, with such
acquisitions, there is the risk that future operating performance may be
unfavorably impacted due to acquisition related costs such as, but not
limited to, in-process research and development charges, additional
development expenses, lower gross margins generated by the sales of acquired
products and restructuring costs associated with duplicate facilities.
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 six
patents granted, thirty patents pending, thirty-two patents in preparation in
the United States, and fifteen 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 manufactured or 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
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States and thus make the possibility of piracy of the Company's technology
and products more likely. On April 7, 1998, 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".
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights, which has resulted in significant,
often protracted and expensive litigation. The Company and certain of its
customers and foundries have, from time to time, been notified that they may
be infringing patents or other intellectual property rights owned by third
parties. In addition, customers have been named in suits alleging
infringement of patents or other intellectual property rights by customer
products. Certain components of these products have been purchased from the
Company and may be subject to indemnification provisions made by the Company
to its customers. 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. As the Company's products become more integrated
and offer increased functionality, there is a likelihood that more of these
claims will occur. The Company cannot accurately predict the eventual
outcome of any suit or other alleged infringement of intellectual property.
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. See "Legal Proceedings". 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
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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. In addition, if the Company is to
successfully design and develop technologically advanced products, it must
license a variety of software design and development tools from third
parties. There can be no assurance that such licenses, or licenses of other
third party technology, will be available or can be renewed on terms
acceptable to the Company, if at all. The inability of the Company to obtain
or renew such license arrangements on acceptable terms could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company contracts with independent foundries to manufacture all of
its hardware 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. While the Company believes there is adequate foundry capacity
available to meet its current requirements, there can be no assurance that
the Company will continue to have access to sufficient capacity to meet its
needs in the future. If there is a decrease in available foundry capacity it
is likely that the lead time required to manufacture the Company's products
will increase. In addition, the Company had anticipated that it would be
able to satisfy a small portion of its manufacturing requirements from UICC;
however due to the October 1997 fire at UICC the Company will not be able to
utilize this foundry in the foreseeable future. UICC management has
indicated that capacity will be available through substitute capacity
arrangements, however no assurance can be given as to the availability of
such capacity. 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.
In October 1997, a fire damaged the UICC facility. UICC management has
advised the Company that a majority of the equipment, majority of the
inventory and a significant portion of the building were completely destroyed
at an estimated loss of approximately $331 million (based on
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current exchange rates). UICC management has also advised the Company that
approximately 10% of the loss to the facility will not be covered by
insurance and that there is a deductible amount that UICC must pay with
respect to the insured portion. Despite any unreimburseable loss, UICC
management has represented to the Company that it is rebuilding the facility
and expects the facility to be fully rebuilt and operational by April of
1999. Given the fire, the Company has evaluated its investment in the UICC
facility and the potential impact of the Company's portion of the
unreimburseable loss to determine whether there has been an impairment and
as the Company believes that estimated future cash inflows expected to be
generated by the facility and/or disposition of the investment are in excess
of the carrying amount of the investment, no impaired loss has
been recognized as of March 31, 1998. Representations have been made by UICC
management that the facility's foundry capacity that has been guaranteed to
the Company will be available through substitute capacity arrangements. To
date, the Company has not requested that UICC made such substitute capacity
available to the Company. Therefore, there can be no assurance that such
substitute foundry capacity will be available to the Company should the
Company require it. Additionally, 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'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 77% and 86%
of the Company's net revenues in the three months ended March 31, 1998 and
1997, respectively. Sales of CD-ROM controller products are expected to
continue to account for a substantial portion of the Company's total revenues
for the foreseeable future. The market for CD-ROM controller products
continues to mature and therefore, it is expected that sales of such products
will not necessarily continue to grow at historical rates and will be
influenced by the traditional seasonality and volatility associated with the
PC market. It is further anticipated that the proliferation of DVD-ROM
drives will impact the demand for CD-ROM controller products. Due to the
backward
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compatibility of DVD-ROM drives, it is critical that the Company maintain its
CD-ROM customer base throughout this transition to DVD-ROM. As the CD-ROM
market has begun to mature and transition toward the emerging CD-R/W and
DVD-ROM market, there have been a number of new competitors entering the
market. This increased competition combined with pressure from the sub-$1000
PC segment for lower cost components have caused tremendous price erosion on
CD-ROM controller prices. In addition, as a majority of the new competitors
are located in Asia, together with a majority of the Company's customers, the
Company currently is hampered in its ability to effectively compete given the
effects of the strong dollar versus Asian currencies. Furthermore, there is
currently a trend toward integrating increased functionality on the CD-ROM
controller. Therefore, the Company's revenues and its gross margins from its
CD-ROM controller products will be dependent on the Company's ability to
introduce such integrated products in a commercially competitive manner. The
Company has not previously offered an integrated CD-ROM controller product
that provides functions that had traditionally been supplied by separate,
single function chips. The Company is currently experiencing development
delays with its first integrated CD-ROM controller product. To provide
integrated CD-ROM controller products, the Company has been and will continue
to be required to expand the scope of its research and development efforts to
provide these new functions, which will require the hiring of engineers
skilled in the respective areas and additional management coordination among
the Company engineering and marketing groups. Alternatively, the Company may
find it necessary or desirable to license or acquire technology to enable the
Company to provide these functions, and there can be no assurance that any
such technology will be available for license or purchase on acceptable terms
to the Company. In addition, with new functions being added to the CD-ROM
controller product, companies that historically provided chips with these
functions are now entering the CD-ROM controller market with integrated
products containing these functions as well as the controller function.
Accordingly, given the above-stated factors, there can be no assurance that
the Company will be able to sustain the current level of such product sales
or current operating margins. In addition, there can be no assurance that
the market for CD-ROM controller products in general, or the Company's CD-ROM
controller products in particular, will support the Company's planned
operations in the future. Any decrease in the overall level of sales of, or
the prices for, the Company's CD-ROM controller products, due to
introductions of products by present or future competitors, a decline in
demand for CD-ROM controller products, product obsolescence or any other
reason would have a material adverse effect on the Company's business,
financial condition and results of operations.
International sales, principally to Japan, Taiwan, Korea and Belgium
accounted for approximately 87% and 98% of the Company's net revenues in the
three months ended March 31, 1998 and 1997, respectively. A substantial
portion of the Company's international revenues in the comparison periods
were derived from Taiwanese, Japanese, Korean and Belgian manufacturers of
CD-ROM drives. Most of the Company's foreign sales are negotiated in U.S.
dollars; however, invoicing is often done in local currency. Assets and
liabilities which are denominated in non-functional currencies are translated
to the functional currency on a monthly basis and the resulting gain or loss
is recorded within nonoperating income in the statement of operations. Many
of the Company's non-functional currency receivables and payables are hedged
through managing net asset positions, product pricing and other means. The
Company's strategy is to minimize its non-functional currency net assets or
net liabilities in its foreign subsidiaries. The Company's policy is not to
speculate in financial instruments for profit on the exchange rate price
fluctuations, trade in currencies for which there are not underlying
exposures, or enter into trades for any currency to intentionally increase
the underlying exposure. The Company uses financial instruments, including
local currency debt arrangements, to offset the gains or losses of the
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financial instruments against gains or losses on the underlying operations
cash flows or investments. The Company expects that there could be hedges of
anticipated transactions or investments in foreign subsidiaries in the
future. The Company is also subject to the additional risks of conducting
business outside of the United States. These risks include unexpected
changes in, or impositions of, legislative or regulatory requirements, delays
resulting from difficulty in obtaining export licenses for certain
technology, tariffs, quotas and other trade barriers and restrictions, longer
payment cycles, greater difficulty in accounts receivable collection,
potentially adverse tax rates, the burdens of complying with a variety of
foreign laws and other factors beyond the Company's control. With the
current economic problems in Asia and the strengthening of the dollar, the
Company has recently experienced a more conservative buying pattern from its
customers and increased price pressure on its products. 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. As a result, the Company may be subject
to the risks of currency fluctuations. There can be no assurance that one or
more of the foregoing factors will not have a material adverse effect on the
Company's business, financial condition or results of operations or require
the Company to modify its current business practices.
A limited number of customers historically have accounted for a
substantial portion of the Company's net revenues. In the three months ended
March 31, 1998 and 1997, sales to the Company's top ten customers accounted
for approximately 76% and 78%, respectively, of the Company's net revenues.
The Company expects that sales to a limited number of customers will continue
to account for a substantial portion of its net revenues for the foreseeable
future. The Company has experienced significant changes from year to year in
the composition of its major customer base and believes this pattern will
continue. The Company does not have long-term purchase agreements with any of
its customers. Customers generally purchase the Company's products pursuant
to cancelable short-term purchase orders. The loss of, or significant
reduction in purchases by, current major customers would have a material
adverse effect on the Company's business, financial condition and results of
operations. There can be no assurances that the Company's current customers
will continue to place orders or that existing orders will not be canceled.
If sales to current customers cease or are reduced, there can be no assurance
that the Company will be able to continue to obtain the orders from new
customers necessary to offset any such losses or reductions.
The Company's future performance depends, to a significant degree, on
the continued retention and contribution of members of the Company's senior
management as well as other key personnel. The Company is in the process of
recruiting additional senior managers and technical personnel. Competition
for these persons is intense and there can be no assurance that the Company
will be able to attract and retain qualified managers and other personnel.
The loss of the services of one or more of these key personnel could
adversely affect the Company.
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. These date
code fields will need to accept four digit entries to distinguish 21st
century dates from 20th century dates. As a result, in less than two years,
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computer systems and/or software used by many companies may need to be
upgraded to comply with such "Year 2000" requirements. The Company is
currently installing various new internal information systems in connection
with operating its business. These systems are believed to be Year 2000
compliant. The Company is currently evaluating the impact of the Year 2000 on
its products, suppliers and customers, but has not yet completed the process.
As a result, the Company has no reasonable basis to conclude that the Year
2000 will not materially affect the Company's operations.
Since its inception, the Company has experienced significant growth in
the number of its employees and in the scope of its operating and financial
systems. To manage growth effectively, the Company will need to continue to
improve its operational, financial and marketing information systems,
procedures and controls, and expand, train, and manage its employee base.
The Company is in the final stages of implementing a new management
information system. Any problems encountered with the new system could
materially adversely affect the Company's operations.
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 March 31, 1998 consisted of approximately $129.3 million in
cash, cash equivalents and short-term investments, approximately $25.0
million in lines of credit with two Japanese financial institutions, of which
$17.8 million was available as of March 31, 1998 and approximately $12.5
million in lines of credit with Taiwanese financial institutions of which
approximately $12.1 million was available as of March 31, 1998.
During the nine months ended March 31, 1998, operating activities
provided net cash of approximately $6.4 million. This cash resulted
primarily from net income of $10.8 million, non-cash adjustments to net
income of $6.7 million, utilization of foundry deposits of $5.8 million and
restructuring related charges of $1.8 million, partially offset by net
changes in accounts payable of $14.0 million and other operating assets and
liabilities of $4.7 million. Net income includes the impact of the receipt of
approximately $8.1 million recorded during the nine months ended March 31,
1998 related to the settlement agreement between the Company and United
Microelectronics Corporation in connection with a complaint the Company had
filed with the International Trade Commission on July 21, 1997. See "Legal
Proceedings". Investing and financing activities utilized cash of
approximately $22.5 million consisting primarily of an investment in the UICC
foundry venture of $11.6 million, purchases of property and equipment of $9.5
million and net repayment of debt of $1.9 million and treasury stock
acquisitions of $1.8 million, partially offset by proceeds from issuance of
common stock of $2.5 million.
The Company believes that its existing cash, cash equivalents,
short-term investments and credit facilities will be sufficient to provide
adequate working capital and to fund necessary purchases of property and
equipment through at least the next twelve months. Capital expenditures for
the remainder of fiscal 1998 are anticipated to be approximately $3.2
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.
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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 $5.0 million
amount was expensed by the Company in the quarter ended June 30, 1997. The
first payment of $3.0 million was paid in January 1998 and the second payment
of $2.0 million is due in December 1998.
On January 29, 1998, the Company and its wholly-owned subsidiary Pixel
Magic, Inc. signed a Plan of Reorganization and Agreement of Merger ("The
Merger Agreement") with Xerographic Laser Images Corporation ("XLI"), a
developer of resolution enhancement technology. Pursuant to the Merger
Agreement, XLI will become a wholly-owned subsidiary of Pixel Magic. The
Merger Agreement provides for a cash payment of approximately $3.7 million to
XLI shareholders on the effective date of the merger and the right to receive
additional payments up to a maximum of approximately $11.3 million subject to
the achievement of certain milestones by XLI over a three year period ending
on December 31, 2000. The merger is subject to the approval of XLI
shareholders. The transaction will be accounted for as a purchase
transaction. The Company currently anticipates that it will expense a
significant portion of the purchase price in the period during which the
acquisition is closed.
On March 20, 1998, the Company entered into an asset purchase agreement
with Odeum Microsystems, Inc. ("Odeum") and Hyundai Electronics America
("HEA") pursuant to which the Company agreed to acquire certain assets of
Odeum for $4.0 million. With this acquisition, the Company acquired two
products currently in production, an integrated MPEG-2 audio/video decoder
and transport demultiplexer and a DVD-5 compliant QPSK demodulator. Both
products are used predominantly in "free to air" satellite and cable set-top
boxes for MPEG-2 encoded digital television broadcasting. The transaction
was consummated on April 2, 1998. This transaction will be accounted for as a
purchase transaction. The Company anticipates that it will expense a
significant portion of the purchase price for this acquisition in the period
ended June 30, 1998.
On January 22, 1998, the Company announced that its Board of Directors
had authorized the repurchase of up to 2.0 million shares of its common
stock, either in the open market or in private transactions. Accordingly, the
Company may utilize cash to repurchase its common stock. The repurchase
program is authorized for one year, unless further extended by the Company's
Board of Directors. As of March 31, 1998, the Company has purchased 287,500
shares for approximately $1.8 million.
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.
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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 and the elimination of required future cash
prepayments of approximately $73 million. Under the amended agreement, no
additional prepayment is required; however, the Company must utilize the
entire amount of the prepayment paid as of October 1996 through a certain
committed amount of wafer purchases in calendar years 1997, 1998, and 1999 or
a portion of the prepayment will be forfeited. In March 1998, the Company
further amended its agreement with TSMC allowing the Company to utilize
excess wafer purchases in 1997 and 1998 to reduce the Company's committed
wafer purchases in the following years. This amendment resulted in the
Company utilizing calendar 1998 committed wafer purchases beginning in
calendar 1997 after the committed wafer purchases for calendar 1997 were met.
As a result of this amendment the Company recorded a credit to foundry
deposits of approximately $5.3 million which was used to offset payables to
TSMC in the quarter ended March 31, 1998. In addition, the Company received
an additional credit of $7.1 million which will be used to offset future
payments to TSMC. The Company currently believes the terms and conditions of
the agreement, as amended, will be met although no assurance can be given in
this regard.
In September 1996, April 1997 and September 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 deposits and prepayments under the amended foundry agreements
described above are recorded at cost and total approximately $28.3 million as
of March 31, 1998. 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 although no assurance can be given in this
regard.
In October 1995, the Company entered into a series of agreements with
United Microelectronics Corporation ("UMC") 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. As an investor in this venture, the
Company has rights to a portion of the total wafer capacity for the
manufacture of its proprietary products. The Company paid for its investment
in the foundry venture in three installments: $13.7 million in January 1996,
$25.9 in January 1997 and $11.6 in December 1997. This final payment was made
by the Company after receiving representations from UICC management that the
losses from the October fire (discussed below) would be covered by insurance
and that the facility would be rebuilt to its fully operational state.
Investment in the foundry venture as of March 31, 1998 was approximately
$51.2 million which represents an investment of approximately 9.3% of the
total outstanding shares of the foundry venture.
In October 1997, a fire damaged the UICC facility. UICC management has
advised the Company that a majority of the equipment, majority of the inventory
and a significant portion of the building were completely destroyed at an
estimated loss of approximately $331 million (based on
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current exchange rates). UICC management has also advised the Company that
approximately 10% of the loss to the facility will not be covered by
insurance and that there is a deductible amount that UICC must pay with
respect to the insured portion. Despite any unreimburseable loss, UICC
management has represented to the Company that it is rebuilding the facility
and expects the facility to be fully rebuilt and operational by April of
1999. Given the fire, the Company has evaluated its investment and the
potential impact of the Company's portion of the unreimburseable loss in the
UICC facility to determine whether there has been an impairment and as the
Company believes that estimated future cash inflows expected to be generated
by the facility and/or disposition of the investment are in excess of the
carrying amount of the investment, no impaired loss has been recognized as of
March 31, 1998. Representations have been made by UICC management that the
facility's foundry capacity that has been guaranteed to the Company will be
available through substitute capacity arrangements. To date, the Company has
not requested that UICC make such substitute capacity available to the
Company. Therefore, there can be no assurance that such substitute foundry
capacity will be available to the Company should the Company require it.
Additionally, 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.
31
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and various of its current and former officers and Directors
are parties to several lawsuits which purport to be class actions filed on
behalf of all persons who purchased or acquired the Company's stock
(excluding the defendants and parties related to them) for the period July
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
plaintiffs' Second Amended Consolidated Complaint was filed on August 1,
1997. On December 3, 1997, the state court judge sustained the Oak
defendants' demurrer to plaintiffs' Second Amended Consolidated Complaint
without leave to amend to the causes of action for breach of fiduciary duty
and abuse of control, and to the California Corporations Code Sections
25400/25500 claims with respect to the Company, a number of the individual
officers and directors, and the venture capital investors. The judge also
sustained the demurrer with leave to amend to the California Civil Code
Sections 1709/1710 claims, however plaintiffs elected not to amend this
claim. Accordingly, the only remaining claim in state court, IN RE OAK
TECHNOLOGY SECURITIES LITIGATION, is the California Corporations Code
Sections 25400/25500 cause of action against four officers of the Company and
the Company's investment bankers.
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 plaintiffs' Second Amended Consolidated
Complaint was filed on September 4, 1997. Defendants' Motion to Dismiss was
heard on December 17, 1997. The federal court judge took the matter under
submission and has not yet issued a ruling.
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.
32
<PAGE>
All of these actions are in the early stages of proceedings. 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.
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 (Investigation No.
337-TA-401) on August 19, 1997, naming as respondents: Winbond Electronics
Corporation ("Winbond"); Winbond Electronics North America Corporation;
Wearnes Technology (Private) Ltd.; Wearnes Electronics Malaysia Sendirian
Berhad; and Wearnes Peripheal International (Pte.).
On March 16, 1998, the Company and Winbond entered into a settlement
agreement pursuant to which Winbond obtained a nonexclusive, royalty-bearing
license to the Company's U.S. patents No.'s 5,535,327 and 5,581,715 and the
Company obtained a nonexclusive, royalty-free license to several Winbond
patents. The settlement agreement provided that the parties would jointly
seek termination and dismissal of investigation No. 337-TA-401 as to Winbond
and its four affiliated companies: Winbond Electronics North America
Corporation; Wearnes Technology (Private) Ltd.; Wearnes Electronics Malaysia
Sendirian Berhad; and Wearnes Peripheal International (Pte.). On April 15,
1998, Investigation No. 337-TA-401 was ordered terminated as to all parties.
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. Prior to the ITC's institution
of the formal investigation proceeding, the Company and UMC entered into a
settlement agreement, effective July 31, 1997, pursuant to which UMC agreed
to cease and desist the manufacture of its specified CD-ROM controllers,
except under certain limited conditions which expired 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. In September 1997, October 1997 and February 1998, the
Company received $2.6 million, $4.8 million and $0.7 million, respectively
pursuant to this settlement. Proceeds from the settlement were recorded as
miscellaneous income and included in nonoperating income for the periods
ended September 30, 1997, December 31, 1997 and March 31, 1998,
respectively.
On October 27, 1997, the Company filed a complaint in the United States
District Court, Northern District of California against UMC for breach of
contract, breach of the covenant of good faith and fair dealing and fraud
based on UMC's breach of the settlement agreement arising out of the ITC
action. Together with the filing of the complaint, the Company filed a motion
for a preliminary injunction against UMC, seeking to enjoin UMC from selling
the CD-ROM
33
<PAGE>
controllers, that were the subject of the ITC action and related settlement
agreement, through or to a UMC affiliated, Taiwanese entity called MediaTek.
On February 23, 1998, the federal court judge denied the Company's request
for a preliminary injunction based on the court's findings that there was no
evidence that UMC was presently engaged in the manufacture of CD-ROM
controllers or other products covered by the settlement agreement. On
December 24, 1997, UMC answered the Company's complaint and counterclaimed
asserting causes of action for recission, restitution, fraudulent
concealment, mistake, lack of mutuality, interference and declaratory
judgment of non-infringement, invalidity and unenforceability of the Oak
patent that was the subject of the original ITC action filed against UMC.
The Company believes these counterclaims to be without merit and will
vigorously defend its patent. Both the Company and UMC seek compensatory and
punitive damages. In addition, the Company seeks permanent injunctive
relief. On April 14, 1998, the Company filed a Motion to Bifurcate UMC's
patent counterclaims from the contract-related claim's and counterclaims.
The Motion to Bifurcate is scheduled to be heard on May 22, 1998. If an
order is granted bifurcating the UMC patent counterclaims, a trial on the
contract-related issues is scheduled for December of 1998. If the Company's
Motion to Bifurcate is not granted, it is expected that a trial on all claims
and counterclaims will occur in the second calendar quarter of 1999.
In a related action to the lawsuit that was commenced by the Company
against UMC (described above), on December 19, 1997, MediaTek, a UMC
affiliated, Taiwanese entity, filed a complaint in the United States District
Court, Northern District of California, against the Company for declaratory
judgment of non-infringement, invalidity and unenforceability of the Oak
patent that was the subject of the original ITC action against UMC, and
intentional interference with prospective economic advantage. MediaTek seeks
compensatory damages of not less than $10 million and punitive damages. The
Company filed its answer on January 8, 1998 denying all the allegations. The
Company believes the suit to be without merit and will vigorously defend its
patent.
On April 7, 1998, the Company filed a new complaint with the
International Trade Commission ("ITC") alleging that five Asian companies,
are violating U.S. trade laws by importing or selling CD-ROM drive
controllers that infringe a United States patent owned by the Company. The
Company's complaint is asserted against United Microelectronics Corp.;
MediaTek, Inc.; Lite-On Group; Lite-On Technology Corp and AOpen, Inc.
In its complaint, the Company requests the ITC to investigate the five
above-named companies and to enter an order barring imports into the United
States of their allegedly infringing products and products containing them,
including CD-ROM drives and personal computers. A formal investigative
proceeding was instituted by the ITC (Investigation No. 337-TA-409) on May 8,
1998 naming as respondents United Microelectronics Corp. MediaTek, Inc.,
Lite-On Technology Corp. and AOpen, Inc. In most cases, the ITC decides
within 12 to 15 months after the filing of a complaint whether or not to
issue an order excluding foreign products that allegedly infringe U.S.
patents. In connection with this legal proceeding, the Company will incur
substantial legal and other expenses.
If any of the above pending actions are decided adversely to the
Company, it would likely have a material adverse affect on the Company's
financial condition and results of operations.
34
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith or incorporated by reference
herein.
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------ -------------
<S> <C>
3.01 The Company's Restated Certificate of Incorporation, as amended (1)
3.02 The Company's Restated Bylaws (2)
3.03 Certificate of Correction to the Restated Certificate of
Incorporation of the Company (16)
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 (16)
4.06 Rights Agreement between the Company and BankBoston, N.A. dated
August 19, 1997 (16)
10.01 1988 Stock Option Plan, as amended and related documents (3)*
10.02 1994 Stock Option Plan and related documents (3) and amendment
thereto dated February 1, 1996 (4)*
10.03 1994 Outside Directors' Stock Option Plan and related documents (3)*
10.04 1994 Employee Stock Purchase Plan (3)*
10.05 401(k) Plan and related documents (3) and Amendment Number One
and Supplemental Participation Agreement thereto (5)*
10.06 Lease Agreement dated August 3, 1988 between John Arrillaga,
Trustee, or his Successor Trustee, UTA dated 7/20/77 (John
Arrillaga Separate Property Trust) as amended and Richard T.
Peery, Trustee, or his Successor Trustee, UTA dated 7/20/77
(Richard T. Peery Separate Property Trust) as amended, and
Justin Jacobs, Jr., dba Siri-Kifer Investments, a joint
venture, and the Company, as amended June 1, 1990, and Consent
to Alterations dated March 26, 1991 (lease agreement for 139 Kifer
Court, Sunnyvale, California) (3), and amendments thereto dated
June 15, 1995 and July 19, 1995 (5)
35
<PAGE>
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) and addendum thereto dated September 26, 1997(17)**
36
<PAGE>
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 (16)
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 (16)**
10.22 Agreement of Termination of Employment Agreement between Pixel Magic, Inc.
and Peter D. Besen dated June 13, 1997 (16)
10.23 Agreement of Termination of Employment Agreement between Pixel Magic, Inc.
and Don Schulsinger dated June 13, 1997 (16)
10.24 Release and Settlement Agreement between the Company and United
Microelectronics Corporation dated July 31, 1997 (16)**
10.25 Sublease Agreement dated December 1, 1997 between Global Village Communication,
Inc. and the Company (lease agreement for 1150 East Arques Avenue, Sunnyvale,
California) and accompanying lease and amendment thereto (18)
10.26 Amendment to Option Agreement by and between Taiwan Semiconductor
Manufacturing Co., Ltd, and the Company. **
10.27 Settlement Agreement between Winbond Electronics Corporation and the
Company. **
11.01 Statement regarding computation of net income per share
27.01 Financial Data Schedule
</TABLE>
- -------------------
(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.
37
<PAGE>
(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.
(16) 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,
1997.
(17) 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, 1997.
(18) 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
December 31, 1997.
- -------------------
* Indicates Management incentive plan.
** Confidential treatment granted and/or requested as to portions of the
exhibit.
(b) Reports on Form 8-K
A report on Form 8-K was filed on January 28, 1998 reporting the
business restructuring that was announced with the release of the Company's
second fiscal quarter results. Pursuant to the restructuring plan, the
Company would discontinue its graphics and audio/communications businesses
and focus on three core markets: optical storage, consumer electronics and
digital office equipment. The Company also appointed Mr. Richard Black, a
Director of the Company since 1987, to the executive management team as
president and added Mr. Young Sohn, president of Quantum Corporation's
Enterprise and Personal Storage Group, to its Board of Directors. The form
8-K also reported that its Board of Directors approved a stock repurchase
plan.
38
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OAK TECHNOLOGY, INC.
(Registrant)
Date: May 14, 1998 /S/ SIDNEY S. FAULKNER
-----------------------------
Sidney S. Faulkner
Vice President, Finance
Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
39
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------ -------------
<S> <C>
10.26 Amendment to Option Agreement by and between Taiwan
Semiconductor Manufacturing Co., Ltd, and the Company.**
10.27 Settlement Agreement between Winbond Electronics Corporation
and the Company. **
11.01 Statement regarding computation of net income per share
27.01 Financial Data Schedule
</TABLE>
-------------------
** Confidential treatment requested as to portions of the exhibit
40
<PAGE>
EXHIBIT 10.26
FIRST AMENDMENT TO THE OPTION AGREEMENT
THIS FIRST AMENDMENT TO THE OPTION AGREEMENT (the "Amendment") is made
and becomes effective as of March 1, 1998 (the "Effective Date") by and
between Taiwan Semiconductor Manufacturing Co., Ltd., and company duly
incorporated under the laws of the Republic of China ("ROC"), having its
principal place of business at No. 121, Park Avenue 3, Science Based
Industrial Park, Hsin-Chu, Taiwan, ROC ("TSMC"), and Oak Technology, Inc., a
company duly incorporated under the laws of ROC, having its principal place
of business at Rm. B, No. 370, Sec. 1, Fu-Hsing S. Rd. Taipei, Taiwan ("Oak").
In consideration of mutual covenants and conditions, the parties, hereto
agree to amend the Option Agreement entered into on August 8, 1996 (the
"Option Agreement") as follows:
1. Capitalized terms not defined herein shall have the same meanings given
them in the Option Agreement.
2. Owing to the fact that the actual number of wafers purchased by OAK in
1996 exceeded the 1996 Customer Committed Capacity by [ * ] wafers, the
parties agree to apply such exceeding number of wafers to the 1997 Base
Capacity thereby reducing the 1997 Base Capacity from [ * ] wafers to
[ * ] wafers, and the 1997 Customer Committed Capacity from [ * ] wafers
to [ * ] wafers. The parties further agree that the 1997 TSMC Committed
Capacity shall remain at [ * ] wafers.
3. In the event that OAK's purchase of wafers exceeds the TSMC Committed
Capacity of year(s) 1997 and/or 1998, the parties agree that the exceeding
number of wafers would be applied first to the Base Capacity and then to
the Option Capacity of the following calendar year, and the Base Capacity,
Option Capacity and Customer Committed Capacity of the following calendar
year will therefore be reduced as appropriate by the excess amount.
However, the TSMC Committed Capacity would not be affected by the
occurrence of the above-stated conditions.
4. Subject to the foregoing amendments, the Option Agreement shall continue
in full force and effect.
IN WITNESS WHEREOF, the parties have executed this First Amendment to the
Option Agreement as of the date first stated above.
Taiwan Semiconductor Oak Technology, Inc.
Manufacturing Co., Ltd.
By: /s/ C.C. Tsai By: /s/ Sidney S. Faulkner
---------------------------- ----------------------------
Name: C.C. Tsai Name: Sidney S. Faulkner
Title: Senior Director Title: Vice President
Asia Marketing & Technical Service & Chief Financial Officer
* CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR
REDACTED PORTIONS WHICH HAVE BEEN FILED SEPARATELY
WITH THE COMMISSION.
<PAGE>
EXHIBIT 10.27
SETTLEMENT AGREEMENT
WINBOND ELECTRONICS CORPORATION (hereinafter "Winbond") and OAK
TECHNOLOGY, INC. (hereinafter "Oak") hereby agree to settlement of ITC
Investigation No. 337-TA-401 on the following terms and conditions:
1. DEFINITIONS.
a. The "Effective Date" of the settlement is March 16, 1998.
b. The "Licensed Patents" are Oak's U.S. Patent No. 5,535,327 and U.S.
Patent No. 5,581,715, and any continuation, division, continuation-in-part,
reissue, reexamination, renewal and extension thereof, including U.S. and
foreign counterparts.
c. The "Licensed Products" are [ *
] It is agreed that the Winbond 88111F, 88111AF, 88112F, 88113F, 88113AF,
88222, and 88223 chips are Licensed Products that are, were or will be
individually sold by or for Winbond. It is also agreed that all other Winbond
controllers implementing substantially the same structures and/or methods
insofar as the claims of the Licensed Patents are concerned, are also Licensed
Products.
d. As used in this Agreement [ *
]
e. As used in this Agreement [ *
]
2. RIGHTS UNDER THE LICENSED PATENTS.
a. Winbond has the right [ *
]
3. RIGHTS UNDER WINBOND PATENTS. [ *
]
4. DISMISSAL OF ITC ACTION. Based on this Settlement Agreement, Oak and
Winbond agree to jointly seek termination and dismissal of Investigation
No. 337-TA-401 as to all parties.
* CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR
REDACTED PORTIONS WHICH HAVE BEEN FILED SEPARATELY
WITH THE COMMISSION.
<PAGE>
5. CONFIDENTIALITY. Terms of this settlement shall be kept
confidential, except as required by law or statute or as otherwise agreed to by
the parties.
[ *
]
9. MODIFICATION. This Agreement shall not be modified, except by a writing
duly executed by both parties.
10. The parties agree that, except as required by law, public comment will be
limited to the following:
Oak and Winbond have resolved their dispute regarding CD-
ROM controller chips. As part of the resolution, Winbond has
obtained a license under the Oak patents.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized officers.
OAK TECHNOLOGY, INC.
Date: March 17, 1998 By: /s/ SHAWN M. SODERBERG
-------------------------------
Title: GENERAL COUNSEL
----------------------------
Date: March 18, 1998 By: /s/ ARCHIE YEH
-------------------------------
Title: VP WINBOND ELECTRONICS CORP.
----------------------------
* CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR
REDACTED PORTIONS WHICH HAVE BEEN FILED SEPARATELY
WITH THE COMMISSION.
Page 2 of 2
<PAGE>
EXHIBIT 11.01
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------- ---------------------------
1998 1997 1998 1997
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net income (loss)............................................. $ (3,004) $ 9,540 $ 10,791 $ 21,075
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Weighted average shares used in computing basic
net income (loss) per share.................................. 42,000 40,532 41,809 40,469
------------ ----------- ------------ -----------
Weighted average number of dilutive common
equivalent shares used in computing diluted net
income (loss) per share:
Options.................................................... - 2,108 756 2,005
Warrants................................................... - 161 79 156
------------ ----------- ------------ -----------
Weighted average shares used in computing
diluted net income (loss) per share.......................... 42,000 42,801 42,644 42,630
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Net income (loss) per share:
Basic...................................................... $ (0.07) $ 0.24 $ 0.26 $ 0.52
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Diluted.................................................... $ (0.07) $ 0.22 $ 0.25 $ 0.49
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
</TABLE>
<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 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE YEAR TO DATE AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000824225
<NAME> OAK TECHNOLOGY, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 71,508
<SECURITIES> 57,754
<RECEIVABLES> 21,271
<ALLOWANCES> 647
<INVENTORY> 9,137
<CURRENT-ASSETS> 181,179
<PP&E> 40,383
<DEPRECIATION> 16,041
<TOTAL-ASSETS> 277,879
<CURRENT-LIABILITIES> 22,857
<BONDS> 0
0
0
<COMMON> 42
<OTHER-SE> 250,577
<TOTAL-LIABILITY-AND-EQUITY> 277,879
<SALES> 35,550
<TOTAL-REVENUES> 35,550
<CGS> 21,145
<TOTAL-COSTS> 21,145
<OTHER-EXPENSES> 22,983
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 68
<INCOME-PRETAX> (6,236)
<INCOME-TAX> (3,232)
<INCOME-CONTINUING> (3,004)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,004)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)
</TABLE>
