<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 September 30, 1998, there were outstanding 40,656,495 shares of the
Registrant's Common Stock, par value $0.001 per share.
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
INDEX
<TABLE>
PART I - FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1998
(unaudited) and June 30, 1998............................................3
Condensed Consolidated Statements of Operations (unaudited) for the
Three Months ended September 30, 1998 and 1997...........................4
Condensed Consolidated Statements of Cash Flows (unaudited) for the
Three Months Ended September 30, 1998 and 1997...........................5
Notes to Condensed Consolidated Financial Statements (unaudited)............6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...........................11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...........................................................25
Item 6. Exhibits and Reports on Form 8-K............................................28
SIGNATURES...........................................................................32
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
(Unaudited)
SEPTEMBER 30, JUNE 30,
1998 1998
------------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 50,998 $ 59,803
Short-term investments 54,343 57,422
Accounts receivable, net of allowance for doubtful
accounts of $812 and $809, respectively 13,616 17,605
Inventories 3,714 7,558
Current portion of foundry deposits 10,771 2,944
Prepaid expenses and other current assets 11,063 16,323
--------- ---------
Total current assets 144,505 161,655
Property and equipment, net 26,468 25,114
Foundry deposits 9,871 18,231
Investment in foundry venture 51,216 51,216
Purchased technology 10,345 1,567
Other assets 4,050 3,628
--------- ---------
Total assets $ 246,455 $ 261,411
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 3,360 $ 2,625
Accounts payable 4,656 6,236
Other accrued liabilities 10,328 8,480
--------- ---------
Total current liabilities 18,344 17,341
Deferred income taxes 2,607 2,607
Other long-term liabilities 185 255
--------- ---------
Total liabilities 21,136 20,203
--------- ---------
Stockholders' equity:
Preferred stock, $0.001 par value; 2,000,000
shares authorized none issued and outstanding
as of September 30, 1998 and June 30, 1998 -- --
Common Stock, $0.001 par value; 60,000,000
shares authorized; 40,656,495 and 41,147,969
shares issued and outstanding of September 30,
1998 and June 30, 1998, respectively 41 42
Additional paid-in capital 154,755 156,464
Retained earnings 70,523 84,702
--------- ---------
Total stockholders' equity 225,319 241,208
--------- ---------
Total liabilities and stockholders' equity $ 246,455 $ 261,411
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1998 1997
---------- ---------
<S> <C> <C>
Net revenues $ 19,967 $ 43,293
Cost of revenues 10,466 20,755
---------- ---------
Gross profit 9,501 22,538
Research and development expenses 13,134 10,831
Selling, general, and administrative expenses 8,394 6,311
Acquired in-process technology 7,161 --
---------- ---------
Operating income (loss) (19,188) 5,396
Nonoperating income 1,952 4,131
---------- ---------
Income (loss) before income taxes (17,236) 9,527
Income taxes (3,057) 3,334
---------- ---------
Net income (loss) $ (14,179) $ 6,193
---------- ---------
---------- ---------
Net income (loss) per share
Basic $ (0.35) $0.15
---------- ---------
---------- ---------
Diluted $ (0.35) $0.15
---------- ---------
---------- ---------
Shares used in a computing net income (loss) per share
Basic 40,928 41,321
---------- ---------
---------- ---------
Diluted 40,928 42,569
---------- ---------
---------- ---------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(14,179) $ 6,193
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,827 1,577
Inventory related adjustments -- 1,077
Acquired in-process technology 7,161 --
Deferred income taxes (114) (2,193)
Foundry deposits utilized 533 --
Changes in operating assets and liabilities:
Accounts receivable 3,989 (2,130)
Inventories 3,844 725
Prepaid expenses and other current assets 5,374 (429)
Accounts payable and accrued expenses (1,892) 141
-------- --------
Net cash provided by operating activities 7,543 4,961
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (11,102) (21,401)
Proceeds from matured short-term investments 14,181 23,712
Additions to property and equipment, net (3,056) (4,131)
Acquisition of ViewPoint, Inc., net of cash acquired (9,467) --
Acquisition of XLI Incorporated common stock (3,675) --
Payment of certain XLI Incorporated liabilities at
acquisition date (2,094) --
Other assets (90) --
-------- --------
Net cash used in investing activities (15,303) (1,820)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of debt 735 1,551
Repayment of debt (70) (2,292)
Issuances of common stock 388 1,431
Treasury stock acquisitions (2,098) --
-------- --------
Net cash used in financing activities (1,045) 690
-------- --------
Net increase (decrease) in cash and cash equivalents (8,805) 3,831
Cash and cash equivalents, beginning of period 59,803 87,609
-------- --------
Cash and cash equivalents, end of period $ 50,998 $ 91,440
-------- --------
-------- --------
Supplemental information:
Cash paid (refunded) during the period:
-------- --------
Interest $ 14 $ 90
-------- --------
-------- --------
Income taxes $ (8,033) $ 2,322
-------- --------
-------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PREPARATION/ACCOUNTING POLICIES/RECENT ACCOUNTING PRONOUNCEMENTS
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, 1998, included in the Oak Technology, Inc. (the
"Company") 1998 Annual Report on Form 10-K filed with the Commission.
ACCOUNTING POLICIES. There have been no changes in accounting policies
used by the Company during the quarter ended September 30, 1998, except as
discussed below:
Effective July 1, 1998, the Company adopted the provisions of the
Financial Accounting Standards Boards's (FASB) Statement of Financial
Accounting Standards (SFAS) No. 130, REPORTING OF COMPREHENSIVE INCOME. SFAS
No. 130 established standards for the display of comprehensive income and its
components in a full set of financial statements. Comprehensive income
includes all changes in equity during a period except those resulting from
the issuance of shares of stock and distributions to shareholders. There
were no differences between net income (loss) and comprehensive income (loss)
during the quarters ended September 30, 1998 and 1997.
RECENT ACCOUNTING PRONOUNCEMENTS. In June, 1997, the FASB issued SFAS
No 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION.
SFAS No. 131 establishes standards for the way public business enterprises
report information about operating segments in annual financial statements
and requires those enterprises to report selected information about operating
segments in interim financial reports issued to stockholders. SFAS No. 131
is effective for financial statements for periods beginning after December
31, 1997. The Company does not anticipate it will change its reporting
methodology as a result of this pronouncement.
The FASB recently issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 addresses the accounting
for derivative instruments, including certain derivative instruments embedded
in other contracts. Under SFAS No. 133, entities are required to carry all
derivative instruments in the balance sheet at fair value. The accounting
for changes in fair value (i.e. gains or losses) of a derivative instrument
depends on whether it has been designated and qualifies as part of a hedging
relationship and, if so, the reason for holding it. The Company must adopt
SFAS No. 133 by July 1, 1999. The Company does not anticipate that SFAS No.
133 will have a material impact on its financial statements.
2. INVENTORIES
Inventories are stated at the lower of cost (first in, first out) or
market and consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
------------- ---------
<S> <C> <C>
Purchased parts and work in process....... $ 607 $5,612
Finished goods............................ 3,107 1,946
------ ------
$3,714 $7,558
------ ------
------ ------
</TABLE>
6
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
3. FOUNDRY DEPOSITS
In June and November 1995, the Company entered into agreements with TSMC
and Chartered to obtain certain additional wafer capacity through the year
2001 (subsequently amended to 1999). 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.
As of September 30, 1998, the Company has $16.7 million of deposits with
TSMC which under the agreement (as previously amended) must be utilized
against calendar year 1999 wafer purchases. The Company has already utilized
the maximum amount of prepayments allowed by the agreement against calendar
year 1997 and 1998 wafer purchases. Should the Company not purchase
sufficient wafers from TSMC during calendar 1999 (the final year of the
amended agreement) to utilize the entire amount of the remaining prepayment,
the unused portion of the prepayment will be forfeited.
As of September 30, 1998, the Company has $3.5 million of deposits with
Chartered, under a previously amended agreement which also expires December
31, 1999. The previous 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 TSMC and
Chartered foundry agreements, as amended, will be met; that the remaining
deposits will be utilized; and that the $36 million of commitments to
Chartered will not be reinstated. However, no assurance can be given in this
regard, since full utilization of the remaining deposit is based on the
assumption that wafer purchasing volumes will increase from current levels,
in part due to new product introductions.
4. INVESTMENT IN FOUNDRY VENTURE
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.
On October 3, 1997, a fire damaged the UICC facility. UICC management
has publicly stated that a majority of the equipment and inventory and a
significant portion of the building were completely destroyed at an estimated
loss of approximately $324 million. UICC management has also stated that is
has reached a $300 million insurance settlement for claims stemming from the
fire and that in accordance with the coinsurance clause, UICC had to pay
approximately $23.5 million of damages. Despite the damages payment, UICC
management has represented that UICC's financial status has remained
unaffected given significant realized investment gains made during 1998.
UICC has further stated that it expects to complete reinforcement of the
building structure before the end of 1998, to install fab equipment by May
1999, and to be in production by the last quarter of calendar 1999, using
primarily .18 micron process technology. Given the fire, the Company has
evaluated its investment 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 the disposition of
the investment are in excess of the carrying amount of the investment, no
impairment loss has been recognized as of September 30, 1998
7
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
5. NET INCOME (LOSS) PER SHARE/STOCKHOLDER'S EQUITY
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 during the
period in accordance with Statement of Financial Accounting Standards #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
SEPTEMBER 30,
------------------
1998 1997
---- ----
<S> <C> <C>
Net income (loss)............................. $(14,179) $ 6,193
--------- -------
--------- -------
Weighted average shares used in computing
basic net income (loss) per share........... 40,928 41,321
Dilutive stock options and other common stock
equivalents................................. - 1,248
--------- -------
Dilutive potential common shares.............. 40,928 42,569
--------- -------
Earnings (Loss) Per Share:
Basic....................................... $ (0.35) $ 0.15
--------- -------
--------- -------
Diluted..................................... $ (0.35) $ 0.15
--------- -------
--------- -------
</TABLE>
Approximately 119,000 of stock options were excluded from the computation for
the three months ended September 30, 1998 since they were antidilutive during
the loss period. During the three months ended September 30, 1998, the
Company repurchased 658,000 shares of its common stock for approximately $2.1
million, pursuant to a plan authorized in fiscal year 1998 by its board of
directors to purchase up to two million shares. Since the plan was
authorized, the Company has repurchased approximately 1.8 million shares.
6. ACQUISITIONS
On July 2, 1998, the Company acquired ViewPoint Technology, Inc.
(ViewPoint), a privately held company that was developing solutions for the
CD-RW drive market. ViewPoint had developed a controller that supports high
encoding speeds for CD-RW drives and this component is expected to complement
the Company's expertise in the block decoder area and be utilized in the
Company's next generation CD-RW drives. The Company paid $10,130,000 for all
the outstanding shares of ViewPoint. The transaction was accounted for under
the purchase method of accounting, and ViewPoint's development programs were
integrated into the Company's overall development programs from the date of
acquisition. Of the $10,130,000 purchase price, $0.9 million was allocated
to cash, fixed assets, and other tangible assets; $4.4 million was allocated
to purchased technology and other intangible assets; and $4.8 million was
allocated to in-process research and development programs and, accordingly,
was charged to operations in the quarter ended September 30, 1998.
On August 11, 1998 the Company acquired Xerographic Laser Images
Corporation (XLI), a provider of print quality enhancement technology for the
digital office equipment market. XLI will operate as a division of the
Company's wholly owned subsidiary, Pixel Magic, and will serve to leverage
Pixel's position in the digital office equipment market by broadening its
expertise in resolution enhancement technology. The Company paid $3,675,000
to the XLI shareholders on the effective date of the merger, and at that
date, the shareholders had the right to receive additional payments of up to
$11,365,000 subject to the achievement of certain milestones by XLI over a
three-year period ending December 31, 2000. Pursuant to a post-closing audit
and related post-closing adjustment set forth in the merger agreement, it was
determined that XLI had a net deficit (for purposes of calculating the
post-closing contingent cash adjustment as defined in the acquisition
agreement) of $1,937,673 at the acquisition date which resulted in a
contingent cash adjustment of $1,112,673, thereby reducing the contingent
payment amount to $10,252,327. The transaction was also accounted for under
the
8
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
6. ACQUISITIONS (CONTINUED)
purchase method of accounting, and XLI's operations have been included in the
Company's consolidated financial statements from the date of acquisition.
The cash purchase price for XLI was allocated as follows (in thousands):
<TABLE>
<S> <C>
Net liabilities assumed $ (3,090)
In-process research and development 2,376
Purchased technology and other intangible assets 4,389
----------
$ 3,675
----------
----------
</TABLE>
The purchased technology and other intangible assets acquired from
ViewPoint and XLI will be amortized over three years. The amounts of the
purchase price assigned to the fair market values of in-process research and
development and purchased technology represent Company management's best
estimate. The Company will continue to review these estimates during the
remainder of the current fiscal year, as provided by Accounting Principles
Board Opinion No. 16, to ensure the Company's allocation complies with
appropriate financial reporting practices.
7. 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 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 and securities analysts. On July 16, 1998,
the state court provisionally certified a national class of all persons who
purchased the Company's stock during the class period. The class was
provisionally certified with the order held in abeyance pending resolution of
the question of whether a nationwide class may bring a California
Corporations Code Section 25400/25500 claim, which will be resolved in the
DIAMOND MULTIMEDIA SECURITIES LITIGATION appeal by the California Supreme
Court.
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.
9
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. CONTINGENCIES (CONTINUED)
Additionally, various of the Company's current and former officers and
Directors are defendants in three consolidated derivative actions pending in
Santa Clara County Superior Court in Santa Clara, California, entitled IN
RE OAK TECHNOLOGY DERIVATIVE ACTION. This lawsuit, which asserts a claim for
breach of fiduciary duty and a claim under California securities law based
upon the officers' and Directors' trading in securities of the Company, has
been stayed pending resolution of the class actions.
In all of the putative state and federal class actions, the plaintiffs
are seeking monetary damages and equitable relief. In the derivative action,
the plaintiffs are also seeking an accounting for the defendants' sales of
Company stock and the payment of monetary damages to the Company.
All of these actions are in the early stages of proceedings and the
Company is currently investigating the allegations. Based on its current
information, the Company believes the suits to be without merit and will
defend its position vigorously. Although it is reasonably possible the
Company may incur a loss upon conclusion of these claims, an estimate of any
loss or range of loss cannot be made. No provision for any liability that
may result upon adjudication has been made in the Company's Consolidated
Financial Statements. In connection with these legal proceedings, the Company
expects to incur legal and other expenses.
In September, 1998 the Company and certain of its current Directors
became parties to a putative class action lawsuit pending in the Court of
Chancery in the State of Delaware, entitled MANNING V. OAK TECHNOLOGY, ET
AL., Civil Action No. 16656NC. This action alleges violations of the
Delaware General Corporation Law and breaches of fiduciary duty and is
brought on behalf of all owners of Oak Technology common stock at any time
between August 19, 1997 and the date of class certification. Plaintiffs'
claims are based upon the Board of Directors' adoption on or about August 19,
1997 of a Stockholder Rights Plan that included a provision that limited the
redemption or modification of the Plan to its Continuing Directors or their
designated successors. Plaintiffs allege that the Stockholder Rights Plan
disenfranchises public stockholders by forcing them to vote for incumbent
directors who enjoy full voting rights; that it restricts the ability of
future directors to exercise their full statutory prerogatives; and that the
particular provision at issue is an unreasonable and disproportionate
response to any threatened takeover. Plaintiffs are seeking an injunction and
a declaratory judgment that the Stockholder Rights Plan is invalid and
unenforceable and monetary damages for the alleged violations of fiduciary
duty.
This action is in the earliest stage of the proceeding. The Company
believes the claims to be without merit and will defend its position
vigorously. No provision for any liability that may result upon adjudication
has been made in the Company's Consolidated Financial Statements.
In connection with these legal proceedings, the Company expects to
incur legal and other expenses.
The Company is party to various other legal proceedings, including a
number of patent-related matters. In the opinion of management, including
internal counsel, these proceedings will not have a material adverse effect
on the Company's consolidated financial position or overall results of
operations. In connection with these matters, however, the Company has
incurred, and expects to continue to incur, substantial legal and other
expenses.
The estimate of potential impact on the Company's consolidated financial
position or overall results of operations for all of the aforementioned legal
proceedings could change in the future.
10
<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
A FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES ACT OF
1934, AS AMENDED. SUCH STATEMENTS INCLUDE DECLARATIONS REGARDING THE INTENT,
BELIEF OR CURRENT EXPECTATIONS OF THE COMPANY AND ITS MANAGEMENT. PROSPECTIVE
INVESTORS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT
GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE A NUMBER OF RISKS AND
UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE INDICATED
BY SUCH FORWARD-LOOKING STATEMENTS. AMONG THE IMPORTANT FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH
FORWARD-LOOKING STATEMENTS ARE: (i) THAT THE INFORMATION IS OF A PRELIMINARY
NATURE AND MAY BE SUBJECT TO FURTHER ADJUSTMENT, (ii) VARIABILITY IN THE
COMPANY'S QUARTERLY OPERATING RESULTS, (iii) GENERAL CONDITIONS IN THE
SEMICONDUCTOR INDUSTRY, (iv) RISKS RELATED TO PENDING LEGAL PROCEEDINGS, (v)
DEVELOPMENT BY COMPETITORS OF NEW OR SUPERIOR PRODUCTS OR THE ENTRY OF NEW
COMPETITORS INTO THE COMPANY'S MARKETS, (vi) THE COMPANY'S ABILITY TO
DIVERSIFY ITS PRODUCT AND MARKET BASE BY DEVELOPING AND INTRODUCING NEW
PRODUCTS WITHIN DESIGNATED MARKET WINDOWS AT COMPETITIVE PRICE AND
PERFORMANCE LEVELS, (vii) WILLINGNESS OF PROSPECTIVE CUSTOMERS TO DESIGN THE
COMPANY'S PRODUCTS INTO THEIR PRODUCTS, (viii) AVAILABILITY OF ADEQUATE
FOUNDRY CAPACITY AND ACCESS TO PROCESS TECHNOLOGIES, (ix) THE COMPANY'S
ABILITY TO PROTECT ITS PROPRIETARY INFORMATION AND OBTAIN ADEQUATE LICENSES
OF THIRD PARTY TECHNOLOGY ON ACCEPTABLE TERMS, (x) RISKS RELATED TO USE OF
INDEPENDENT MANUFACTURERS AND THIRD PARTY ASSEMBLY AND TEST VENDORS, (xi)
DEPENDENCE ON KEY PERSONNEL, (xii) RELIANCE ON A LIMITED NUMBER OF LARGE
CUSTOMERS, (xiii) DEPENDENCE ON SALES OF CD-ROM CONTROLLER PRODUCTS, (xiv)
RISKS RELATED TO INTERNATIONAL BUSINESS OPERATIONS, (xv) ABILITY OF THE
COMPANY TO MAINTAIN ADEQUATE PRICE LEVELS AND MARGINS WITH RESPECT TO ITS
PRODUCTS, (xvi) MANAGEMENT OF CHANGING OPERATIONS RELATED TO THE COMPANY'S
ATTEMPT TO DIVERSIFY ITS PRODUCT AND MARKET BASE, (xvii) CURRENT DEPENDENCE
ON SALES TO THE ASIAN MARKETS, (xviii) THE ABILITY TO ATTRACT AND RETAIN
QUALIFIED MANAGEMENT AND TECHNICAL PERSONNEL AND (xix) OTHER RISKS IDENTIFIED
FROM TIME TO TIME IN THE COMPANY'S REPORTS AND REGISTRATION STATEMENTS FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING THE ANNUAL REPORT ON
FORM 10-K FOR THE YEAR ENDED JUNE 30, 1998.
GENERAL
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 consist primarily of
integrated circuits and supporting software and firmware to provide a
complete solution for customers.
The Company contracts with independent foundries to manufacture all of
its products, enabling the Company to focus on its design strengths, minimize
fixed costs and capital expenditures and gain access to advanced
manufacturing facilities. Except pursuant to its agreements with TSMC and
Chartered, the Company's foundries generally are not obligated to supply
products to the Company for any specific period, in any specific quantity or
at a specific price.
During the third quarter of fiscal 1998, the Company restructured its
operations along three market-focused groups: Optical Storage Group,
Consumer Group, and the Digital Office Equipment Group (Pixel Magic), at the
same time discontinuing its product development and marketing efforts in its
PC audio and 3D graphics businesses. Since then, the Company has completed
three acquisitions (ODEUM Microsystems, Viewpoint Technology, Inc., and
Xerographic Laser Images Corporation), and made a joint venture investment
(Omni Peripherals Pte, Ltd.), all aimed at expanding the potential product
offerings for these three target markets. The ViewPoint and XLI acquisitions
were completed during the first quarter of fiscal year 1999 ended September
30, 1998, and are discussed further in the notes to the condensed
consolidated financial statements.
11
<PAGE>
As repositioned, the Company provides high-performance, integrated
semiconductors to original equipment manufacturers (OEMs) worldwide who serve
the optical storage, consumer electronics and digital office equipment
markets. The Company's products, consisting primarily of integrated circuits
and supporting software and firmware, enable its OEM customers to deliver
cost-effective, powerful systems to the end-user for storage, home
entertainment and imaging applications. One of the world's leading merchant
suppliers of controllers for CD-ROM and CD-R/W drives, the Company's planned
product offerings for its three target market segments have expanded to
include, in addition to optical storage controllers, MPEG-2 audio/video
decoders for VideoCD (VCD) and DVD players; integrated circuits for digital
broadcast systems such as cable, satellite and terrestrial set-top boxes; and
multitasking imaging and compression processors for digital office equipment.
The Company's mission is to continue to seek opportunities for value-added
silicon in these emerging market segments where it can leverage its core
competencies to offer powerful, cost-effective and complete solutions to its
OEM partners.
In its press release regarding the results of operations for the first
quarter of fiscal year 1999, the Company also announced that it expects to
record a net loss for the second quarter of fiscal year 1999 as the Company
transitions to its next generation products for the optical storage and
digital video disk markets and its first generation products for the digital
broadcast market. For fiscal year 1999, the Company expects that a majority
of its revenue will continue to be generated by its CD-ROM controller product
line as the Company works through its product transitions. The CD-ROM
controller market is a mature market in which the Company is experiencing
severe pricing and competitive pressures. (See Results of Operations)
RESULTS OF OPERATIONS
NET REVENUES. The Company's net revenues in the comparison periods were
primarily derived from sales of its CD-ROM controller products which
comprised 70% and 86% of the Company's net revenues in the three months ended
September 30, 1998 and 1997 respectively. Net revenues decreased 54% to
$19.9 million in the three months ended September 30, 1998 from $43.3 million
in the comparable period of fiscal 1998. Approximately two-thirds of the
revenue decrease was attributable to a decrease in unit sales of CD-ROM
controllers from the comparable period of fiscal 1998, with the remainder of
the decrease due to a decline in the average selling price ("ASP") of the
CD-ROM controllers. The decrease in unit sales is primarily the result of a
loss of market share in Taiwan, the maturation of the CD-ROM market, and
development delays in the Company's next-generation CD-ROM product, and to a
lesser extent, economic downturns in the Asian markets to which a large
majority of the Company's products are sold. In the three months ended
September 30, 1998 and 1997, sales to the Company's top ten customers
accounted for approximately 79% and 82%, respectively, of the Company's net
revenues. International sales, principally to Taiwan, Japan, Korea,
Singapore, and Belgium accounted for approximately 87% and 96% of the
Company's net revenues in each of the three months ended September 30, 1998
and 1997, respectively.
The Company anticipates that existing CD-ROM controller product sales
will continue to decline during the remainder of the current fiscal year.
While the Company also anticipates that revenue from newer products,
including MPEG-2 decoders, compression codecs, imaging DSPs and
next-generation CD-RW applications will increase, on an overall basis,
revenues for at least the forseeable future will continue to be significantly
less than the comparable periods of the previous fiscal year, and will show
little, if any, sequential growth. See "Factors That May Affect Future
Results" below.
GROSS MARGIN. Cost of revenues includes the cost of wafer fabrication,
assembly and testing performed by third-party vendors and direct and indirect
costs associated with the procurement, scheduling and quality assurance
functions performed by the Company. The Company's gross margin decreased to
47.6% in the three month period ended September 30, 1998 as compared to 52.1%
during the comparable period in the prior year. The decrease in gross margin
is primarily the result of a decrease in ASPs for the Company's CD-ROM
controller products which was only partially offset by a decrease in the
Company's unit cost for the same products. The Company's overall gross
margin is subject to change due to various factors, including, among others,
competitive product pricing, yields, wafer costs, assembly and test costs and
product mix. The Company expects that ASPs for its existing products will
continue to decline over time and that ASPs for each new product will decline
significantly over the life of the product. The Company continues to
experience severe price pressure on its CD-ROM controller and Video CD
products and expects such price erosion to continue. The Company does not
believe it can achieve cost reductions or sales of new products with higher
gross margins which fully offset the expected price declines of its
12
<PAGE>
CD-ROM and VideoCD 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 market and the
digital video disk player portion of the 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 20% to
$13.1 million in the three months ended September 30, 1998 from $10.8 million
in the comparable period in the prior year. This increase was principally
the result of the hiring of additional technical personnel and associated
expenses. Research and development expenses increased significantly as a
percentage of net revenues to 66% during the three months ended September 30,
1998 from 25.0% in the comparable period in the prior year due primarily to
the significant decrease in the Company's net revenues in the current period
compared to the comparable period of fiscal 1998. The Company will continue
to invest substantial resources in research and development in an effort to
complete the development of its new products in the Company's target
markets: optical storage, consumer electronics and digital office equipment.
The Company does expect, however, to hold research and development expenses
in the remaining fiscal quarters of 1999 flat or slightly less than expenses
incurred in the first quarter of fiscal 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative (S,G&A) expenses increased 33% to $8.4 million in the three
months ended September 30, 1998 from $6.3 million in the comparable period in
the prior year. This increase was principally the result of the hiring of
additional management and administrative personnel since the year-ago quarter
and associated expenses, as well as increased legal expenses related
primarily to the complaints the Company filed with the ITC on July 21, 1997
and April 7, 1998 (ITC Complaints) and additional litigation related to a
settlement agreement entered into with one of the parties in the July 21 ITC
Complaint. See "Legal Proceedings". S,G&A expenses increased significantly
as a percentage of net revenues to 42.0% in the three months ended September
30, 1998 from 14.6% during the comparable period in fiscal 1997, due
primarily to a significant decrease in the Company's net revenues in the
comparison periods. The Company expects to continue to incur higher S,G&A
expenses as a percentage of net revenues during the remainder of fiscal 1999
as compared to comparable year-ago periods, however, the Company expects to
be able to keep absolute dollar S,G&A expenses in the remaining quarters of
fiscal 1999 flat or slightly less than expenses incurred in the first quarter.
ACQUIRED IN-PROCESS TECHNOLOGY. During the first quarter of fiscal
1999, the Company acquired ViewPoint and XLI (see note 6 to the condensed
consolidated financial statements). Of the combined purchase prices of the
two companies, $7.2 million was allocated to in-process research and
development (IPR&D) and was charged to operations ($4.8 million related to
ViewPoint, $2.4 million related to XLI). Substantially all of the remainder
of the purchase prices of the two companies (aside from allocations to
tangible assets totaling $0.9 million) has been allocated to purchased
technology and other intangible assets (totaling $8.8 million) recorded on
the Company's balance sheet, and will be amortized to operations on a
straight-line basis over three years.
NONOPERATING INCOME. During the first quarter of fiscal 1999,
nonoperating income decreased to $2.0 million from $4.1 million during first
quarter of fiscal 1998. In the year-ago quarter, the Company recorded as
nonoperating income approximately $2.6 million it received 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").
Interest income (net of expense) was lower in the first quarter of fiscal
1999 than in the prior quarter due to a reduced invested cash balance and
lower interest rates, however this was partially offset by translation gains
recorded in the first quarter of 1999 (related primarily to the strengthening
of the Japanese Yen). The Company recorded translation losses in the first
quarter of 1998 when the Yen was weakening.
INCOME TAXES. The overall effective tax benefit rate for the three
months ended September 30, 1998 is 17.8%. No tax benefit has been assigned
to the write-off of IPR&D, since it is not deductible for tax purposes.
Excluding the impact of the IPR&D, the tax benefit recorded is 30.3% of the
pre-tax loss, and is less than the statutory income tax rates due to
limitations on loss carryback benefits available to the Company. The Company
recorded a 35% effective tax rate in the first quarter of fiscal 1998; the
effective tax rate for fiscal 1998 as a whole was subsequently reduced to 15%
as a result of lower taxable income and substantial R&D credits earned by
the Company, offset by a partial valuation allowance.
13
<PAGE>
FACTORS THAT MAY AFFECT FUTURE RESULTS
The following factors should be carefully considered in evaluating the
Company and its business.
QUARTERLY FLUCTUATIONS. The Company's quarterly revenue and operating
results have varied significantly in the past, and are likely to vary
substantially from quarter to quarter in the future. The Company's operating
results are affected by a wide variety of factors, many of which are outside
the Company's control, including but not limited to, 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
specific 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, 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. 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 semiconductor industry has historically been characterized by rapid
technological change, cyclical market patterns, significant price erosion,
periods of over-capacity and production shortages, variations in
manufacturing costs and yields and significant expenditures for capital
equipment and product development. In addition, the industry has experienced
significant economic downturns at various times, characterized by diminished
product demand and accelerated erosion of product prices. The Company may
experience substantial period-to-period fluctuations in operating results due
to general semiconductor industry conditions. The downturns in the industry
often occur in connection with, or in anticipation of, maturing product
cycles (of both the semiconductor companies and their customers) and
declines in general economic conditions. These downturns have been
characterized by abrupt fluctuations in product demand, production
overcapacity and subsequent accelerated erosion of average selling prices,
and in some cases, have lasted for more than a year. The Company may
experience substantial period-to-period fluctuations in future operating
results due to general industry conditions or events occurring in the general
economy and the Company's operating results and financial condition could be
materially and adversely impacted by a significant industry-wide downturn.
Even if customers' aggregate demand were not to decline, the availability of
additional capacity can adversely impact pricing levels, which can also
depress revenue levels. Also, during such periods, customers benefiting from
shorter lead times may delay some purchase into future periods. There can be
no assurance the Company will not experience such downturns in the future,
which could have a material impact on the Company's operating results and
financial condition.
In addition, the Company currently places noncancelable orders to
purchase its products from independent foundries on an approximately three
month rolling basis and is currently committed with two of its foundries for
certain minimum amounts of capacity for the next several fiscal quarters,
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. Due to the
Company's relatively narrow customer base for certain devices and the short
product life cycles of such products, such cancellations can leave the
Company with significant inventory exposure, which could have a material
adverse effect on the Company's operating results. Consequently, if
anticipated sales and shipments in any quarter are rescheduled, canceled, or
do not occur as quickly as expected, expense and inventory levels could be
disproportionately high and the Company's business, financial condition and
results of operations for that quarter or for the year would be materially
adversely affected.
The markets in which the Company competes are intensely competitive
and are characterized by rapid technological change, declining unit ASP's and
rapid product obsolescence. The Company expects competition to increase in
the future from existing competitors and from other companies that may enter
the Company's existing or future markets with solutions that may be less
costly or provide higher performance or additional features. The Company's
existing and potential competitors include many large domestic and
international companies that have
14
<PAGE>
substantially greater financial, manufacturing, technical, marketing,
distribution and other resources, broader product lines and longer standing
relationships with customers than the Company. The Company's competitors
also include a number of emerging companies as well as some of the Company's
own customers and suppliers. The Company is currently attempting to enter
several new markets in which the Company has not previously operated. These
markets are intensely competitive and the Company will have to compete with
large domestic and international companies that have long standing
relationships with the Company's target customers. Certain of the Company's
principal competitors maintain their own semiconductor foundries and may
therefore benefit from certain capacity, cost and technological advantages.
The Company believes that its ability to compete successfully depends on a
number of factors, both within and outside of its control, including the
price, quality and performance of the Company's and its customers' products,
the timing and success of new product introductions by the Company, its
customers and its competitors, the 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 customers 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. The Company's operating results
for the remainder of fiscal year 1999 are likely to be affected by these
factors, as well as others. There can be no assurance that the Company will
be able to compete successfully in the future.
The Company and various of its current and former officers and
Directors are parties to certain legal proceedings. See "Legal Proceedings."
All of these actions are in the early stages of proceedings and the Company
is currently investigating the allegations. Based on its current
information, the Company believes the suits to be without merit and will
defend its position vigorously. No provision for any liability that may
result upon adjudication has been made in the Company's Condensed
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
PRICING ISSUES. 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, especially in the consumer electronics market and the optical
storage market, are characterized by intense price competition. As the
markets for the Company's products mature and competition increases, as has
been the trend for the CD-ROM and digital video disk markets, the Company
anticipates that ASPs on its products will decline. The Company continually
attempts to pursue cost reductions, including process enhancements, in order
to maintain acceptable gross profit margins. Gross profit margins also vary
reflecting the impact of changes in the general condition of the economy,
capacity utilization levels in the semiconductor industry, customer
acceptance of new technologies and products, product functionality and
capabilities, shifts in product mix, manufacturing yields and the effect of
ongoing manufacturing cost reduction activities. 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, fails to reduce
its manufacturing costs, or fails to utilize its prepaid deposits with the
TSMC and Chartered foundries, the result would be a material adverse effect
on the Company's business, financial condition and operating results.
NEW PRODUCT INTRODUCTIONS. 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 its next generation CD-RW
and digital video disk products as well as new products in the digital
broadcast market and its first generation PC DVD product at competitive price
and performance levels. Currently, the Company's financial performance is
dependent upon timely and successful execution of these next generation and
new products. The Company has recently experienced some product development
delays in its optical storage business. 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, consumer
electronics and digital imaging. There can be no assurance that products
currently under development in these core technologies or any other new
products will be successfully developed or will achieve market acceptance,
thereby affecting the Company's ability to achieve diversification of its
products and markets, and thereby revenue diversification. The failure of
the Company to introduce new products successfully or the failure of new
products
15
<PAGE>
to achieve market acceptance would have a material adverse effect on the
Company's business, financial condition and results of operations. The
success of new product introductions is dependent on several factors,
including recognition of market requirements, product cost, timely completion
and introduction of new product designs, improvement of existing technologies
and development and implementation of new process technologies in order to
continue to reduce semiconductor die size, improve device performance and
manufacturing yields, adapt products and processes to technological changes
and adopt emerging industry standards. The Company's success is also
dependent upon securing sufficient foundry capacity for volume manufacturing
of wafers and achievement of acceptable manufacturing yields from the
Company's contract manufacturers. Semiconductor design and process
methodologies are subject to rapid technological change. Decreases in
geometries call for sophisticated design efforts, advanced manufacturing
equipment and cleaner fabrication environments. 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. In particular, the Company has experienced delays in its
products for the optical storage market and the digital office equipment
market. There can be no assurance that the Company will successfully identify
new product opportunities and develop and bring new products to market in a
timely manner, that the Company's products will be selected for design into
the products of its targeted customers or that products or technologies
developed by others will not render the Company's products or technologies
obsolete or noncompetitive. Furthermore, there can be no assurance that the
products of the Company's customers will be successfully introduced into the
market. The failure of the Company's new product development efforts, the
failure of the Company to achieve market acceptance of its new products and
the failure of the products of the Company's customers to achieve market
acceptance would have a material adverse effect on the Company's business,
financial condition and operating results.
NEED FOR ADDITIONAL CAPITAL. The semiconductor industry is capital
intensive. In order to remain competitive, the Company must continue to make
significant investments in new facilities and capital equipment. The Company
spent $3.0 million on capital additions in the first quarter of fiscal 1999
and although it expects to spend lesser amounts in the remaining quarters of
fiscal year 1999, significant amounts of capital additions could be required
in subsequent years. The Company believes that existing liquid resources and
funds generated from operations, if any, combined with its ability to borrow
funds will be adequate to meet its operating and capital requirements and
obligations into the foreseeable future. The Company believes that a
company's level of financial resources is an important factor in its
industry. Accordingly, the Company may from time to time seek additional
equity or debt financing. There can be no assurance that such funds will be
available on terms acceptable to the Company when needed. Any future equity
financing will also lead to dilution to the existing shareholders.
Additionally, in order to obtain an adequate supply of wafers,
especially wafers manufactured using advanced process techniques the Company
has entered into, and will continue to consider various possible
transactions, including various "take or pay" contracts (such as those
described in Foundry Deposits later in this document) that commit the Company
to purchase specified quantities of wafers over extended periods.
Manufacturing arrangements such as these may require substantial capital
investment, which may require the Company to seek additional financing. There
can be no assurance that such additional financing, if required, will be
available when needed or if available, will be on satisfactory terms.
ACQUISITIONS. 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. In addition,
investments in emerging technology present risks of loss of value of one or
more of the investments due to failure of the technology to gain the
predicted market acceptance.
The Company, in order to remain competitive, must also maintain its
ability to manage any 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.
In the fourth quarter of fiscal year 1998, the Company acquired ODEUM
Microsystems, Inc. (ODEUM) and allocated approximately $1.3 million of the
purchase price to in-process research and development (which was expensed)
and approximately $2.2 million to purchased technology and other intangible
assets which are recorded on the Company's balance sheet. In the first
quarter of fiscal year 1999, the Company acquired ViewPoint and allocated
approximately $4.8 million of the purchase price to in-process research and
development and approximately $4.4 million to purchased technology and other
intangible assets. Also in the first quarter of fiscal year 1999, the Company
acquired XLI and allocated approximately $2.4 million of the purchase price
to in-process research and development and approximately $4.4 million to
purchased technology and other intangible assets. For the ViewPoint and XLI
acquisitions, the valuation of the acquired in-process research and
development used by the Company in making its determination as to the amount
of in-process research and development expense was supported by valuation
studies prepared by an independent third-party appraiser. For the ODEUM
acquisition, the acquired in-process research and development valuation was
based on Oak management's best estimate based on its analysis of the progress
of the ODEUM research and development in process at the acquisition date and
the anticipated cash flows to be derived from the resulting products.
In September 1998, a representative of the Securities and Exchange
Commission (the "SEC") provided the American Institute of Certified Public
Accountants with guidance as to the factors to be considered in the valuation
of in-process research and development. Although the Company believes that
the amount of the recorded in-process research and development expense is
reasonable when applying these factors, there can be no assurance that the
SEC will not review the Company's valuations, which review could result in
the Company making adjustments to the reported amounts of in-process research
and development expense for the years ended June 30, 1998 and 1999. Any such
adjustment could result in an increase in the amount of purchased technology
and other intangibles recorded with respect to the acquisitions of ODEUM,
ViewPoint, and XLI, which would result in higher amortization expenses, and
therefore, adversely affect the Company's future operating results.
INTELLECTUAL PROPERTY MATTERS. 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 eleven patents granted, forty-nine patents
in preparation in the United States, fifty-seven patents pending in the
United States and twenty-two international patents pending.
16
<PAGE>
The Company intends to seek additional international patents and additional
United States patents on its technology. There can be no assurance that
additional patents will issue from any of the Company's pending applications
or applications in preparation, or be issued in all countries where the
Company's products can be sold, or that any claims allowed from pending
applications or applications in preparation will be of sufficient scope or
strength to provide meaningful protection or any commercial advantage to the
Company. Additionally, competitors of the Company may be able to design
around the Company's patents. There can be no assurance that any patents
held by the Company will not be challenged, invalidated or circumvented, or
that the rights granted thereunder will provide competitive advantages to the
Company. An action is currently pending in the Federal District Court for
the Northern District of California seeking to invalidate one of the
Company's patents relating to it's optical storage products. Moreover, while
the Company holds or has applied for patents relating to the design of its
products, the Company's products are based in part on standards, including
MPEG-1, MPEG-2, JPEG and JBIG and the Company does not hold patents or other
intellectual property rights for such standards. The laws of certain foreign
countries in which the Company's products are or may be manufactured or sold,
including various countries in Asia, may not protect the Company's products
or intellectual property rights to the same extent as do the laws of the
United States and thus make the possibility of piracy of the Company's
technology and products more likely. There can be no assurance that the
steps taken by the Company to protect its proprietary information will be
adequate to prevent misappropriation of its technology or that the Company's
competitors will not independently develop technologies that are
substantially equivalent or superior to the Company's technology.
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights, which has resulted in significant,
often protracted and expensive litigation. Although there is currently no
pending intellectual property litigation against the Company, the Company or
its foundries may, from time to time, be notified of claims that the Company
may be infringing patents or other intellectual property rights owned by
third parties. If it is necessary or desirable, the Company may seek licenses
under such patents or other intellectual property rights. However, there can
be no assurance that licenses will be offered or that the terms of any
offered licenses will be acceptable to the Company. The failure to obtain a
license from a third party for technology used by the Company could cause the
Company to incur substantial liabilities and to suspend the manufacture of
products or the use by the Company's foundries of processes requiring the
technology. Furthermore, the Company may initiate claims or litigation
against third parties for infringement of the Company's proprietary rights or
to establish the validity of the Company's proprietary rights. In fiscal
1997 and again in fiscal 1998, the Company filed a complaint with the 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"). Litigation by or
against the Company could result in significant expense to the Company and
divert the efforts of the Company's technical and management personnel,
whether or not such litigation results in a favorable determination for the
Company. In the event of an adverse result in any such litigation, the
Company could be required to pay substantial damages, cease the manufacture,
use and sale of infringing products, expend significant resources to develop
non-infringing technology, discontinue the use of certain processes or obtain
licenses to the infringing technology. There can be no assurance that the
Company would be successful in such development or that such licenses would
be available on reasonable terms, or at all, and any such development or
license could require expenditures by the Company of substantial time and
other resources. Patent disputes in the semiconductor industry have often
been settled through cross-licensing arrangements. Because the Company has a
limited portfolio of patents, the Company may not be able to settle an
alleged patent infringement claim through a cross-licensing arrangement. If
a successful claim is made against the Company or its customers and a license
is not made available to the Company on commercially reasonable terms or the
Company is required to pay substantial damages or awards, the Company's
business, financial condition and results of operations would be materially
adversely affected.
In addition, certain technology used in the Company's products is
licensed from third parties, and pursuant thereto the Company is required to
fulfill confidentiality obligations and in certain cases pay royalties. 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. Should the Company lose its rights to or be
unable to obtain the necessary copy protection software, the Company would be
unable to sell and market certain of its products. The Company licenses
technology from Sun Microsystems, Inc. for use in its consumer products under
an agreement requiring royalty payments, and also has a number of joint
development and supply arrangements, and on occasion buys products off the
shelf for use with its own products. The Company's agreements with third
parties, often have no specified term and may be terminated by either party
in the event of breach by the other. The
17
<PAGE>
Company's business could be adversely affected by the loss for any reason of
certain of these third-party agreements. In the future, it may be necessary or
desirable for the Company to seek additional licenses to intellectual property
rights held by third parties or purchase products manufactured and/or sold by
third parties or purchase products manufactured and/or sold by third parties
with respect to some or all of its product offerings. There can be no
assurance that such licenses or purchases will be available on terms acceptable
to the Company, if at all. The inability of the Company to enter into such
license arrangements on acceptable terms or to maintain its current licenses on
acceptable terms could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company also generally enters into confidentiality agreements with its
employees and confidentiality and license agreements with its customers and
potential customers, and limits access to and distribution of the source and
object code of its software and other proprietary information. Under some
circumstances, the Company grants licenses that give its customers limited
access to the source code of the Company's software which increases the
likelihood of misappropriation or misuse of the Company's technology.
Accordingly, despite precautions taken by the Company, it may be possible for
unauthorized third parties to copy certain portions of the Company's technology
or to obtain and use information that the Company regards as proprietary.
There can be no assurance that the steps taken by the Company will be adequate
to prevent misappropriation of its technology or to provide an adequate remedy
in the event of a breach or misappropriation by others.
MANUFACTURING ISSUES. The Company contracts with independent foundries to
manufacture all of its products, enabling the Company to focus on its design
strengths, minimize fixed costs and capital expenditures and gain access to
advanced manufacturing facilities. Certain of the Company's foundry agreements
require up-front, nonrefundable prepayments or deposits and these fixed costs
could affect the Company's operating margins if the Company is unable to
utilize the minimum number of wafers required under the agreements. The
Company is dependent on its foundries to allocate to the Company a portion of
their foundry capacity sufficient to meet the Company's needs to produce
products of acceptable quality and with acceptable manufacturing yields and to
deliver products to the Company in a timely manner. These foundries fabricate
products for other companies and some manufacture products of their own design.
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.
Product supply and demand fluctuations common to the semiconductor
industry are historically characterized by periods of manufacturing capacity
shortages immediately followed by periods of overcapacity, which are caused by
the additions of manufacturing capacity in large increments. The industry has
moved from a period of capacity shortages in 1995 to what appears to be a
current period of excess capacity for the immediate future. During a period of
industry overcapacity, profitability can drop sharply as factory utilization
declines and high fixed costs of operating a wafer fabrication facility are
spread over a lower net revenue base. Despite industry overcapacity, there can
be no assurance that the Company can achieve timely, cost-effective access to
such capacity when needed.
The Company generally does not have long-term volume production contracts
with its customers. Accordingly, customers generally buy the Company's products
on a purchase order basis, often with short lead times. In periods of
manufacturing capacity shortages, the Company may not be able to meet the
customers required delivery times. Customer orders are also subject to
rescheduling and cancellation which could result in the Company having excess
inventory given that the Company does not enjoy such cancellation or
rescheduling privileges with its foundries. In addition, whether any specific
product design will result in volume production orders and, if so, the
quantities included in any such orders, are factors beyond the control of the
Company. Insufficient orders will result in underutilization of the Company's
manufacturing facilities which would adversely impact the Company's business,
financial condition and operating results.
The Company's results of operations could also be adversely affected if
particular suppliers are unable to provide a sufficient and timely supply of
product, whether because of raw material shortages, capacity constraints,
unexpected disruptions at the plants, delays in qualifying new suppliers or
other reasons, or if the Company is forced to purchase materials from higher
cost suppliers or to pay expediting charges to obtain additional supply, or if
the Company's test facilities are disrupted for an extended period of time.
Production could also be constrained
18
<PAGE>
by delays if there is a need to move production from one facility to another.
Such problems with supply could adversely affect the Company's business,
financial condition and operating results. As the Company generally does not
use multiple sources of supply for its products, the consequences of these
factors occuring is magnified.
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 the 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 The Company's 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, industry overcapacity, 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.
Disruption of operations at any of the manufacturing facilities utilized
by the Company or any of its subcontractors for any reason, including work
stoppages, fire, earthquake, flooding or other natural disasters, would cause
delays in shipments of the Company's products. There can be no assurance that
alternative capacity would be available on a timely basis on terms acceptable
to the Company, if at all, thereby resulting in a loss of customers. This
could 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 publicly stated that a majority of the equipment
and inventory and a significant portion of the building were completely
destroyed at an estimated loss of approximately $324 million (based on year-end
exchange rates). UICC management has also stated that it has reached a $300
million insurance settlement for claims stemming from the fire and that in
accordance with the coinsurance clause, UICC had to pay $23.5 million of the
damage. Despite the damages payment, UICC management has represented that
UICC's financial status has remained unaffected given significant investment
gains made during the year. UICC has further stated that it expects to complete
reinforcement of the building structure before the end of the year, to install
fab equipment by May 1999, and to be in production by the last quarter of
Calendar 1999, using primarily .18 micron process technology. Given the fire,
the Company has evaluated its investment 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
impairment loss has been recognized as of September 30, 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.
The manufacture of semiconductors is a highly complex and precise process,
with current trends in the Company's markets leading to increasingly complex
products. 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. The greater integration of functions and
complexity of operations of the Company's products increase the risk that latent
defects or subtle faults could be discovered by customers or end users after
volumes of product have been shipped. If such defects were significant, the
Company could incur material recall and replacement costs for product warranty.
The relationships with customers could also be adversely impacted. 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.
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
19
<PAGE>
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.
DEPENDENCE ON CD-ROM CONTROLLER PRODUCTS. Sales of the Company's
CD-ROM controller products comprised 70% and 86% of the Company's net
revenues in the quarters ended September 30, 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 fiscal 1999. 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 CD-RW and eventually DVD drives will impact the demand for
CD-ROM controller products. Due to the backward compatibility of DVD-ROM
drives, it is critical that the Company maintain its CD-ROM customer base
throughout this transition to DVD-ROM. Although the Company is currently
pursuing the development of optical storage semiconductors for use in DVD-ROM
drives, there can be no assurance that the Company will have a DVD product,
that such product will be available within an acceptable market window, or
that such product will be able to sustain the current level of optical
storage product sales. Furthermore, although the Company is currently a
leading supplier of CD-RW controllers, due to product delays the Company
expects to experience lower unit sales from its CD-RW product until its next
generation CD-RW product is available As the CD-ROM market has begun to
mature and transition toward the emerging CD-RW and DVD-ROM markets, there
have been a number of new competitors entering the market. This increased
competition combined with the pressure from the sub-$1000 PC segment for
lower cost components have caused tremendous price erosion on CD-ROM
controller prices. 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. Although the Company
experienced some development delays in its integrated controller, as of the
end of the first quarter of fiscal 1999, it was available for sampling. To
provide integrated CD-ROM, CD-RW and DVD 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's 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. The
Company's future revenue generation is much dependent on the successful
introduction of its next generation CD-RW product and first generation PC DVD
product, and there can be no assurance that the Company will be successful in
the timely development of such products or that the products will achieve
customer acceptance. The Company has recently experienced, and continues to
experience, a decrease in the overall level of sales of, and prices for, the
Company's CD-ROM controller products, due to introductions of products by
competitors, a decline in demand for CD-ROM controller products, product
obsolescence and delays in its integrated CD-ROM controller product which
have had a material adverse effect on the Company's business, financial
condition and results of operations.
RISKS PERTAINING TO INTERNATIONAL BUSINESS. During the quarters ended
September 30, 1998 and 1997, 87% and 96%, respectively, of the Company's net
revenues were derived from international sales. A substantial portion of the
Company's international revenues are derived from manufacturers of CD-ROM drives
in Japan, Taiwan, Korean, Belgium and Singapore. Most of the Company's foreign
sales are negotiated in US dollars; however, invoicing is often done in local
currency. As a result, the Company may be subject to the risks of currency
fluctuations. Assets and liabilities which are denominated in non-functional
currencies are remeasured into the functional currency on a monthly basis and
the resulting gain or loss is recorded within non-operating income in the
20
<PAGE>
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 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
taxes, 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. There can be no
assurance that one or more of the foregoing factors will not have a material
adverse effect on the Company's business, financial condition or operating
results or require the Company to modify its current business practices.
LIMITED CUSTOMER BASE. A limited number of customers historically has
accounted for a substantial portion of the Company's net revenues. In the
quarters ended September 30, 1998 and 1997, sales to the Company's top ten
customers accounted for approximately 79% and 82%, respectively, of the
Company's net revenues. These customers were all purchasers of the Company's
CD-ROM product. Although the Company is currently attempting to diversify its
products, markets, and customer base, the Company expects that sales to a
limited number of customers will continue to account for a substantial portion
of its net revenues for the foreseeable future. The Company has experienced
significant changes from year to year in the composition of its major customer
base and believes this pattern will continue. The Company does not have long
term purchase agreements with any of its customers. Customers generally
purchase the Company's products pursuant to short-term purchase orders. The
loss of, or significant reduction in purchases by, current major customers such
as Mitsumi or LG Electronics would have a material adverse effect on the
Company's business, financial condition and operating results. There can be no
assurances that the Company's current customers will continue to place orders
or that existing orders will not be canceled. If sales to current customers
cease or are reduced, there can be no assurance that the Company will be able
to continue to obtain the orders from new customers necessary to offset any
such losses or reductions. The loss of business or cancellation of orders from
any key customers, significant changes in scheduled deliveries to any of these
customers or decreases in the prices of products sold to any of these customers
could have a material adverse effect on the Company's business, financial
condition and results of operations.
COMPETITION. The markets in which the Company competes are intensely
competitive and are characterized by rapid technological change, declining unit
ASPs and rapid product obsolescence. The Company expects competition to
increase in the future from existing competitors and from other companies that
may enter the Company's existing or future markets with solutions that may be
less costly or provide higher performance or additional features. The
Company's existing and potential competitors include many large domestic and
international companies that have substantially greater financial,
manufacturing, technical, marketing, distribution and other resources, broader
product lines and longer standing relationships with customers than the
Company. The Company's competitors also include a number of emerging companies
as well as some of the Company's own customers and suppliers. The Company is
currently attempting to enter several new markets in which the Company has not
previously operated. These markets are intensely competitive and the Company
will have to compete with large domestic and international companies that have
long standing relationships with the Company's target customers. Specifically,
the Company's ability to compete successfully in the PC DVD and digital
broadcast markets will depend on its ability to develop partnerships with other
companies established in the industries and to gain recognition in such
markets. There can be no assurance that participation in these new markets
will produce
21
<PAGE>
positive results for the Company. Certain of the Company's principal
competitors maintain their own semiconductor foundries and may therefore
benefit from certain capacity, cost and technological advantages. In addition,
in both the digital video disk market and digital office equipment market, the
Company's most intense competition comes from captive suppliers. 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 development of technical innovations, the ability to obtain
adequate foundry capacity and sources of raw materials, the efficiency of
production, the rate at which the Company's customers design the Company's
products into their products, the market acceptance of the products of the
Company's customers, the number and nature of the Company's competitors in a
given market, the assertion of intellectual property rights and general market
and economic conditions. There can be no assurance that the Company will be
able to compete successfully in the future.
DEPENDENCE ON KEY PERSONNEL. The Company's future performance depends, to
a significant degree, on the retention and contribution of members of the
Company's senior management as well as other key personnel. Three of the
Company's most senior finance personnel, including the Chief Financial Officer,
as well as the President of the Company's Optical Storage Group left the
Company in the fourth quarter of fiscal 1998. On October 29, 1998 the Company
announced that it had hired a new Chief Financial Officer. The Company is in
the process of recruiting replacements for the other positions as well as
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 replacements or additional senior managers and
technical personnel.
YEAR 2000 RISK FACTOR. Many currently installed computer systems and
software products are coded to accept only two digit entries in the date code
field. These data 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, computer systems and/or software used by many companies may
need to be upgraded to comply with such "Year 2000" requirements.
The Company has begun a review of its Year 2000 readiness in three main
areas: Internal systems, external vendors and products. The review will
consist of the following phases: Inventory/Assessment, Conversion/Vendor
Readiness, Contingency Planning, Testing and Implementation. The Company is
currently in the Inventory/Assessment phase of the project. This phase is
scheduled to complete by December 31, 1998. The entire Year 2000 project is
expected to complete by June 1999, the Company's fiscal year end.
For internal systems, the Company will be looking at all network
components, PCs, Unix workstations, business applications, CAD systems,
desktop applications, operating systems, testers, telephone systems, FAX,
copiers, security and environmental systems. With the recent implementation
of the Oracle ERP system and upgrades of PCs to Pentium CPUs and other
upgrades, the Company does not anticipate any major Year 2000 related
renovation work for internal systems. However, the failure of any internal
system to achieve Year 2000 readiness could result in material disruptions to
the Company's operations. The Company has begun requesting Year 2000
readiness and warranty statements from external product and service vendors.
Even where assurances are received from third parties there remains a risk
that failure of systems and products of other companies on which the Company
relies could have a material adverse effect on the Company. The Company will
examine how its products may be affected by Year 2000. The inability of any
of the Company's products to properly manage and manipulate data in the year
2000 could result in increased warranty costs, customer satisfaction issues,
potential lawsuits and other material problems.
At this point, the Company believes that total cost of achieving Year
2000 readiness will be less than $1.5 million. At the end of the assessment
phase, the Company will be able to more accurately estimate the total costs
for Year 2000 readiness. The foregoing statements are based upon
management's best estimates at the present time, which were derived utilizing
numerous assumptions of future events, including the continued availability
of certain resources, third party modification plans and other factors. There
can be no guarantee that these estimates will be achieved and actual results
could differ materially from those anticipated. Specific factors that might
cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, the nature and amount of
programming required to upgrade or replace each of the affected programs, the
rate and magnitude of related labor and consulting costs and the success of
the Company's external customers and suppliers in addressing the Year 2000
issue.
The Company does not currently have a contingency plan that addresses
how it plans to handle any of the "worst-case" Year 2000 issues that may
confront it. The need for such a plan will be reviewed in the Contingency
Planning phase of the Year 2000 project as discussed above.
The Company's evaluation is on-going and it expects that new and
different information will become available to it as that evaluation
continues. As a result, the Company has no reasonable basis to conclude that
the Year 2000 problem will not have a materially adverse effect on the
Company's operations.
22
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its cash requirements from
cash generated from operations, the sale of equity securities, bank lines of
credit and long-term and short-term debt. The Company's principal sources of
liquidity as of September 30, 1998 consisted of approximately $105.3 million in
cash, cash equivalents and short-term investments. The Company also has
approximately $13.1 million in lines of letters of credit with Taiwanese
financial institutions, all of which was available at September 30,
1998. Additionally, approximately $15 million in lines of credit exist with
Japanese financial institutions, of which approximately $11.6 million was
available at September 30, 1998. Related to the Japanese line of credit, the
Company was in violation of one of the financial covenants of the related
agreement which specified a maximum allowable quarterly net loss. Due to the
write-off of in-process research and development during the first quarter of
fiscal year 1999, the maximum allowable net loss was exceeded. The Company
requested and received a waiver of this violation from the bank.
In the first quarter of fiscal 1999, operating activities provided net cash
of approximately $8.4 million. The Company's net loss of approximately $14.2
million was offset by receipt of income tax refunds totaling $8.0 million, a
decrease in accounts receivable and inventory of $7.8 million, and the non-cash
effect of depreciation and amortization ($2.8 million) and in-process research
and development writeoffs ($7.2 million). Investing activities utilized cash of
approximately $16.1 million primarily due to the ViewPoint and XLI acquisitions
($15.2 million, net of cash acquired) and additions to property, plant and
equipment of $3.0 million. Additionally, the Company repurchased 658,000 shares
of it common stock during the quarter, for a total of approximately $2.1
million.
The Company believes that its existing cash, cash equivalents,
short-term investments and credit facilities will be sufficient to provide
adequate working capital and to fund necessary purchases of property and
equipment through at least the next twelve months. However, there can be no
assurance that the Company will not be required to seek other financing
sooner or that such financing, if required, will be on terms satisfactory to
the Company. The Company may also utilize cash to acquire or invest in
complementary businesses or products or to obtain the right to use
complementary technologies. From time to time, in the ordinary course of
business, the Company evaluates potential acquisitions of such businesses,
products or technologies. However, the Company has no present
understandings, commitments or agreements with respect to any material
acquisition of other businesses, products or technologies.
FOUNDRY DEPOSITS AND INVESTMENT IN FOUNDRY VENTURE
FOUNDRY DEPOSITS. The Company contracts with independent foundries to
manufacture all of its semiconductor products, enabling the Company to focus
on its design strengths, minimize fixed costs and capital expenditures and
gain access to advanced manufacturing facilities. The Company's primary
suppliers under such arrangements during the first quarter of fiscal year
1999 were TSMC, Sony, and LG Semicon Co. Ltd. in Korea. The Company also
uses wafer fabrication facilities at Chartered, Rohm, and NEC. Except as
described in the paragraphs below, the foundries generally are not obligated
to supply products to the Company for any specific period, in any specific
quantity or at a specific price, except as may be provided in a particular
purchase order. However, in order to obtain an adequate supply of wafers,
especially wafers manufactured using advanced process techniques, the Company
has entered into, and will continue to consider various possible
transactions, including various "take or pay" contracts, such as those
described below, that commit the Company to purchase specified quantities of
wafers over extended periods. Manufacturing arrangements such as these may
require substantial capital investment, which may require the Company to seek
additional financing. There can be no assurance that such additional
financing, if required, will be available when needed or if available, will
be on satisfactory terms.
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.
At September 30, 1998, the Company has unused foundry deposits totaling
$16.7 million with TSMC. Under the terms of the agreement with TSMC (as
previously amended), the remaining deposits will be used against calendar 1999
(the final year of the agreement) wafer purchases. The Company has already
utilized the maximum credit allowed by the agreement for calendar years 1996,
1997 and 1998. Under the terms of the amended agreement, wafer purchases made
by the Company subsequent to reaching the calendar 1998 maximum are being
23
<PAGE>
applied against calendar 1999 requirements. Once a certain base amount of
wafer purchases has been made for calendar 1999, TSMC will issue credits
against the remaining deposit on a per-wafer basis. 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, since full utilization of
the remaining deposit would presume increased wafer purchasing levels than
currently exist, based in part upon new product introductions.
The Company's agreement with Chartered, as previously amended, also
expires on December 31, 1999. The Company has $3.5 million of unused foundry
deposits with Chartered at September 30, 1998. The previous 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, since full
utilization of the remaining deposit is based on the assumptions that wafer
purchasing levels will increase from current levels, in part due to new product
introductions.
INVESTMENT IN FOUNDRY VENTURE. 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
publicly stated that a majority of the equipment and inventory and a
significant portion of the building were completely destroyed at an estimated
loss of approximately $324 million (based on year-end exchange rates). UICC
management has also stated that it has reached a $300 million insurance
settlement for claims stemming from the fire and that in accordance with the
coinsurance clause, UICC had to pay approximately $23.5 million of the damage.
Despite the damages payment, UICC management has represented that UICC's
financial status has remained unaffected given significant investment gains
made during the year. UICC has further stated that it expects to complete
reinforcement of the building structure before the end of the year, to install
fab equipment by May 1999, and to be in production by the last quarter of
calendar 1999, using primarily .18 micron process technology. Given the fire,
the Company has evaluated its investment 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
impairment loss has been recognized as of September 30, 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.
24
<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 and securities analysts. On July 16, 1998,
the state court provisionally certified a national class of all persons who
purchased the Company's stock during the class period. The class was
provisionally certified with the order held in abeyance pending resolution of
the question of whether a nationwide class may bring a California
Corporations Code Section 25400/25500 claim, which will be resolved in the
DIAMOND MULTIMEDIA SECURITIES LITIGATION appeal by the California Supreme
Court.
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.
In connection with these legal proceedings, the Company expects to
incur legal and other expenses. 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.
The Company and certain of its current Directors are parties to a
putative class action lawsuit pending in the Court of Chancery in the State
of Delaware, entitled MANNING V. OAK TECHNOLOGY, ET AL., Civil Action No.
25
<PAGE>
16656NC. This action alleges violations of the Delaware General Corporation
Law and breaches of fiduciary duty and is brought on behalf of all owners of
Oak Technology common stock at any time between August 19, 1997 and the date
of class certification. Plaintiffs' claims are based upon the Board of
Directors' adoption on or about August 19, 1997 of a Stockholder Rights Plan
that included a provision that limited the redemption or modification of the
Plan to its Continuing Directors or their designated successors. Plaintiffs
allege that the Stockholder Rights Plan disenfranchises public stockholders
by forcing them to vote for incumbent directors who enjoy full voting rights;
that it restricts the ability of future directors to exercise their full
statutory prerogatives; and that the particular provision at issue is an
unreasonable and disproportionate response to any threatened takeover.
Plaintiffs are seeking an injunction and a declaratory judgment that the
Stockholder Rights Plan is invalid and unenforceable and monetary damages for
the alleged violations of fiduciary duty.
This action is in the earliest stage of the proceeding. The Company
believes the claims to be without merit and will defend its position
vigorously. No provision for any liability that may result upon adjudication
has been made in the Company's Consolidated Financial Statements.
In connection with these legal proceedings, the Company expects to
continue to incur legal and other expenses.
On July 21, 1997, the Company filed a complaint with the ITC based on
the Company's belief that certain Asian companies were violating U.S. trade
laws by the unlicensed importing or selling of certain CD-ROM controllers
that infringed one or more of the Company's United States 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 and/or importation into the United States
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, February 1998 and April 1998, the Company received $2.6
million, $4.7 million, $0.7 million and $2.6 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, March 31, 1998 and June 30,
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 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
26
<PAGE>
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 June 11, 1998, this case was consolidated for all purposes with a
related case brought against the Company by MediaTek (described below). On
the same date, pursuant to UMC's request, the court ordered the consolidated
action stayed under 28 U.S.C. Section 1659, based on the court's conclusion
that the civil action involves the same issues involved in Investigation No.
337-TA-409 before the International Trade Commission, initiated by Oak
(described below).
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 June 11, 1998, this case was consolidated for all purposes
with a related case brought by the Company against UMC (described above). On
the same date, pursuant to UMC's request, the court ordered the consolidated
action stayed under 28 U.S.C. Section 1659, based on the court's conclusion
that the civil action involves the same issues involved in Investigation No.
337-TA-409 before the International Trade Commission, initiated by Oak
(described below).
On April 7, 1998, the Company filed a new complaint with the ITC
alleging that five Asian companies are violating U.S. trade laws by the
unlicensed 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. On August 28, 1998, the Administrative law Judge (ALJ)
supervising the investigation entered an initial determination that the
investigation be terminated as to respondent UMC. On September 4, 1998, the
Company filed a petition with the Commission for review of the initial
determination. On October 7, 1998, the Commission reversed the initial
determination of the ALJ as the Commission determined that the Company's
complaint against UMC does state an unfair trade practices claim under
Section 337 of the Tariff Act. Trial before the ALJ is presently scheduled
to commence on January 11, 1999. 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 has incurred and will
continue to 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.
27
<PAGE>
ITEM 2. CHANGES IN SECURITIES
None
ITEN 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
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)
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
28
<PAGE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
<S> <C>
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)**
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)
29
<PAGE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
<S> <C>
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 (19)**
10.27 Settlement Agreement between Winbond Electronics Corporation and
the Company (19)**
11.01 Statement regarding computation of net income (loss) 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.
(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.
(19) 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, 1998
* Indicates Management incentive plan.
** Confidential treatment granted and/or requested as to portions of the
exhibit.
30
<PAGE>
(b) Reports on Form 8-K
The Company filed a Report on Form 8-K on July 31, 1998, making an item 5
disclosure related to the resignation of its chief financial officer.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OAK TECHNOLOGY, INC.
(Registrant)
Date: November 16, 1998
/s/ RICHARD B. BLACK
------------------------------------------
Richard B.Black, President
(Principal Executive Officer)
32
<PAGE>
EXHIBIT 11.01
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF NET INCOME (LOSS) PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------
1998 1997
-------- -------
<S> <C> <C>
Statement of operations data:
Net income (loss)......................................... $(14,179) $ 6,193
-------- -------
-------- -------
Weighted average number of common and
dilutive common equivalent shares used
in computations:
Common stock......................................... 40,928 41,321
Stock options and other common stock equivalents..... -- 1,248
-------- -------
Shares used in computing net income (loss) per share........... 40,928 42,569
-------- -------
-------- -------
Net income (loss) per share.................................... $ (0.35) $ 0.15
-------- -------
-------- -------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS AS FOUND ON PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE
QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 50,998
<SECURITIES> 54,343
<RECEIVABLES> 14,428
<ALLOWANCES> 812
<INVENTORY> 3,714
<CURRENT-ASSETS> 144,505
<PP&E> 43,596
<DEPRECIATION> 17,128
<TOTAL-ASSETS> 246,455
<CURRENT-LIABILITIES> 18,344
<BONDS> 23
0
0
<COMMON> 41
<OTHER-SE> 225,278
<TOTAL-LIABILITY-AND-EQUITY> 246,455
<SALES> 19,967
<TOTAL-REVENUES> 19,967
<CGS> 10,466
<TOTAL-COSTS> 10,466
<OTHER-EXPENSES> 28,689
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15
<INCOME-PRETAX> (17,236)
<INCOME-TAX> (3,057)
<INCOME-CONTINUING> (14,179)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,179)
<EPS-PRIMARY> (0.35)
<EPS-DILUTED> (0.35)
</TABLE>
