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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED JUNE 30, 1999
OR
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NO. 0-25298
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OAK TECHNOLOGY, INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE 77-0161486
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
139 KIFER COURT, SUNNYVALE, CALIFORNIA 94086
(Address of principal executive (Zip Code)
offices)
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Registrant's telephone number, including area code: (408) 737-0888
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
PREFERRED STOCK PURCHASE RIGHTS
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the Registrant
was required to file such reports, and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference to Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $148,996,000 as of August 31, 1999, based upon the
closing price of the Registrant's Common Stock on the Nasdaq National Market
reported for August 31, 1999. Shares of Common Stock held by each executive
officer and Director and by each person who beneficially owns more than 5% of
the outstanding Common Stock have been excluded in that such persons may under
certain circumstances be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination of affiliate
status for any other purpose.
41,189,586 shares of the Registrant's $.001 par value Common Stock were
outstanding at August 31, 1999
DOCUMENTS INCORPORATED BY REFERENCE
No documents (or portions thereof) are incorporated by reference into the
Parts of this Form 10-K, as amended.
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PART I
ITEM 1. BUSINESS
EXCEPT FOR THE HISTORICAL FINANCIAL INFORMATION CONTAINED HEREIN, THE
MATTERS DISCUSSED IN THIS ANNUAL REPORT ON FORM 10-K MAY BE CONSIDERED
"FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED. SUCH STATEMENTS INCLUDE DECLARATIONS REGARDING THE INTENT, BELIEF OR
CURRENT EXPECTATIONS OF THE COMPANY AND ITS MANAGEMENT. SUCH FORWARD-LOOKING
STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE A NUMBER OF
RISKS AND UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
INDICATED BY SUCH FORWARD-LOOKING STATEMENTS. THE IMPORTANT FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED ARE DISCUSSED IN
THE SECTION TITLED "FACTORS THAT MAY AFFECT FUTURE RESULTS" IN ITEM 7,
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS. OTHER RISKS MAY ALSO BE IDENTIFIED FROM TIME TO TIME IN THE
COMPANY'S REPORTS AND REGISTRATION STATEMENTS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
GENERAL
The Company designs, develops and markets high performance integrated
semiconductors, software and platform solutions to original equipment
manufacturers ("OEMs") worldwide who serve the optical storage, consumer
electronics and digital imaging equipment markets. The Company's products
consist primarily of integrated circuits and supporting software and firmware
all designed to store and distribute digital content, thereby enabling its OEM
customers to deliver cost-effective, powerful systems to the end-user for the
home and enterprise. The Company contracts with independent foundries to
manufacture all of its products, enabling the Company to focus on its design
strengths, minimize fixed costs and capital expenditures and gain access to
advanced manufacturing facilities. The Company's mission is to be a leading
solution provider for the storage and distribution of digital content.
During the third quarter of fiscal 1998, the Company restructured its
operations along three market-focused groups: Optical Storage Group, the
Consumer Group, and the Imaging Group (Pixel Magic, serving the digital imaging
equipment market), and at the same time, discontinued its product development
and marketing efforts in its PC audio and 3D graphics businesses.
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 approximately $10.1
million 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.
On August 11, 1998, the Company acquired Xerographic Laser Images
Corporation ("XLI"), a provider of print quality enhancement technology for the
digital imaging equipment market. XLI operates as a division of the Company's
wholly owned subsidiary, Pixel Magic, and serves to leverage Pixel's position in
the digital imaging 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. Under the terms of the merger agreement, revenue levels from
products utilizing XLI's technologies in excess of a base amount of $3,675,000
for each year of a three year period must be attained in order for XLI to
receive additional contingency payments, up to a maximum amount of $10,252,327.
To date these milestones have not been achieved and no additional payments have
been made to XLI shareholders. Such payments would be recored on the Company
balance sheet as an adjustment of the purchase price of XLI. Pursuant to a
post-closing audit and related post-closing adjustment set forth in the
acquisition agreement, it was
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determined that XLI had a net deficit (for purposes of calculating a 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 purchase method of accounting, and XLI's
operations have been included in the Company's consolidated financial statements
from the date of acquisition.
On July 29, 1999, the Company entered into an Agreement and Plan of Merger
and Reorganization (the "Merger Agreement") by and among Xionics Document
Technologies, Inc. ("Xionics"), Vermont Acquisition Corporation, a wholly-owned
subsidiary of the Company ("Merger Sub"), and the Company, whereunder Xionics
will merger with and into Merger Sub and thus become a wholly-owned subsidiary
of the Company (the "Merger"). Completion of the Merger is contingent upon
Xionics' stockholders approving the Merger at a special meeting to be announced
in a Joint Proxy Statement expected to be mailed to Xionics and Company
stockholders during November 1999; the Company's stockholders approving the
issuance of new shares of Company common stock to be exchanged for Xionics
common stock; and the satisfaction of waiver of other closing conditions
contained in the Merger Agreement. In the Merger, Xionics stockholders will
receive $2.94 in cash and 0.8031 shares of Company Common Stock for each share
of Xionics Common Stock owned.
Along with the ODEUM Microsystems acquisition and a joint venture investment
in Omni Peripherals Pte, Ltd. completed in fiscal 1998, these recent
acquisitions aimed at expanding the potential product offerings for the three
targeted markets.
As a leading merchant supplier of controllers for CD-ROM and CD-R/W drives,
the Company has expanded its product offerings for its three targeted market
segments to include controllers for DVD drives; MPEG-2 audio/video decoders for
DVD players; integrated circuits for digital broadcast systems; and multitasking
imaging and compression processors for the emerging class of digital imaging
equipment. The Company spent the majority of fiscal 1999 developing its next
generation CD-RW controllers, an imaging processor for the inkjet multifunction
peripheral market and further generations of imaging processors, compression
codecs and resolution enhancement solutions, its next generation MPEG-2 audio/
video decoder for DVD players and first generation products for the terrestrial
segment of the digital broadcast market.
For the twelve months ended June 30, 1999, net sales for the Company totaled
$71.1 million as compared to sales of $157.1 million in the prior year. The
Company reported a net loss of $50.7 million for fiscal year 1999 as compared to
a net income of $5.9 million in fiscal 1998. The current loss trend began in the
third quarter of fiscal 1998 and has continued for each quarter of fiscal 1999.
The Company's operating losses generally have been due to the significant
decline in the sales volume in its optical storage business, which historically
has accounted for approximately 80% of the Company's net revenues. In fiscal
1998, the Company failed to timely and adequately develop its integrated CD-ROM
controller product and second generation CD-RW product. Consequently, for fiscal
1999, the Company was dependent on mature CD-ROM products and its first
generation CD-RW product for its revenue. These mature products have continued
to decline in both unit sales volumes and average sales price in each successive
quarter throughout fiscal 1999. Although the Company is currently sampling its
next generation CD-RW product, it does not expect to be in mass production with
this product until the second half of fiscal 2000.
On February 2, 1999, the Company announced the appointment of Young K. Sohn
to the office of President and Chief Executive Officer. Mr. Sohn has initiated a
comprehensive review of all aspects of the Company and has put in place a new
management team whose charter is to architect and execute a turnaround plan for
the Company. The Company is expected to formally announce its turnaround plan in
the second half of fiscal 2000.
The Company was originally incorporated in California in 1987 and was
reincorporated in Delaware in 1994. Its executive offices and principal
marketing, sales and product development operations are located at 139 Kifer
Court, Sunnyvale, California 94086, telephone number (408) 737-0888. In
addition,
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the Company has facilities in Andover, Massachusetts; Taipei, Taiwan; Tokyo,
Japan; Bristol, England; Munich, Germany; and Shezhen, China.
TARGET MARKETS AND PRODUCTS
Currently, the Company's three target markets include optical storage,
consumer electronics and digital imaging equipment, which correspond to the
Company's Optical Storage Group, Consumer Group and Imaging Group, respectively.
The Company's business strategy and product offerings (current and planned for
fiscal 2000) for each of the target market segments are described below.
OPTICAL STORAGE
BUSINESS OVERVIEW/STRATEGY
Multimedia computer applications have driven the demand for low-cost,
high-density storage mechanisms in recent years. The adoption of CD-ROM
technology as the mainstream optical storage medium on the desktop was fueled in
large measure by data-intensive, graphics/audio/video-rich applications that
required a universal, high-density storage medium. The Company's Optical Storage
Group is a leading provider of controllers to the optical storage market and has
shipped more than 125 million controllers to date. More than 50% of the drives
shipped to date contain controllers from the Company's Optical Storage Group. A
pioneer in this field with the first IDE/AT/PI CD-ROM controller, the Company
has focused its recent product development efforts on emerging segments of this
industry, namely CD-RW and DVD drives. The Company's Optical Storage Group
currently has solutions for CD-ROM, CD-RW and DVD drives, and its core
competencies include IDE and alternative interfaces, error correction code
(ECC), DSP/servo control, disc write encoding, wobble servo, write strategy,
system design, and system software and firmware. The Company's OEM customers for
its optical storage products in fiscal 1999 included Philips, Yamaha and
Mitsumi.
The Company's optical storage business faced major challenges during fiscal
1999 including rapidly declining average selling prices (ASPs) and gross
margins, increased competition from both Taiwan and Japan based competitors, and
delays in its integrated CD-ROM controller product and next generation CD-RW
product. Currently, the optical storage market is experiencing a myriad of
transition as numerous types of new drive mechanisms emerge. The growth of the
sub-$1000 PC and initial lack of DVD-ROM has extended the life of CD-ROM drives
on the desktop and has temporarily slowed down the penetration of the DVD-ROM
drives into the PC market. The DVD-ROM steep growth is expected to resume over
the next year as DVD-ROM drive costs are further reduced and a wider selection
of DVD-ROM titles becomes available. However, the optical storage market is
currently witnessing an accelerated adoption of CD-RW drives, driven by the
increased popularity of customized audio CD recordings and the widespread
availability of MP3 audio titles on the Internet. Another interesting
development is the recent appearance of the "Combo Drive", a CD-RW drive with
DVD read capability. This drive offers a wide functionality to the end user and
could become a mainstream product if the cost challenges are successfully
addressed by the drive manufacturers. The DVD writable market is off to a slow
start, with high prices and multiple competing standards limiting the adoption
rate by PC OEMs. The DVD writable market is not expected to experience
significant growth until the calendar year 2001 timeframe as the competing
standards consolidate and prices become more competitive.
The Company has prepared for these market transitions by focusing its
development efforts on the CD-RW and DVD technologies, which provide the Company
the opportunity to offer valuable innovation to its customers in a growing
market with technological challenges. The Company's strategy in increasing its
market penetration includes technology innovation, protection of intellectual
property, and aggressive marketing/pricing programs including strategic
alliances with drive manufacturers and technology partners.
The CD-RW market has picked up considerable momentum as more consumers
discover the advantages of this writable and removable medium. Rewritable CD
drives are quickly emerging as a strong
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contender to CD-ROM drives and though primarily offered today in the retail
after market, these optical storage devices are beginning to emerge as the
preferred device on the desktop for audio CD generation, archival and data
interchange applications. Increased consumer demand and the widespread adoption
of CD-RW drives by the PC OEM manufacturers over the next year are expected to
contribute to significant growth in the CD-RW market.
The Company expects that functional integration will play an important role
in cost reduction of the CD-RW drives, thereby fueling its mass adoption by PC
OEMs. To this end, the Company has recently announced the OTI-9790, offering the
most highly integrated and cost effective solution for high performance CD-RW
drives. The OTI-9790 offers a three-in-one level of integration, combining on
one chip the encoder/decoder functions, DSP, a full servo sub-system, as well as
the write strategy and ATIP demodulator. The OTI-9790 also offers an integrated
USB interface, allowing the support of both the retail after-market and the PC
OEM applications. The Company provides a complete solution to its customers
through the availability of a comprehensive reference design based on the
OTI-9790, including the full firmware needed to build a CD-RW drive. The
capability to offer a complete solution places the Company in a unique
competitive position and offers a valuable time-to-market advantage to its
customers. The OTI-9790 is currently sampling and is expected to be in volume
production in the second half of fiscal 2000.
The Company also has a number of ongoing developments for the DVD market,
with the OTI-9820 device currently sampling. This device also follows the high
integration philosophy, combining the functions of the DVD and CD-ROM decoder,
DSP and a full servo sub-system on the same chip.
The following table shows the Company's current mix of optical storage
products for fiscal 2000. The Company also has several next-generation products
currently in development.
OPTICAL STORAGE PRODUCTS
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NAME DESCRIPTION STATUS
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OTI-9230...... The Company's four-in-one IDE/ATAPI CD-ROM controller. In production
Combines four major functions of a CD-ROM drive (CD-DSP,
servo, block decoder, and 1Mb DRAM)
OTI-9790...... The Company's three-in-one integrated CD-RW controller. Sampling . Production
Integrates encoder/decoder, DSP, servo, write strategy and shipments in 2hFY00
ATIP demodulator.
OTI-9820...... The Company's three-in-one integrated DVD controller. Sampling
Integrates DVD/CD-ROM decoder, DSP and servo functions.
</TABLE>
DIGITAL IMAGING EQUIPMENT
BUSINESS OVERVIEW/STRATEGY
The Company's imaging group, located in Andover, MA, with its Pixel Magic
brand of products is a leading provider of controllers to the digital imaging
market. The Company's imaging group designs high-performance, full-featured
compression codecs, imaging DSPs, resolution enhancement solutions and embedded
controller board solutions for the emerging class of digital copiers, printers
and multifunction peripherals. Core competencies include strong expertise in
color/monochrome image processing pipelines, dot modulation and resolution
enhancement technology, and high-speed compression/decompression and systems
expertise. The Company offers a broad suite of products, including integrated
semiconductors and embedded controller-board solutions, to major OEMs in the
digital imaging equipment market to power a variety of digital imaging systems,
such as digital laser copiers and printers (monochrome and color) and
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copycentric, faxcentric and printcentric multifunction peripherals (MFPs). The
Company's OEM customers for these products during fiscal 1999 include Canon,
Fujitsu, Fuji-Xerox, Hewlett-Packard, Kodak, Matsushita, Olivetti and Xerox.
Pixel Magic was acquired by Oak Technology in November 1995. In August 1998, the
Company completed the acquisition of Xerographic Laser Images (XLI). XLI is a
supplier of leading dot modulation and resolution enhancement products to
digital imaging manufacturers.
The Company's solutions for the digital imaging include its PM-2x/3x family
of JBIG/JPEG compression codecs, the PM-4x family of high-speed imaging DSPs,
and XLI's family of resolution enhancement technology (RET) products. In
addition, the Company combines its silicon solutions with firmware and software
to deliver customized embedded controller board solutions to its customers.
Fundamental shifts are presently occurring in the digital imaging market.
These changes include distributed printing, the emergence of multifunction
peripherals, the increasing use of color and higher resolution images, the
emergence of the internet as a key communications vehicle and the trend towards
outsourcing and widespread connectivity.
Although historically targeting the high-end of the digital imaging market,
the Company is now also targeting high-volume opportunities, such as the low- to
mid-range laser and inkjet products (including color systems). One of the
Company's new product initiatives for fiscal 2000 is a high-speed, low-cost
imaging DSP (iDSP) for the growing inkjet MFP market. For fiscal 2000, the
Company is also developing a new modular architecture for MFP designs,
leveraging its iDSP and compression technology as well as dot modulation
technology to create differentiated embedded controller products. The Company's
strategy for its coming generations of products is to leverage this architecture
to build more standardized, cost-effective system-level solutions. This strategy
minimizes engineering resources typically spent on customization efforts for its
OEMs, accelerates its customers' time-to-market and increases cost
effectiveness.
DIGITAL IMAGING EQUIPMENT PRODUCTS
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PRODUCT DESCRIPTION STATUS
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PM-1V High-speed bitonal image processor providing single-pass In production.
compression or decompression of image data.
PM-2m 40 MHz bitonal JBIG codec with multitasking capability. In production.
Provides single pass compression or decompression, as well
as scaling and rotation of bitonal image data.
PM-22 75 MHz bitonal JBIG codec with a 32-bit I/O. Provides single In production.
pass compression or decompression, as well as scaling and
rotation of bi-tonal image data.
PM-23 MFP controller with integrated compression. Sampling.
PM-36 A fixed function JPEG compression and decompression Sampling.
processor with a sustained data rate of up to 75 MHz.
PM-44+ A programmable 85 MHz image processor. Single instruction, In production.
fouir data paths.
PM-44I A programmable 125 MHz image processor with integrated Sampling.
memory. Single instruction, four data paths.
PM-48 A programmable 125 MHz image processor. Single instruction, Sampling.
eight data paths
XLI-2050, Family of image enhancement processors for laser copiers, In production.
2032, 2016 printers and MFPs.
</TABLE>
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CONSUMER ELECTRONICS
BUSINESS OVERVIEW/STRATEGY
The emergence of digital video in recent years has created several market
opportunities to enable the delivery of digital content to the home by means of
entertainment systems such as DVD players, digital television (DTV) systems and
set-top boxes (STBs). The rapid migration away from analog to digital technology
in the entertainment system market is creating a need for cost-effective,
complete solutions, including integrated digital circuits and system software,
in the consumer electronics market. This trend is presenting significant
opportunities for companies with combined expertise in the development of
integrated digital circuits and system software.
In the second half of fiscal 1998, as part of its business redirection
efforts, the Company established its Consumer Group to target the emerging
digital entertainment system market, with focus on complete silicon based
solutions for videodisk player systems (DVD and VCD) and digital broadcast
applications. The Company's Consumer Group targets opportunities in the emerging
digital consumer entertainment market by developing value-added integrated
circuits and reference design solutions for DVD players and terrestrial set-top
boxes. Core competencies of the consumer group include MPEG decoding, graphics
processing, analog integration, and software expertise at each of the microcode,
systems and applications levels.
During the course of fiscal 1999, the consumer group executed on its
strategy to withdraw from the low margin, declining VCD market, to focus on the
growing DVD player market. The Company expects to have completed its withdrawal
from this market in the first half of fiscal 2000. Since the end of calendar
1998, DVD technology has experienced a strong growth rate, particularly in the
US, Europe and Japan. The Company expects that this trend will continue, and
develop in China where DVD has a significant opportunity to become the
replacement technology for VCD and S-VCD. During fiscal 1999, the Company
introduced a robust, cost-effective DVD player reference design based on its
OTI-226 integrated DVD decoder, to provide target OEMs in Japan, China,
Southeast Asia and the US with a ready-to-manufacture system solution, thereby
accelerating their time-to-market. The company's strategy, going forward, is to
focus on developing cost-effective, silicon based, system solutions for this
market, which leverages its intellectual property in MPEG, graphics, audio
processing and DVD servo technology. The Company is currently in development
with its next generation solution for the DVD player market.
The digital broadcast market presents several opportunities for the Company
to leverage its existing technology investment in MPEG video and audio, graphics
processing, digital demodulation, error correction and analog cores. In fiscal
1998, the Company initiated several measures to begin building a position in
this market, including establishing a research and development center in
Bristol, U.K. (Oak Technology, Ltd.) a sales office in Munich, Germany (Oak
Technology GmbH) and acquiring key assets of ODEUM Microsystems, Inc., including
an MPEG -2 audio/video decoder and transport demultiplexor and a DVB-S compliant
QPSK demodulator. In its product development efforts for fiscal 1999, the
Company has primarily focused on the digital terrestrial market. The digital
terrestrial market has experienced strong growth during 1999 in the UK with both
digital terrestrial set-top-box and integrated digital TV (IDTV). The Company
expects strong adoption to continue for this technology in Europe and Asia. The
transition of the large installed base of TV sets from analog to digital will
create significant opportunity for cost-effective silicon-based, system
solutions. During fiscal 1999 the Company delivered two products aimed at this
market:
OTI7000: The world's first single-chip front-end solution for digital
terrestrial receivers.
OTI8215: A system-on-a-chip solution optimized for the digital terrestrial
market.
In both the DVD and digital broadcast markets, the company's strategy is to
focus on strategic alliances and partnerships with top tier OEMs early in new
product development efforts. That helps ensure a good adequation of new products
with market requirements in terms of time-to-market, cost-effectiveness and
performance.
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CONSUMER PRODUCTS
The following table shows the Company's current mix of consumer products for
fiscal 2000. The Company also has several other products currently in
development.
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NAME DESCRIPTION STATUS
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OTI-226 The Company's 1st generation single-chip DVD decoder for DVD In production
player applications. Supports CSS authentication and
decryption, Dolby AC-3 sound.
Atlanta The Company's 1st generation DVD player reference design. A Sampling
cost effective, ready-to-production system level solution
including Oak OTI226 DVD decoder chip and all the necessary
system software
OTI-257 The Company's third-generation highly integrated MPEG-1 Phased-out
decoder for VCD players. Combines MPEG-1 audio/video
decoding, CD-ROM decoding, and complete karaoke functions
with full-screen, on-screen display.
OTI-8211 The Company's single-chip, integrated MPEG-2 audio/video In production
decoder for digital cable/satellite set-top box
applications.
Access The Company's 1st generation digital cable/satellite set-top Sampling
box reference design. A cost-effective, ready-to-production,
system level solution, including the OTI8211 integrated
MPEG-2 audio/video decoder chip and all the necessary system
software.
OTI-8215 The Company's 2nd generation integrated decoder chip for the Sampling
digital terrestrial/cable/satellite set-top box
applications. Combine MPEG-2 audio and video decoder with
transport/demux, system CPU and video encoder functions
OTI-7000 The Company's 1st generation single-chip Coded Orthogonal Sampling
Frequency Demodulator (COFDM) for digital terrestrial
receivers
OTI-8511 The Company's DVB-compliant digital QPSK demodulator for In production
satellite set-top boxes.
</TABLE>
MANUFACTURING AND DESIGN METHODOLOGY
MANUFACTURING
The Company contracts with independent foundries to manufacture all of its
products, enabling the Company to focus on its design strengths, minimize fixed
costs and capital expenditures and gain access to advanced manufacturing
facilities. The Company is dependent on its foundries to allocate to the Company
a portion of their foundry capacity sufficient to meet the Company's needs to
produce products of acceptable quality and with acceptable manufacturing yields
and to deliver products to the Company in a timely manner. These foundries
fabricate products for other companies and some manufacture products of their
own design. The loss of any of these foundries as a supplier, the inability of
the Company in a period of increased demand for its products to expand the
foundry capacity of its current suppliers or qualify other wafer manufacturers
for additional foundry capacity, any inability to obtain timely and adequate
deliveries from the Company's current or future suppliers or any other
circumstances that would require the Company to seek alternative sources of
supply could delay shipments of the Company's products. Delays in shipments
could damage relationships with its current and prospective customers, provide
an advantage to the Company's competitors and have a material adverse effect on
the Company's business, financial condition and results of operations. Most of
the Company's devices are currently fabricated using
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complementary metal oxide semiconductor ("CMOS") process technology with 0.5
micron and 0.35 micron feature sizes. The Company is currently designing
products for .25 micron feature sizes. All of the Company's semiconductor
products are assembled and tested by independent subcontractors.
The Company's primary suppliers during fiscal year 1999 were TSMC and Sony.
The Company also uses wafer fabrication facilities at Chartered, and NEC. 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
with TSMC and Chartered as described in Note 12 to the consolidated financial
statements, that commit the Company to purchase specified quantities of wafers
over extended periods.
The Company's reliance on independent manufacturers and third party assembly
and testing vendors involves a number of additional risks, including the
unavailability of, or interruption in access to, certain process technologies
and reduced control over delivery schedules, quality assurance and costs. In
addition, as a result of the Company's dependence on foreign subcontractors, the
Company is subject to the risks of conducting business internationally,
including foreign government regulation and general political risks, such as
political and economic instability, potential hostilities, changes in diplomatic
and trade relationships, currency fluctuations, unexpected changes in, or
imposition of, regulatory requirements, tariffs, import and export restrictions,
and other barriers and restrictions, potentially adverse tax consequences, the
burdens of complying with a variety of foreign laws and other factors beyond the
Company's control. Substantially all of the Company's agreements with its
offshore wafer fabrication and assembly facilities provide for pricing and
payment in U.S. dollars.
The manufacture of semiconductors is a highly complex and precise process.
Additionally, the Company's products are particularly complex and difficult to
manufacture. Minute levels of contaminants in the manufacturing environment,
defects in the masks used to print circuits on a wafer, difficulties in the
fabrication process or other factors can cause a substantial percentage of
wafers to be rejected or a significant number of die on each wafer to be
nonfunctional. Many of these problems are difficult to diagnose, time consuming
and expensive to remedy, all of which can affect the Company's time to market
with a particular product. 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors that May Affect Future
Results--Risks of Supply Constraints and Manufacturing Process" below.
DESIGN METHODOLOGY
The Company's products compete in markets that are characterized by rapidly
developing technology and evolving industry standards. The Company addresses
these issues with a design environment based on workstations, dedicated product
simulators, system simulation with hardware and software modeling, and use of a
high level design description language in order to define, develop and deliver
new and enhanced products more rapidly. The Company's engineering and design
capabilities are significant to its future performance, and the Company has
invested regularly in new advanced equipment and software tools in an effort to
keep these tools updated with the latest technology. The Company's library of
core cells is key to its ability to reduce the time needed to design new
products. Examples of core cells include a CD-ROM decoder core, CD-R/W
encoder/decoder core, CD-DSP & CD-Servo core, a parallel, multi-pipelined
microprocessor core, MPEG2 core, DVD-DSP core, a .5 and .35 micron memory
compiler and a .5 and .35 micron I/O library. Design methodology, including
equipment and software tools, is a critical factor with respect to the Company's
ability to successfully develop technology and products. There can be no
assurance that the Company will be able to obtain the equipment, software tools
and other resources
8
<PAGE>
needed to develop technically advanced products in a timely manner. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Factors that May Affect Future Results--New Product Introduction"
below.
MARKETING AND CUSTOMERS
From its inception, the Company has been committed to a worldwide marketing
strategy. The Company utilizes a direct sales force in the United States,
Germany, Japan, Taiwan and the Peoples Republic of China and a worldwide network
of manufacturers' representatives and distributors in North America, Europe and
Asia. While customers around the world have many needs in common, each region
has its own requirements. In order to support customers in key geographic
markets, the Company has established sales and support offices in Andover,
Massachusetts; Munich, Germany; Tokyo, Japan; Taipei, Taiwan and Shenzhen,
China, in addition to its corporate headquarters in Sunnyvale, California. The
Company believes that sales and technical support personnel based in the
Company's regional offices understand the technical needs, business philosophy
and culture of their respective customers. On-site personnel are trained to
respond to customer needs efficiently and effectively.
The Company believes that customer service and technical support are
important competitive factors in the optical storage, consumer electronics and
digital imaging markets. The Company provides technical support to its customers
worldwide. With a global presence, the Company is able to provide prompt
technical support to its customers. In addition, the Company's representatives
travel frequently to customer sites to assist in design-in activity. The Company
provides several other types of technical support, including software
distribution through an electronic bulletin board, evaluation boards, product
demonstration software, engineering design kits and application notes. The
Company works closely with its customers in qualification of its products and
providing needed quality and reliability data. In addition, the Company makes
the latest revision of its software available to its customers and can customize
the Company's software to a customer's specific requirements.
Sales of the Company's products are made pursuant to purchase orders and the
Company has no long-term sales agreements with any of its customers. Purchase
orders are subject to price renegotiations and to changes in quantities of
products and delivery schedules in order to reflect changes in the customers'
requirements. In addition, in certain circumstances, orders may be canceled at
the discretion of the buyer without penalty. The Company's business, consistent
with that of others in the semiconductor industry, is generally characterized by
short lead-time orders. The Company's actual shipments depend on the
manufacturing capacity of the Company's foundries. Therefore, as foundry
capacity tightens, the Company may not be able to meet the customer's requested
delivery date or the Company may have to put its customers on allocation. Due to
its dependence on third party manufacturing capacity, the Company believes that
backlog at any particular date may not be indicative of actual net revenues for
any future period.
Sales of CD-ROM, CD-R and CD-RW controller products comprised 65%, 82% and
84% of the Company's net revenues in fiscal 1999, 1998 and 1997, respectively.
Sales of CD-ROM and CD-RW controller products are expected to continue to
account for a majority of the Company's total revenues for the foreseeable
future. Due to the maturation of the CD-ROM controller market, pressure from the
sub-$1000 PC segment for lower priced components, new competitors, uncertain
demand for personal computers and the Company's delay in the next generation
CD-ROM product releases, the Company has experienced for the past several
quarters and is currently experiencing both a decrease in unit sales and prices
of its mature CD-ROM and CD-RW controller products, which in turn has had a
material adverse effect on the Company's business, financial condition and
results of operation. Although the Company has recently introduced several new
products in its attempt to diversify its product and market base, there can be
no assurance that these products will be successfully designed, accepted by the
Company's customers, and brought to production or that the Company's customer's
products will be accepted in the marketplace.
9
<PAGE>
A substantial majority of the Company's revenues in fiscal 1999, 1998 and
1997 were derived outside of the United States, primarily in Asia. The
geographical areas accounting for the Company's net revenues in fiscal 1999,
1998, and 1997 are as follows:
<TABLE>
<CAPTION>
JUNE 30,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Japan...................................................... 52% 39% 40%
Other Asia................................................. 22 44 56
Europe..................................................... 11 9 1
North America.............................................. 15 8 3
</TABLE>
Accordingly, the Company is subject to the risks of conducting business
outside of the United States. These risks include unexpected changes in, or
impositions of, legislative or regulatory requirements, delays resulting from
difficulty in obtaining export licenses for certain technology, tariffs, quotas
and other trade barriers and restrictions, longer payment cycles, greater
difficulty in accounts receivable collection, potentially adverse taxes, the
burdens of complying with a variety of foreign laws and other factors beyond the
Company's control. The Company is also subject to general geopolitical risks in
connection with its international operations, such as political, social and
economic instability, potential hostilities and changes in diplomatic and trade
relationships. There can be no assurance that such factors will not adversely
affect the Company's operations in the future or require the Company to modify
its current business practices. In addition, the laws of certain foreign
countries in which the Company's products are or may be developed, manufactured
or sold, including various countries in Asia, may not protect the Company's
products or intellectual property rights to the same extent as do the laws of
the United States and thus make the possibility of piracy of the Company's
technology and products more likely. Most of the Company's foreign sales are
negotiated in U.S. dollars; however, invoicing is often done in local currency.
As a result, the Company may be subject to the risks of currency fluctuations.
There can be no assurance that one or more of the foregoing factors will not
have a material adverse effect on the Company's business, financial condition or
operating results or require the Company to modify its current business
practices.
A limited number of customers historically have accounted for a substantial
portion of the Company's net revenues. In fiscal 1999, 1998 and 1997, sales to
the Company's top ten customers accounted for approximately 70%, 81% and 78%,
respectively, of the Company's net revenues. In fiscal 1999, Yamaha Corporation
accounted for 17% and Mitsumi accounted for 10% of net revenues. In fiscal 1998,
Mitsumi accounted for 17% and LG Electronics accounted for 14% of the Company's
net revenues. In fiscal 1997, Mitsumi accounted for 14% and LG Electronics
accounted for 13% of the Company's net revenues. Kanematsu, a Japanese trading
company, purchases product from the Company and resells the product to Japanese
manufacturers. The Company expects that sales to a limited number of customers
will continue to account for a substantial portion of its net revenues for the
foreseeable future. The Company has experienced significant changes from year to
year in the composition of its major customer base and believes this pattern
will continue. The Company does not have long-term purchase agreements with any
of its customers. Customers generally purchase the Company's products subject to
cancelable short-term purchase orders. The loss of, or a significant reduction
in, purchases by current major customers would have a material adverse effect on
the Company's business, financial condition and results of operations. In fiscal
1998 and 1999 the Company lost a number of its optical storage customers due to
increased competition and the Company's failure to timely develop its next
generation CD-ROM and CD-RW controller products. There can be no assurance that
the Company's current customers will continue to place orders or that existing
orders will not be canceled. If sales to current customers cease or are reduced,
there can be no assurance that the Company will be able to continue to obtain
the orders from new customers necessary to offset any such losses or reductions.
Moreover, there can be no assurance that the Company could qualify its foundries
for potential new customers or that it could do so in a timely manner.
10
<PAGE>
The Company currently places noncancelable orders to purchase its products
from independent foundries on an approximately three month rolling basis and is
currently committed with two of its foundries for certain minimum amounts of
capacity for the next several years while its customers generally place purchase
orders with the Company less than four weeks prior to delivery that may be
rescheduled or under certain circumstances may be canceled without penalty.
Consequently, if anticipated sales and shipments in any quarter are rescheduled,
canceled or do not occur as quickly as expected, expense and inventory levels
could be disproportionately high and the Company's business, financial condition
and results of operations for that quarter or for the year would be materially
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors that May Affect Future
Results--Risks of Supply Constraints and Manufacturing Process" below.
COMPETITION
The optical storage and consumer (particularly, video disk player) markets
in which the Company competes are intensely competitive and are characterized by
rapid technological change, declining unit average selling prices ("ASPs") and
rapid product obsolescence. The Company is currently experiencing intense
competition in both the optical storage and consumer markets and expects
competition to increase in the future from existing competitors and from other
companies that may enter the Company's existing or future markets with solutions
that may be less costly or provide higher performance or additional features.
The Company's existing and potential competitors include many large domestic and
international companies that have substantially greater financial,
manufacturing, technical, marketing, distribution and other resources, broader
product lines and longer standing relationships with customers than the Company.
The Company's competitors also include a number of emerging companies. Certain
of the Company's principal competitors in the optical storage market maintain
their own semiconductor foundries and may therefore benefit from certain
capacity, cost, quality control and technological advantages. In its effort to
diversify its customer and market base, in fiscal 1999 the Company entered the
digital broadcast market, a market in which the Company has not operated
previously. In general, the Company believes that its ability to compete
successfully depends on a number of factors, both within and outside of its
control, including the price, quality and performance of the Company's and its
customers' products, the timing and success of new product introductions by the
Company, its customers and its competitors, the emergence of new industry
standards, the development of technical innovations, the ability to obtain
adequate foundry capacity and sources of raw materials, the efficiency of
production, the rate at which the Company's customers design the Company's
products into their products, the market acceptance of the products of the
Company's customers, the assertion of intellectual property rights and general
market and economic conditions. There can be no assurance that the Company will
be able to compete successfully in the future.
The willingness of prospective customers to design the Company's products
into their products depends, to a significant extent, upon the ability of the
Company to have product available at the appropriate market window and to price
its products at a level that is cost effective for such customers. The markets
for most of the applications for the Company's products, particularly the
optical market and the consumer market, are characterized by intense price
competition. As the markets for the Company's products mature and competition
increases, the Company anticipates that ASPs on its products will decline. If
the Company is unable to reduce its costs sufficiently to offset declines in
ASPs or is unable to successfully introduce new higher-performance products with
higher ASPs, the Company's business, financial condition and result of
operations will be materially adversely affected. If the Company experiences
yield or other production problems or shortages of supply that increase its
manufacturing costs, or fails to reduce its manufacturing costs, the result
could have a materially adverse effect on the Company's business, financial
condition and operating results.
Prior to the Company's entry into the optical storage market, merchant
suppliers such as Sanyo and captive suppliers such as Panasonic, Sony and
Toshiba supplied semiconductor solutions for proprietary and SCSI drivers.
Although the Company was the first company to sell a single-chip IDE/ATAPI
11
<PAGE>
CD-ROM controller, many competitors including Cirrus Logic, MediaTek and Sanyo
now offer single-chip solutions. Furthermore, companies such as Toshiba,
Panasonic and Sony have developed their own IDE/ATAPI CD-ROM controllers and, in
addition to using them internally, sell these controllers to the merchant market
in competition with the Company's products. As the Company integrates more
functionality into its controllers, companies that had previously supplied
complementary products may also become competitors. The Company expects
increased competition in the optical storage market from large, international
companies that have their own manufacturing capabilities as this market
transitions to CD-RW and DVD. The Company's strength in competing against this
increased competition in the future will be the technological leadership and
customer relationships that it has developed and cultivated over the past
several years.
In the videodisk player market, comprised of the Company's VCD and DVD
products, the Company competes primarily with C-Cube Microsystems, ESS
Technology, Toshiba, Matsushita and LSI Logic. Approximately one-third of the
total available market of the videodisk player market is comprised of captive
suppliers. These captive suppliers are Japanese companies that make both chips
and players and are members of the DVD Forum. As members of the DVD Forum, these
companies, as a DVD player manufacturer generally pay a lower patent royalty fee
to the Forum, and therefore, enjoy a cost advantage over the Company's targeted
customers making it more difficult for the Company's customers and thereby the
Company to compete successfully. In the cable, satellite and terrestrial
markets, the Company competes with SGS Thompson, LSI Logic, VLSI Technology and
Broadcom. For the most part, these companies are all large, international
companies with a much larger infrastructure than the Company. The cable,
satellite and terrestrial markets are all new markets for the Company and
although this market is still emerging, as a new entrant, the Company will be
competing with companies who already have a strong relationship with the
Company's targeted customers. Furthermore, the Company expects competition to
increase in the future. For the Company to compete successfully in the satellite
and terrestrial market, it must develop alliances with tuner and mechanism
providers. The Company recently executed a joint development agreement with one
of the world's leading digital TV tuner manufacturers on its first generation
demodulator chip for the terrestrial market. However, the Company must form
additional alliances if the Company is to compete successfully in the satellite
and terrestrial market.
In the digital imaging market, the Company's primary product offerings
target the niche, high-end market and the Company's merchant competition does
not offer directly competitive products. In some cases, the merchant competition
offers a subset of the Company's product features. In other cases, the merchant
competition offers a software alternative to the Company's hardware solution.
However, the Company expects direct merchant competition in the niche, high-end
digital imaging equipment market to emerge in the near future. Despite this lack
of direct competition in the merchant market, the Company does experience
competition with its DSP, compression and resolution enhancement products from
internal design groups within the Company's targeted customers, such as Xerox,
HP, Canon, Hitachi, NEC and Texas Instruments. As with the merchant market, the
Company's strength in competing with these internal design teams comes from the
breadth of the solution the Company is able to provide. With respect to the
Company's embedded controller board products, the Company competes with
Peerless, Xionics, Electronics for Imaging and AHT. The Company is currently
able to provide more silicon on a controller board than its competition
providing it with a cost advantage. However, the Company must continue to
enhance and strengthen its software capabilities in order to compete
successfully in this market. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations Factors that May Affect Future
Results--Competitive Market" below. As to the new lower-end of products the
Company is developing for the digital imaging equipment market, the Company
expects greater direct competition than it currently experiences in the niche,
high-end market.
12
<PAGE>
RESEARCH AND DEVELOPMENT
The Company currently invests substantial resources in its product
development efforts. During fiscal 1999, 1998 and 1997, the Company spent
approximately $51.1 million, $49.7 million, and $34.7 million, respectively, on
research and development activities. The Company intends to continue to invest
in the development of products in each of its core technologies and in products
that integrate its core technologies.
The Company's performance is highly dependent upon the successful
development and timely introduction of new products at competitive price and
performance levels. There can be no assurance that products currently under
development or any other new products will be successfully developed or will
achieve market acceptance. The failure of the Company to introduce new products
successfully or the failure of new products to achieve market acceptance would
have a material adverse effect on the Company's business, financial condition
and results of operations. During fiscal 1998 and most of fiscal 1999, the
Company failed to timely introduce its integrated CD-ROM controller and next
generation of CD-RW controller creating a situation where the Company was
selling only mature optical storage products which continued to decline in unit
volume sales and ASPs. This, combined with other factors including increased
competition, resulted in a significant decline in revenues. The success of new
product introductions is dependent on several factors, including recognition of
market requirements, product cost, timely completion and introduction of new
product designs, quality of new products and achievement of acceptable
manufacturing yields from the Company's contract manufacturers. Due to the
design complexity of its products, the Company has experienced delays in
completing development and introduction of new products, and there can be no
assurance that the Company will not encounter such delays in the development and
introduction of future products. There can be no assurance that the Company will
successfully identify new product opportunities and develop and bring new
products to market in a timely manner, that the Company's products will be
selected for design into the products of its targeted customers or that products
or technologies developed by others will not render the Company's products or
technologies obsolete or noncompetitive. The failure of the Company's new
product development efforts or the failure of the Company to achieve market
acceptance of its new products would have a material adverse effect on the
Company's business, financial condition and results of operations.
PROPRIETARY RIGHTS AND LICENSES
The Company's ability to compete is affected by its ability to protect its
proprietary information. The Company considers its technology to be proprietary
and relies on a combination of patents, trademarks, copyrights, trade secret
laws, confidentiality procedures and licensing arrangements to protect its
intellectual property rights. The Company currently has patents granted, patents
pending, patents in preparation in the United States, and international patents
pending. Oak's first patent was issued in 1996. Accordingly, the duration of
Oak's material patents are no less than 14 years. 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
13
<PAGE>
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 International Trade Commission
("ITC") against certain Asian manufacturers of optical storage controller
devices based on the Company's belief that such devices infringed one or more of
the Company's patents. The complaint seeks a ban on the importation into the
United States of any infringing CD-ROM controller or products containing such
infringing CD-ROM controllers. (See "Legal Proceedings"). Litigation by or
against the Company could result in significant expense to the Company and
divert the efforts of the Company's technical and management personnel, whether
or not such litigation results in a favorable determination for the Company. In
the event of an adverse result in any such litigation, the Company could be
required to pay substantial damages, cease the manufacture, use and sale of
infringing products, expend significant resources to develop non-infringing
technology, discontinue the use of certain processes or obtain licenses to the
infringing technology. There can be no assurance that the Company would be
successful in such development or that such licenses would be available on
reasonable terms, or at all, and any such development or license could require
expenditures by the Company of substantial time and other resources. Patent
disputes in the semiconductor industry have often been settled through
cross-licensing arrangements. Because the Company has a limited portfolio of
patents, the Company may not be able to settle an alleged patent infringement
claim through a cross-licensing arrangement. If a successful claim is made
against the Company or its customers and a license is not made available to the
Company on commercially reasonable terms or the Company is required to pay
substantial damages or awards, the Company's business, financial condition and
results of operations would be materially adversely affected.
The Company generally enters into confidentiality agreements with its
employees and confidentiality and license agreements with its customers and
potential customers, and limits access to and distribution of the source and
object code of its software and other proprietary information. Under some
circumstances, the Company grants licenses that give its customers limited
access to the source code of the Company's software which increases the
likelihood of misappropriation or misuse of the Company's technology.
Accordingly, despite precautions taken by the Company, it may be possible for
unauthorized third parties to copy certain portions of the Company's technology
or to obtain and use information that the Company regards as proprietary. There
can be no assurance that the steps taken by the Company will be adequate to
prevent misappropriation of its technology or to provide an adequate remedy in
the event of a breach or misappropriation by others.
14
<PAGE>
The Company has licensed technology from third parties for use in its
consumer, optical storage, and digital imaging equipment business, and pursuant
thereto is required to fulfill confidentiality obligations and in certain cases
pay royalties. Certain of the Company's products require that certain copy
protection software or other software be obtained if the products are to be
marketable and exportable. Should the Company lose its rights to or be unable to
obtain the necessary copy protection software, the Company would be unable to
sell and market certain of its MPEG and optical storage products geared for the
DVD market. The Company licenses the Sun Microsystems SPARC core for use with a
number of its consumer products for which it is obligated to pay a royalty based
on a percentage of the net selling price of such products. The Company has also
entered into a number of joint development and supply arrangements pursuant to
which the Company jointly develops a product with another company or contracts
with another company to develop a product or component for it and then purchases
the product or component from such company for resale with other Company
products. In addition, the Company has on occasion purchased off the shelf
products to resell bundled with its own product. 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 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 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.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--The Company May Be Unable to Protect Its Intellectual Property and
Proprietary Rights" and "The Company May Be Unable to Obtain Third Party
Intellectual Property Rights and/or May Be Liable for Significant Damages"
below.
EMPLOYEES
As of June 30, 1999, the Company had 442 full-time employees, including 281
in research and development, 75 in sales and marketing, and 86 in finance,
administration and operations. The Company believes that its future performance
will depend, in part, on its ability to continue to attract and retain qualified
technical and management personnel, particularly highly skilled design engineers
and software programmers involved in new product development, for whom
competition is intense. The Company's employees are not represented by any
collective bargaining unit and the Company has never experienced a work
stoppage. The Company believes that its employee relations are good.
ITEM 2. PROPERTIES
The Company's executive offices and its principal marketing, sales and
product development operations are located in approximately 80,000 square feet
of leased space in Sunnyvale, California under a noncancelable operating lease
that expires in December 2001. The Company has approximately 33,425 square feet
of additional leased facilities in Sunnyvale at 1150 E. Arques under a
noncancelable lease that expires in February 2000. This facility is currently
being subleased to an unrelated party under a noncancelable sublease also
expiring in February 2000. The Company owns a portion of a building in Taipei,
Taiwan, and leases facilities, primarily for sales, product development, and
technical support, in Andover, Massachusetts; Tokyo, Japan; Bristol, England;
Munich, Germany; Shenzhen, China; and Boca Raton, Florida. The Company is
currently attempting to sublease its facilities in Boca Raton where it has 5,208
square feet. The Company believes its existing facilities will be adequate to
meet its requirements for at least the next fiscal year.
ITEM 3. LEGAL PROCEEDINGS
The Company and various of its current and former officers and Directors are
parties to several class action lawsuits filed on behalf of all persons who
purchased or acquired the Company's common stock (excluding the defendants and
parties related to them) for the period July 27, 1995 through May 22, 1996.
15
<PAGE>
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 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 alleged 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 the plaintiffs' First Amended Consolidated
Complaint, but allowed the 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 the
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, the plaintiffs
elected not to amend this claim. Accordingly, the only remaining claim in state
court action, 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.
Plaintiffs have recently filed a motion to reinstate the California Corporation
Code Sections 25400/25500 claims against the company and the remaining Oak
defendants have filed a cross-motion to dismiss this remaining claim against
them. These motions are scheduled for hearing on October 1, 1999. 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 Sections 25400/25500 claim. This issue was resolved in favor of allowing
such nationwide class actions by the California Supreme Court, Case No. 5058723,
on January 4, 1999, in the DIAMOND MULTIMEDIA SECURITIES LITIGATION appeal by
the California Supreme Court. Discovery has commenced in this action. The
defendants and certain third parties have produced documents and a small number
of depositions have been taken.
The Company and several 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 common
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 the plaintiffs leave to amend
most claims. The plaintiffs' Second Amended Consolidated Complaint was filed on
September 4, 1997. The 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. Plaintiffs have recently filed a motion seeking the Court's
permission to voluntarily dismiss this action without prejudice. Defendants have
requested that the dismissal be with prejudice. This motion is scheduled for
hearing on September 29, 1999.
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, Master File No. CV758510. 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 state and putative 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 shares of
the Company's common stock and the payment of monetary damages to the Company.
16
<PAGE>
All of these actions are in the early stages of proceedings. Based on its
current information, the Company believes the suits to be without merit and will
defend its position vigorously. Although it is reasonably possible the Company
may incur a loss upon conclusion of these claims, an estimate of any loss or
range of loss cannot be made. No provision for any liability that may result
upon adjudication has been made in the Company's Consolidated Financial
Statements.
In connection with these legal proceedings, the Company has incurred and
expects to continue to incur legal and other expenses.
The Company and its current Directors were also parties to six putative
class actions filed on behalf of all of the Company's Stockholders (other than
defendants and parties related to them) in the Court of Chancery of the State of
Delaware in and for New Castle County concerning a proposal by a management led
investor group known as "Gold Acquisition Group" to acquire all of the
outstanding shares of the Company for a price of $4.50 per share. The plaintiffs
have requested consolidation of the actions under the caption IN RE OAK
TECHNOLOGY, INC. SHAREHOLDERS LITIGATION, C.A. No. 16789 ("Delaware Shareholders
Litigation"). The other civil action numbers are 16792, 16793, 16794, 16818, and
16831. The plaintiffs alleged that the offer was inadequate and that the
defendants breached their fiduciary duties of loyalty and entire fairness. On
December 14, 1998, a Special Committee of the Board of Directors that had been
formed to evaluate the proposal announced that it would not recommend the
proposal to the Company's full Board of Directors. In addition, on December 21,
1998, Gold Acquisition Group announced that its proposal had expired and to
date, it has not been renewed. On January 27, 1999, David Tsang and Ta-Lin Hsu,
members of Gold Acquisition Group, signed a Letter Agreement agreeing that they
would not, without the prior written consent of a majority of the Board of
Directors of the Company, acquire or offer to acquire any voting securities of
the Company (or take additional actions concerning the voting securities of the
Company as set forth in the Letter Agreement) for a period of one year from the
date of the Letter Agreement. On June 28, 1999, the plaintiffs voluntarily
dismissed the actions without prejudice. The Court entered an order dismissing
the action on July 2, 1999.
The Company and its current Directors were also parties to a putative class
action filed on behalf of all of the Company's Stockholders (other than
defendants and parties related to them) in Santa Clara County Superior Court,
designated KRIM V. OAK TECHNOLOGY, INC., ET AL., Case No. 778281. The
allegations of the plaintiffs in this action were nearly identical to the
Delaware Shareholders Litigation. This action was stayed by agreement of the
parties as a result of the Special Committee's announcement that it would not
recommend to the full Board of Directors the proposal made by Gold Acquisition
Group to acquire all of the outstanding shares of the Company for a price of
$4.50 per share as well as the subsequent announcement of the expiration of the
proposal by Gold Acquisition Group. On April 28, 1999, the plaintiffs filed a
dismissal without prejudice. The Court entered an order dismissing the action on
May 3, 1999.
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 alleged violations of the Delaware General Corporation
Law and breaches of fiduciary duty and was brought on behalf of all of the
Company's common stockholders at any time between August 19, 1997 and
November 25, 1998. The plaintiffs' claims are based upon the Board of Directors'
adoption on or about August 19, 1997 of a Stockholder Rights Plan (the "Rights
Plan") that included a provision that limited the redemption or modification of
the Rights Plan to its Continuing Directors or their designated successors. The
plaintiffs alleged that the Rights Plan with the Continuing Directors provision
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. The plaintiffs sought an injunction and a declaratory
judgment that the Rights Plan is invalid and unenforceable and monetary damages
for the alleged
17
<PAGE>
violations of fiduciary duty. On November 18, 1998, in light of the change in
the law due to the decision in CARMODY V. TOLL BROS., the Company's Board of
Directors voted to amend the Rights Plan to eliminate all Continuing Directors
provisions. On December 11, 1998, the plaintiffs amended their complaint to
include a cause of action which asserted that the Company's Directors elected
after the adoption of the Company's Rights Plan were not validly elected and
another cause of action for breach of fiduciary duty related to the proposal by
the Gold Acquisition Group to acquire all of the outstanding shares of stock of
the Company for $4.50 per share (also the subject of the DELAWARE SHAREHOLDERS
LITIGATION and the KRIM litigation described above). Pursuant to a settlement
reached with the plaintiffs, the action has been dismissed with prejudice,
except for the claims out of the Gold Acquisition Group, which have been
dismissed without prejudice. The Company agreed to pay the plaintiffs' attorneys
fees, which the Court awarded in the amount of $90,000, a portion of which were
paid by the Company's Directors' and Officers' liability insurers. On July 29,
1999, the Court entered an Order approving the settlement and dismissing the
action. The settlement will not have a material effect on the Company's
Consolidated Financial Statements.
In connection with the above-described legal proceedings, the Company has
incurred and 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, Case
No. C-97-20959. 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
18
<PAGE>
subject of the ITC action and related settlement agreement, through or to a
UMC-affiliated, Taiwanese entity called MediaTek. On February 23, 1998, the
federal court judge denied the Company's request for a preliminary injunction
based on the court's findings that there was no evidence that UMC was presently
engaged in the manufacture of CD-ROM controllers or other products covered by
the settlement agreement. On December 24, 1997, UMC answered the Company's
complaint and counterclaimed asserting causes of action for recission,
restitution, fraudulent concealment, mistake, lack of mutuality, interference
and declaratory judgment of non-infringement, invalidity and unenforceability of
the Oak patent that was the subject of the original ITC action filed against
UMC. The Company believes these counterclaims to be without merit and will
vigorously defend its patent. Both the Company and UMC seek compensatory and
punitive damages. In addition, the Company seeks permanent injunctive relief. On
June 11, 1998, this case was consolidated for all purposes with a related case
brought against the Company by MediaTek (described below) under Case No.
C-97-20959. On the same date, pursuant to UMC's request, the federal court judge
ordered the consolidated action stayed under 28 U.S.C. Section 1659, based on
the judge'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). The stay will be lifted upon final
resolution of Investigation No. 337-TA-409, at which time the Company intends to
pursue its action against UMC for breach of contract, breach of the covenant of
good faith and fair dealing and fraud.
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, Case No. C-97-21126. 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) under Case No.
C-97-20959. On the same date, pursuant to UMC's request, the federal court judge
ordered the consolidated action stayed under 28 U.S.C. Section 1659, based on
the judge'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). The stay will be lifted upon final
resolution of Investigation No. 337-TA-409.
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 of 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. The following respondents, all
Taiwanese drive manufacturers, were later added to the proceeding pursuant to an
Initial Determination by the Administrative Law Judge (ALJ) supervising the
Investigation following a motion brought by the Company on August 6, 1998 to add
these respondents: Actima Technology Corp., ASUSTek Computer, Inc., Behavior
Tech Computer Corp., Delta Electronics, Inc. Momitsu Multi Media Technologies,
Pan-International Industrial Corp. and Ultima Electronics Corp. On August 28,
1998, the ALJ 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
19
<PAGE>
claim under Section 337 of the Tariff Act. On December 23, 1998, the ALJ issued
another Initial Determination terminating the investigation as to respondent UMC
for a second time. On December 31, 1998, the Company filed a petition with the
Commission for review of the Initial Determination. On February 3, 1999, the
Commission reversed the Initial Determination of the ALJ for a second time on
the grounds that the Company's complaint against UMC does state an unfair trade
practices claim under Section 337 of the Tariff Act. On May 10, 1999, the ALJ
issued another Initial Determination terminating the investigation as to
respondent UMC for a third time, finding that UMC's activities were licensed On
May 17, 1999, the Company filed a petition with the Commission for review of the
Initial Determination and on June 28, 1999, the Commission determined to review
the Initial Determination.
Trial before the ALJ as to all respondents except UMC commenced on
January 11, 1999 and concluded on January 28, 1999. On May 14, 1999, the ALJ
entered an Initial Determination that no unfair trade practices were committed
by Mediatek under Section 337 of the Tariff Act. On May 24, 1999, the Company
filed a petition requesting the Commission to review the Initial Determination
and on June 28, 1999 the Commission determined to review it. The Company
believes that both the May 14, 1999 and May 17, 1999 Initial Determinations are
incorrect and the Company intends to pursue its right to seek protection from
importation of UMC's and Mediatek's CD-ROM controllers under the trade laws of
the United States. The Commission's decision with respect to both Initial
Determinations is scheduled to be announced in October, 1999. In connection with
this legal proceeding, the Company has incurred and will continue to incur
substantial legal and other expenses.
On February 26, 1999, the Lemelson Medical, Education & Research Foundation,
Limited Partnership (the "Lemelson Partnership") filed a complaint for patent
infringement, naming eighty-eight defendants, including the Company. The
Lemelson Partnership alleges to be the owner of certain patents issued to Jerome
Lemelson (now deceased). The suit is entitled LEMELSON MEDICAL, EDUCATION &
RESEARCH FOUNDATION, LIMITED PARTNERSHIP V. LUCENT TECHNOLOGIES INC., ET AL.,
No. CIV 99-0377-PHX-RGS, and was filed in the United States District Court in
Phoenix, Arizona. In this lawsuit, the Lemelson Partnership claims that the
Company uses certain methods, or imports, sells, or offers to sell certain
devices made using certain methods, claimed in some of the Lemelson
patents-in-suit. Specifically, the suit alleges that Oak infringes certain
claims of U.S. Patents Nos. 4,338,626; 4,390,586; 4,511,918; 4,969,038;
4,979,029; 4,984,073; 5,023,714; 5,023,714; 5,039,836; 5,067,012; 5,119,190;
5,119,205; 5,128,753; 5,144,421; 5,249,045; 5,283,641; and 5,351,078. The
complaint seeks judgment that the Lemelson patents-in-suit are not invalid and
have been willfully and deliberately infringed; unspecified compensatory
damages, together with interest and costs; treble damages; reasonable attorneys'
fees; as well as injunctive relief against further infringement of the Lemelson
patents-in-suit. The Company filed an answer and declaratory relief
counterclaims on August 12, 1999. The Lemelson Partnership responded to the
Company's declaratory relief claims on September 7, 1999. The Company will
defend against the charges raised in the suit.
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.
On September 1, 1999 David D. Tsang and certain of his relatives entered
into a consent decree with the Securities and Exchange Commission in connection
with an insider trading investigation. Pursuant to the terms of the settlement,
Mr. Tsang neither admits nor denies the allegation that he provided nonpublic
information to certain relatives. He did not profit personally from any
transaction in question. The Company cooperated fully with the SEC in the
investigation and was not the subject of the investigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
20
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company has paid no cash dividends on its Common Stock since its
incorporation and anticipates that for the foreseeable future it will continue
to retain any earnings for use in its business. In addition, the Company's bank
arrangements currently prohibit the Company from issuing cash dividends.
The Company's Common Stock trades on the Nasdaq National Market under the
symbol OAKT. The following table indicates the range of the high and low closing
prices as reported by Nasdaq for the past twelve fiscal quarters and June 30,
1999.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
FISCAL 1997
First Quarter................................. 11.000 5.500
Second Quarter................................ 13.750 8.688
Third Quarter................................. 14.563 9.500
Fourth Quarter................................ 10.500 7.563
FISCAL 1998
First Quarter................................. 12.000 9.313
Second Quarter................................ 11.500 6.031
Third Quarter................................. 7.563 5.594
Fourth Quarter................................ 6.438 4.250
FISCAL 1999
First Quarter................................. 4.625 2.000
Second Quarter................................ 4.813 1.875
Third Quarter................................. 4.188 2.969
Fourth Quarter................................ 4.563 2.906
</TABLE>
On August 31, 1999 the closing price of the Common Stock on the Nasdaq
National Market was $4.75 per share. As of August 31, 1999, there were 328
holders of record of the Common Stock of the Company.
21
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------------------------
1999 1998 1997 1996 1995
------------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues (1)...................... $ 71,051 $157,106 $167,395 $247,984 $110,982
Gross profit.......................... 31,432 74,548 94,181 109,485 54,616
Operating income (loss)............... (61,946) (9,104) 32,848 57,147 29,440
Net income (loss)..................... $ (50,669) $ 5,947 $ 23,719 $ 37,133 $ 21,222
Diluted income (loss) per share....... $ (1.24) $ 0.14 $ 0.55 $ 0.87 $ 0.67
Shares used in diluted per share
calculations (2).................... 40,819 42,493 42,757 42,614 31,474
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments............................. $133,203 $117,225 $145,269 $113,284 $150,943
Working capital........................... 150,936 144,314 168,168 134,686 156,258
Total assets.............................. 203,841 261,411 287,595 256,308 193,953
Long-term debt, excluding current
portion................................. 5 27 2,496 2,858 2,227
Total stockholders' equity................ $189,422 $241,208 $238,697 $210,827 $162,643
</TABLE>
- ------------------------
(1) Net revenues include non-refundable technology license fees. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(2) Computed on the basis described in Note 2 of Notes to Consolidated Financial
Statements.
SELECTED QUARTERLY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------
JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30,
1999 1999 1998 1998 1998 1998 1997 1997
-------- --------- --------- --------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues (1) ............... $13,258 15,965 $21,861 $ 19,967 $28,910 $35,550 $49,353 $43,293
Gross profit.................... 4,248 7,375 10,302 9,501 11,485 14,405 26,120 22,538
Operating income (loss)......... (17,304) (13,791) (11,669) (19,188) (12,031) (8,578) 6,109 5,396
Net income (loss)............... $(15,752) (11,045) $(9,693) $(14,179) $(4,844) $(3,004) $ 7,602 $ 6,193
Diluted income (loss) per share
(2) .......................... $ (0.38) $ (0.27) $ (0.24) $ (0.35) $ (0.12) $ (0.07) $ 0.18 $ 0.15
Shares used in diluted per share
calculations (2).............. 40,902 40,768 40,679 40,928 41,532 42,000 42,643 42,569
</TABLE>
- ------------------------------
(1) Net revenues include non-refundable technology license fees. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(2) Computed on the basis described in Note 2 of Notes to Consolidated Financial
Statements.
22
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXCEPT FOR THE HISTORICAL FINANCIAL INFORMATION CONTAINED HEREIN, THE
MATTERS DISCUSSED IN THIS ANNUAL REPORT ON FORM 10-K MAY BE CONSIDERED
"FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES ACT OF 1934, AS
AMENDED. SUCH STATEMENTS INCLUDE DECLARATIONS REGARDING THE INTENT, BELIEF OR
CURRENT EXPECTATIONS OF THE COMPANY AND ITS MANAGEMENT. SUCH FORWARD-LOOKING
STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE A NUMBER OF
RISKS AND UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
INDICATED BY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY UNDERTAKES NO
OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY REVISION TO THESE
FORWARD-LOOKING STATEMENTS WHICH MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCES
AFTER THE DATES HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
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 ACCESS TO 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 AND CD-RW CONTROLLER PRODUCTS AND THE PC MARKET, (XV) RISKS RELATED TO
INTERNATIONAL BUSINESS OPERATIONS, (XVI) ABILITY OF THE COMPANY TO MAINTAIN
ADEQUATE PRICE LEVELS AND MARGINS WITH RESPECT TO ITS PRODUCTS, (XVII) RISKS
RELATED TO ACQUISITIONS, (XVIII) THE ABILITY TO ATTRACT AND RETAIN QUALIFIED
MANAGEMENT AND TECHNICAL PERSONNEL AND (XIX) OTHER RISKS IDENTIFIED FROM TIME TO
TIME IN THE COMPANY'S REPORTS AND REGISTRATION STATEMENTS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION.
GENERAL
The Company designs, develops and markets high performance integrated
semiconductors, software and platform solutions to original equipment
manufacturers worldwide that serve the optical storage, consumer electronics and
digital imaging markets. The Company's products consist primarily of integrated
circuits and supporting software and firmware to provide a complete solution for
its 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. The Company's mission is to be a leading solutions
provider in the storage and distribution of digital content. The Company's
products enable its customers to deliver cost-effective, powerful systems to end
users for home and business use.
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 Imaging 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), announced a fourth (Xionics Document Technologies, Inc.), 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. The Xionics acquisition was announced in August 1999,
and is expected to be completed in November 1999.
As repositioned, the Company provides high-performance, integrated
semiconductors to original equipment manufacturers (OEMs) worldwide who serve
the optical storage, consumer electronics and
23
<PAGE>
digital imaging 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. A leading merchant
supplier of controllers for CD-ROM and CD-R/W drives, the Company's product
offerings for its three target market segments have expanded to include
controllers for DVD drives; MPEG-2 audio/video decoders for DVD players;
integrated circuits for digital broadcast systems such as cable, satellite and
terrestrial set-top boxes; and multitasking imaging processors and compression
codes for the emerging class of 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 fourth
quarter of fiscal 1999, the Company reported a net loss of $15.7 million, its
sixth consecutive quarterly loss. The decrease in fourth quarter revenue and
continued loss is primarily due to a product transition in the Company's optical
storage business (which in fiscal 1998 accounted for over 80% of the Company's
total revenue) as the Company moves to its next generation CD-RW controller,
which is not expected to reach mass production until the second half of fiscal
2000. Although the Company is continuing to ship its single function CD-ROM
controllers, integrated CD-ROM controllers and first generation CD-RW
controller, unit volumes and ASPs of these products have declined and will
continue to decline as these products mature.
On February 2, 1999, the Company announced the appointment of Young K. Sohn
to the office of President and Chief Executive Officer. Mr. Sohn has completed a
comprehensive review of all aspects of the Company and has hired additional
members of the management team whose charter will be to architect and execute a
turnaround plan for the Company.
The Company's quarterly and annual operating results have been, and will
continue to be, affected by a wide variety of factors that could have a material
adverse effect on revenues and profitability during any particular period,
including competitive pressures on selling prices, availability and cost of
foundry capacity and raw materials, fluctuations in yield, loss of any strategic
relationships, the Company's ability to introduce new products in accordance
with OEM design requirements and design cycles, new product introductions by the
Company's competitors and market acceptance of product sold by both the Company
and its customers.
In addition, the Company's operating results are subject to fluctuations in
the markets for its customers' products, particularly the consumer electronics
and personal computer markets, which have been extremely volatile in the past,
and the terrestrial broadcast market, which is in an early stage, creating
uncertainty with respect to product volume and timing. The Company has devoted a
substantial portion of its research and development efforts in recent quarters
to developing chips used in both Digital Video Disk ("DVD") systems, CD-RW
drivers, digital broadcast systems and inkjet multi-function peripherals. The
Company's DVD, CD-RW, digital broadcast and digital imaging products are subject
to the new product risks described in the preceding paragraph, including in
particular the Company's ability to timely introduce these products and the
market's acceptance of them, which could have a materially adverse effect on its
operating results.
24
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RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net revenues, certain
consolidated statement of operations data for the periods indicated:
<TABLE>
<CAPTION>
JUNE 30,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net revenues.......................................... 100.0% 100.0% 100.0%
Cost of revenues...................................... 55.8 52.5 43.7
------ ----- -----
Gross margin.......................................... 44.2 47.5 56.3
Research and development expenses..................... 71.9 31.6 20.7
Selling, general and administrative expenses.......... 49.4 19.7 12.9
Acquired in-process research and development.......... 10.1 1.0 3.0
Restructuring charge.................................. -- 1.0 --
------ ----- -----
Operating income (loss)............................... (87.2) (5.8) 19.7
Non-operating income, net............................. 7.8 10.3 3.2
------ ----- -----
Income (loss) before income taxes..................... (79.4) 4.5 22.9
Income taxes (benefit)................................ (8.1) 0.7 8.7
------ ----- -----
Net income (loss)..................................... (71.3)% 3.8% 14.2%
------ ----- -----
</TABLE>
FISCAL 1999 COMPARED TO FISCAL 1998
NET REVENUES. Net revenues decreased 55% to $71.1 million for fiscal year
1999 compared to $157.1 million for fiscal year 1998. Approximately two-thirds
of the revenue decrease was attributable to a decrease in unit sales of CD-ROM
controllers in the Optical Storage business segment compared to 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 was due to a loss
of CD-ROM and CD-RW market share, the maturation of the CD-ROM market,
development delays in the Company's next-generation CD-ROM and CD-RW products,
and to a lesser extent, economic downturns in the Asian markets to which a large
majority of the Company's products are sold. Overall, sales of optical storage
products, which accounted for 82% of the Company's revenues in the prior fiscal
year, declined 64% in fiscal year 1999.
Net revenues for the Digital Imaging Equipment business segment were $20.9
million for fiscal year 1999, representing a 7.7% increase over the $19.4
million reported in fiscal 1998. This increase was primarily due to increase
revenues from the segment's resolution enhancement products. Net revenues for
the Consumer business segment were $3.2 million for fiscal year 1999,
representing a 34.6% decrease from the $4.9 million reported in fiscal year
1998. This decrease was primarily due to decreased revenues from the segment's
VCD decoder products.
For fiscal years 1999 and 1998, sales to the Company's top ten customers
accounted for approximately 70% and 81%, respectively, of the Company's net
revenues. Two customers accounted for over 10% of revenues in fiscal 1999,
compared to three customers in fiscal 1998. International sales, principally to
Japan, Korea, Singapore, and Belgium accounted for approximately 86% and 92% of
the Company's net revenues in fiscal 1999 and 1998, respectively. See Note 18 to
the Consolidated Financial Statements.
Included in net revenues for fiscal 1999 and fiscal 1998 were $3.5 million
and $1.2 million, respectively, of nonrefundable technology license fees and
royalties.
The Company anticipates that net revenues for at least the first two
quarters of fiscal year 2000 will continue to be significantly less than the
comparable periods of the previous fiscal year as the Company completes its
transition to its next generation CD-RW controllers, which are not expected to
reach mass production until the second half of fiscal 2000. See "Factors That
May Affect Future Results" below.
25
<PAGE>
GROSS MARGIN. Cost of revenues includes the cost of wafer fabrication,
assembly and testing performed by third-party vendors and direct and indirect
costs associated with the procurement, scheduling and quality assurance
functions performed by the Company. The Company's gross margin decreased to
44.2% in fiscal 1999 as compared to 47.5% in fiscal 1998. The decrease in gross
margin is primarily the result of a decrease in ASPs for the Company's CD-ROM
controller products in the Optical Storage business segment which was only
partially offset by a decrease in the Company's unit cost for the same products.
Additionally, operations costs included in cost of goods sold, which were
relatively flat on a dollar basis, became higher as a percentage of revenues due
to the significant decline in sales volumes.
Gross margins for the Digital Imaging Equipment business segment were 68.9%
for fiscal year 1999, representing a decrease from 75.3% gross margin reported
in fiscal 1998. Gross margins for the Consumer business segment were 22.3% for
fiscal year 1999, representing a slight increase from 21.2% gross margin
reported in fiscal year 1998.
Gross margin in fiscal 1999 includes a $2.8 million provision for potential
forfeiture of certain foundry deposits with Chartered Semiconductor. See
footnote 12 to the consolidated financial statements. Gross margin in fiscal
1998 included the impact of a charge to cost of revenues related to increases in
inventory reserves of $3.3 million recorded during the year as well as a $3.5
million charge related to the discontinuation of the graphics and
audio/communications businesses. Excluding the impact of these inventory and
foundry-related charges, gross margin would have been 48.2% in fiscal 1999 and
51.8% in fiscal 1998.
The Company recorded inventory reserves of approximately $3.3 million and
$2.6 million in fiscal 1999 and 1998, respectively. The reserves represented
write-downs of excess and obsolete products, primarily servo chipsets for the
VideoCD market in Asia. These write-downs were the result of management's
assessment that the market for these products had either significantly declined
or no longer exists. The Company does not anticipate further significant
write-downs of its current inventories, however, as the Company continues to
transition to its next-generation CD-RW products, additional inventory reserves
may be required in future periods.
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
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 CD-ROM
products and therefore, it expects gross margin percentages to decline. In
addition, given the extremely competitive nature of the optical storage and
consumer market, the Company believes that gross margins for new products in its
optical storage market and consumer market 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 were $51.1 million and
$49.7 million, and expressed as a percentage of net revenues were 71.9% and
31.6% in fiscal 1999 and 1998, respectively. The absolute dollar increase in
research and development spending for fiscal 1999 compared to 1998 was primarily
due to the hiring of additional technical personnel, as well as increased
purchased technology amortization expense related to the Odeum, ViewPoint and
XLI acquisitions made in the fourth quarter of fiscal year 1998 and first
quarter of fiscal year 1999. Research and development expenses increased
significantly as a percentage of net revenues for fiscal 1999. This increase was
due to the significant decrease in the Company's net revenues compared to 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.
26
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative (S,G&A) expenses increased 14% to $35.1 million in fiscal 1999
from $30.9 million in fiscal 1998. During the second quarter of fiscal year
1999, the Company incurred approximately $1.6 million of consulting fees and
other expenses related to the evaluation of a buyout proposal from Gold
Acquisition Group. Additionally, legal expenses related to the complaint the
Company filed with the International Trade Commission (ITC) on April 7, 1998 and
additional litigation were higher in fiscal year 1999 compared to fiscal year
1998. See "Legal Proceedings". The increase from 1998 to 1999 was also due to
the hiring of additional management and administrative personnel since the
year-ago periods, and associated expenses. S,G&A expenses increased
significantly as a percentage of net revenues for fiscal 1999 compared to fiscal
1998 due primarily to the significant decrease in the Company's net revenues.
ACQUISTION-RELATED CHARGES. Acquisition-related charges include the costs
associated with the acquisitions of Viewpoint and XLI in fiscal 1999 and the
acquisition of certain assets of ODEUM in fiscal 1998. See note 10 of Notes to
Consolidated Financial Statements.
VIEWPOINT TECHNOLOGY
In the first quarter of fiscal year 1999, the Company acquired ViewPoint, a
privately held development stage company focused on developing high performance
solutions for the growing compact disc-read write market, specifically a
controller device to support high encoding speeds for next-generation CD-RW
drives, which was its only technology. At the date of acquisition, ViewPoint had
yet to introduce its first product in the market place and was in the process of
developing its VPT8008 product, but still required key firmware, drivers, design
changes and silicon testing prior to achieving technological feasibility.
ViewPoint's technology was only valuable when integrated into the Company"
server technology and physically redesigned to add significant key features.
Based on discussions with ViewPoint technical personnel, it was determined that
there were no alternative uses for their CD-RW technology and that approximately
$2.6 million in additional engineering and development expenses would be
required to bring a product to market in fiscal year 2000. The ViewPoint
technology has enabled the Company to develop a CD-RW controller product, the
9790, which will support up to 32x read and 8x write speeds. Management believes
that this product could provide approximately 50% of the Company's revenues in
FY2001. The Company has commenced development of derivative products
incorporating Viewpoint's base technology.
The Company paid $10.1 million in cash for all the outstanding shares of
ViewPoint. The purchase method of accounting was used to record the acquisition
and approximately $4.8 million of the purchase price was allocated to in-process
research and development, which was charged to operations in the quarter ended
September 30, 1998. The remaining costs of the acquisition were recorded on the
Company's balance sheet. Approximately $4.4 million of the purchase price was
allocated to purchased technology and other intangible assets and is being
amortized to operations on a straight-line basis over three years, and $0.9
million was allocated to cash, fixed assets and other tangible assets.
The valuation of the acquired in-process research and development used by
the Company in making the determination as to the amount of in-process research
and development expense was supported by valuation studies. The estimated value
of in-process research and development was derived using the "Income Approach",
which values an asset based on future cash flows that could potentially be
generated by the asset over its estimated useful life. The future cash flows
were discounted to their present value utilizing a discount rate of 28%. The
amounts of the purchase price technology assigned to the fair values of
in-process research and development and purchased technology represent
management's best estimate. The Company did not anticipate any material changes
from historical pricing, margins and expense levels in its valuation
assumptions.
27
<PAGE>
XLI
During the first quarter of fiscal 1999, the Company acquired Xerographic
Laser Images Corporation (XLI), a provider of print quality enhancement
technology for the digital office equipment market. At the date of acquisition,
XLI had developed one product, the XLI-2050 image inhancer, and was also in the
process of developing other high-performance products for digital copiers,
multi-function devices, scanners and display markets. The Company acquired XLI
in order to gain access to imaging technology and expertise that would
complement its own image process solutions. XLI had a number of products in the
development stage, none of which had reached the level of prototype or working
sample. Three primary projects in process at the date of acquisition were 1) the
2050CP which enables printers to have more precise dot positioning and
modulation and thereby, more accurately apply the color on the paper; 2) the
1016P, a black and white printer enhancement chip; and 3) a family of products
for the emerging flat panel display market. Based on discussions with XLI's
technical personnel, it was determined that there were no alternative uses for
their specific technologies outside of the digital office market and that
approximately $1.0 million in additional engineering and development expenses
would be required to bring in-process products to market beginning in fiscal
year 2000. The Company expected that about 20% of its future revenues could be
derived from products integrating XLI's technologies. However, subsequent to the
acquisition the Company has experienced some development delays and has adjusted
future estimates accordingly. The Company's management does not believe that
failure to complete in-process products will have a material adverse impact on
the Company's business, results of operations or financial condition.
The Company paid $3.7 million in cash for all the outstanding shares of XLI.
The purchase method of accounting was used to record the acquisition and
approximately $2.4 million was allocated to in-process research and development,
which was charged to operations in the quarter ended September 30, 1998. The
remaining costs of the acquisition were recorded on the Company's balance sheet
and are being amortized to operations on a straight-line basis over three years.
In addition to the purchase price, XLI shareholders have the right to
receive additional payments subject to the achievement of certain milestones by
XLI. Under the terms of the merger agreement, revenue levels from products
utilizing XLI's technologies in excess of a base amount of $3.7 million each
year of a three year period ending December 31, 2000 must be attained for XLI to
receive additional contingency payments, up to the maximum amount of $10.3
million. To date, these milestones have not been achieved and no additional
payments have been made to XLI shareholders. Such payments would be recorded on
the Company's balance sheet as an adjustment to the purchase price of XLI.
The valuation of the acquired in-process research and development used by
the Company in making the determination as to the amount of in-process research
and development was supported by valuation studies. The estimated value of
in-process research and development was derived using the "Income Approach". The
future cash flows were discounted to their present value utilizing a discount
rate of 25%. The amounts of the purchase price technology assigned to the fair
values of in-process research and development and purchased technology represent
management's best estimate. The Company did not anticipate any material changes
from historical pricing, margins and expense levels in its valuation
assumptions.
ODEUM
In the fourth quarter of fiscal year 1998, the Company acquired certain
assets of ODEUM Microsystems, Inc. (ODEUM), a subsidiary of Hyundai Electronics
America. With the acquisition, the Company acquired an integrated MPEG-2
audio/video decoder and transport demultiplexor and a DVB-S compliant QSPK
demodulator as well as a core group of hardware and software engineers. The
products acquired from ODEUM are used predominantly in "free to air" satellite
and cable set-top boxes for MPEG-2 encoded digital television broadcasting and
therefore, represented the Company's first step in expanding its Consumer
business segment and serving the digital television market. The Company has
recently introduced its first products into the set-top broadcast market
incorporating ODEUM's technologies.
28
<PAGE>
Based on discussions with ODEUM's technical personnel, it was determined
that there were no alternative uses for their specific technologies outside the
digital broadcast market and that approximately $3.0 million in additional
engineering and development expenses would be required to bring in-process
products to market beginning in fiscal year 2000. The Company expected that
approximately 15% of its future revenues could be derived from products
integrating ODEUM's technologies.
The assets OF ODEUM were acquired for $4.1 million in cash. The acquisition
was accounted for using the purchase method of accounting and the product
acquired was integrated into the Company's product offerings from the date of
acquisition. Approximately $1.3 million of the purchase price was allocated to
in-process research and development with the remaining amount was allocated to
purchased technology. The estimated value of in-process research and development
was derived using the "Income Approach". The future cash flows were discounted
to their present value utilizing a discount rate of 35%. The amounts of the
purchase price technology assigned to the fair values of in-process research and
development and purchased technology represent management's best estimate. The
Company did not anticipate any material changes from historical pricing, margins
and expense levels in its valuation assumptions.
RESTRUCTURING CHARGES. During 1998, the Company discontinued its graphics
and audio/communications businesses and incurred a charge to operations of
approximately $1.8 million related to these discontinued businesses. The $1.8
million charge consisted of $1.0 million related to a write-off of prepaid
royalties, approximately $0.6 million for severance pay and $0.2 million for
miscellaneous charges. See note 17 of Notes to Consolidated Financial
Statements.
NONOPERATING INCOME. For fiscal 1999, non-operating income, net, consisted
primarily of net interest income of $5.6 million. For fiscal 1998, non-operating
income, net, included net interest income of $7.4 million, net foreign currency
exchange losses of $2.5 million and approximately $10.6 million related to the
settlement agreement between the Company and United Microelectronics Corporation
in connection with a complaint the Company filed with the ITC on July 21, 1997.
The decrease in net interest income was due primarily to a reduction in the
Company's invested cash balance for most of fiscal 1999 (prior to the receipt of
the proceeds of the sale of the UICC investment discussed in note 12 of Notes to
Consolidated Financial Statements). The Company recorded a small net foreign
currency exchange gain in fiscal 1999, due to strengthening of the Japanese yen
as compared to the exchange loss in fiscal 1998.
INCOME TAXES. The effective tax benefit rate for fiscal year 1999 was
10.2%. The benefit rate was significantly less than statutory rates due to
limitations on net operating loss carryback benefits available to the Company,
as well as an increase to the valuation allowance against the Company's deferred
tax asset. The Company's effective tax rate was 15.0% in fiscal 1998, which was
lower than statutory rates as a result of research and development credits
earned by the Company becoming a higher percentage of the Company's' lower
taxable income. See Note 11 of Notes to Consolidated Financial Statements.
FISCAL 1998 COMPARED TO FISCAL 1997
NET REVENUES. The Company's net revenues in the comparison periods were
primarily derived from product sales. Net revenues decreased 6% to $157.1
million in fiscal 1998 from $167.4 million in fiscal 1997. This decrease was
primarily the result of a decrease in revenues from the sales of CD-ROM
controller products in the Optical Storage business segment and Video CD
products in the Consumer business segment partially offset by an increase in
revenues from the sale of digital imaging products. The decrease in revenues
from CD-ROM controller products was primarily due to a decrease in the average
selling prices ("ASPs") of the products partially offset by an increase in unit
sales. The decrease in revenues from Video CD products was primarily due to a
decrease in unit sales as well as a decrease in ASPs. The increase in revenues
from the sales of digital imaging equipment products was primarily the result of
an increase in unit sales partially offset by a decrease in ASPs.
29
<PAGE>
Net revenues from sales of the Company's CD-ROM controller products in the
Optical Storage business segment were approximately $127.4 million in fiscal
1998 compared to $140.8 million in fiscal 1997, accounting for 81% and 84% of
net revenues, respectively. Although the Company is attempting to diversify its
revenue product base in the three core markets of optical storage, consumer
electronics and digital imaging, it anticipates that CD-ROM controller sales in
the Optical Storage business segment will continue to account for a substantial
majority of its revenue in the foreseeable future.
Net revenues for the Digital Imaging Equipment business segment were $19.4
million for fiscal year 1998, representing a 131.0% increase over the $8.4
million reported in fiscal 1997. This increase was primarily due to increased
revenues from the segment's compression codec products. Net revenues for the
Consumer business segment were $4.9 million for fiscal year 1998, representing a
60.0% decrease from the $12.3 million reported in fiscal 1997. This decrease was
primarily due to decreased revenues from the segment's decoder products.
Net revenues from sales to the Company's top ten customers in fiscal 1998
and 1997 accounted for approximately 81% and 78%, respectively, of the Company's
net revenues.
International sales, principally to Japan, Taiwan, Korea and Belgium
accounted for approximately 92% and 96% of the Company's net revenues in fiscal
1998 and 1997, respectively. This decrease in international sales, as a
percentage of total sales, is primarily attributable to a decrease in
international revenues as well as an increase in domestic revenues in the
comparison periods.
Included in net revenues for fiscal 1998 and fiscal 1997 were $1.2 million
and $0.2 million, respectively, of nonrefundable technology license fees.
Sales of products related to the graphics and audio/communications
businesses which the Company discontinued in the quarter ended March 31, 1998,
accounted for approximately 2% and 1% of the Company's net revenues in fiscal
1998 and 1997, respectively.
GROSS MARGIN. The Company's gross margin decreased to 47.5% in fiscal 1998
as compared to 56.3% in fiscal 1997. Gross margin in fiscal 1998 included the
impact of a charge to cost of revenues related to increases in inventory
reserves of $3.3 million recorded during the year as well as a $3.5 million
charge related to the discontinuation of the graphics and audio/communications
businesses. Excluding the impact of these inventory-related charges, gross
margin in fiscal 1998 would have been 51.8%. Gross margin in fiscal 1997
included the impact of a charge to cost of revenues related to increases in
inventory reserves of $2.6 million recorded during the year. Additionally, gross
margin in fiscal 1997 included the impact of favorable adjustments to cost of
revenues of approximately $18.7 million associated with the sale of products
which had been fully reserved in a prior period as well as manufacturing cost
adjustments of $3.0 million related to foundry agreements. Excluding the impact
of these adjustments, gross margin for fiscal 1997 would have been 44.9%. The
increase in gross margin during the comparison periods, excluding the impact of
the adjustments recorded in fiscal 1998 and fiscal 1997, was primarily the
result of a product mix shift to higher margin CD-R/W controllers in the Optical
Storage business segment and digital imaging products during the comparison
periods. Gross margins related to the graphics and audio/communications
businesses which the Company discontinued in the quarter ended March 31, 1998
accounted for less than 2% and 1% of the Company's total gross margin
contribution in fiscal 1998 and 1997, respectively.
Gross margins for the Digital Imaging Equipment business segment were 75.3%
for fiscal year 1998, representing a decrease from 87.8% gross margin reported
in fiscal 1997. Gross margins for the Consumer business segment were 21.2% for
fiscal year 1998, representing a slight increase from 27.1% gross margin
reported in fiscal year 1997.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$49.7 million and $34.7 million, and expressed as a percentage of net revenues
were 31.6% and 20.7% in fiscal 1998 and 1997, respectively. This increase in
research and development expenditures in fiscal 1998, both in terms of absolute
dollars and as a percentage of net revenues was primarily the result of the
hiring of additional personnel and related expenses.
30
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 42% to $30.9 million in fiscal 1998 from $21.7
million in fiscal 1997. Additionally, selling, general and administrative
expenses increased as a percentage of net revenues to 19.7% in fiscal 1998 from
12.9% in fiscal 1997. This increase was principally the result of the hiring of
additional management and administrative personnel and associated expenses,
costs associated with the implementation of a new management information system
as well as increases in legal expenses. The increase in legal expenses relates
primarily to a complaint the Company filed with the International Trade
Commission on July 21, 1997 ("ITC Complaint") and additional litigation related
to a settlement agreement with one of the parties in the ITC Complaint.
ACQUISITION-RELATED CHARGES. Acquisition-related charges for fiscal 1997
included costs associated with the acquisitions of Pixel Magic.
In November 1995, the Company acquired Pixel Magic, a privately-held company
based in Andover, Massachusetts for $10.5 million in cash, of which $5.0 million
was contingent upon the achievement of certain performance criteria over a
three-year period. Approximately $4.8 million of the initial cash payment was
allocated to in-process research and development and was charged to operations
in fiscal 1996. In June 1997, the Company waived certain of the performance
criteria and agreed to pay the contingent amount of $5.0 million in two
installments during calendar 1998. The first payment of $3.0 million was paid in
January 1998 and the second payment of $2.0 million is due in December 1998. As
a result of this agreement and because the contingent amount was based, in part,
on the continued employment of the former shareholder/employees of Pixel Magic,
Inc., the Company recorded a compensation charge of $5.0 million in fiscal 1997.
NON-OPERATING INCOME, NET. Non-operating income, net consisted primarily of
net interest income of $7.4 million, net foreign currency transaction losses of
$2.5 million and approximately $10.6 million related to the settlement agreement
between the Company and United Microelectronics Corporation in connection with a
complaint the Company filed with the International Trade Commission on July 21,
1997. See "Legal Proceedings".
INCOME TAXES. The Company's effective tax rate was 15.0% and 38.0% in
fiscal 1998 and 1997, respectively. The decrease in effective rate is primarily
due to the Company's continued decrease in taxable income along with the
substantial research and development credits earned by the Company offset by a
partial valuation allowance recorded during 1998. See Note 11 of Notes to
Consolidated Financial Statements.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The following factors should be carefully considered in evaluating the
Company and its business.
QUARTERLY RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATION; FUTURE REVENUES
ARE UNPREDICTABLE AND SUBJECT TO SEASONALITY. The Company's quarterly revenues
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, including factors
that generally affect everyone in its industry and factors that are more
specific to its business and product lines. The principal risk the Company faces
in its business and one which has had, and is expected to continue to have, a
significant effect on its operating results, is its dependence on the optical
storage market. Other factors specific to its business and product lines include
the following: The Company's ability to diversify its product offerings and the
markets for its products; the current market for its products; the loss or gain
of important customers; the timing of significant orders and order cancellations
or reschedulings; pricing policy changes by Oak and its competitors and
suppliers; the potential for significant inventory exposure; the timing of the
development and introduction of new products or enhanced versions of existing
products; market acceptance of new products; increased competition in product
lines; barriers to entry into new product lines; and the competitiveness of
Oak's customers.
31
<PAGE>
In addition, the Company's quarterly operating results could be materially
adversely affected by any judgment or settlement in the Company's ongoing
stockholder legal proceedings. The Company believes that quarterly revenue and
operating results are likely to continue to vary significantly in the future and
period-to-period comparisons of its operating results are not necessarily
meaningful. Readers should not rely on period-to-period comparisons as
indications of future performance.
Other factors generally affecting the semiconductor industry include the
following: rapid technological change; rapid product obsolescence; availability
of foundry capacity; fluctuations in manufacturing yields; availability and cost
of raw materials; the cyclical nature of the semiconductor industry; seasonal
customer demand; potential for erosion of product prices; and general economic
conditions.
The semiconductor industry historically has been characterized by rapid
technological change, cyclical market patterns, significant price erosion,
periods of over-capacity, periods of 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. Any downturns in the
industry would have a material adverse effect on the Company's business and
results of operations
The Company has experienced in the past and may in the future experience
substantial period-to-period fluctuations in operating results due to these
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 over-capacity and subsequent
accelerated erosion of average selling prices, and in some cases have lasted for
more than a year. 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.
Any one or a combination of the above factors may adversely affect the
business and financial condition of the Company.
HISTORY OF OPERATING LOSSES. Although the Company experienced periods of
profitability following its reincorporation in Delaware in October 1994 in
connection with its initial public offering (the Company was first incorporated
in California in 1987), the Company sustained losses following the initial
public offering. Further, while the Company had net income of $5.9 million in
fiscal 1998, the Company experienced a net loss of $50.7 million in fiscal 1999.
Its current loss trend began in calendar year 1998, resulting in an operating
loss of $9.1 million for fiscal 1998 and an operating loss of $61.9 million for
fiscal 1999 (in each case before adjustments for non-operating income or loss,
or income tax expense or benefit). The Company's operating losses generally have
been due to the Company's dependence on its optical storage business, which
historically has accounted for approximately 80% of its business. In fiscal
1998, the Company failed to timely and/or adequately develop its integrated
CD-ROM controller product and second generation CD-RW product. Consequently, for
fiscal 1999, the Company was dependent on mature CD-ROM products and its first
generation CD-RW product for its revenue. These mature products have continued
to decline in both unit sales volume and average sales price in each successive
quarter. The Company is currently sampling its next generation CD-RW product,
but the Company cannot accurately predict the level of customer acceptance and
the product's impact on operating results. If the Company incurs additional
losses or fails to achieve profitability in the future, this will have a
material adverse effect on the Company's business and may affect the trading
price of the Company common stock.
DEPENDENCE ON CD-ROM AND CD-RW CONTROLLER PRODUCTS. Sales of the Company's
CD-ROM and CD-RW controller products comprised 65%, 81% and 84% of the Company's
net revenues in fiscal years 1999, 1998 and 1997, respectively. The Company's
future revenue generation is highly dependent on the successful introduction of
its next generation CD-RW product, although the Company can provide no assurance
that this product will achieve customer acceptance. Although sales of CD-ROM
controller
32
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products are expected to continue to account for a portion of the Company's
total revenues for the foreseeable future, the Company expects that sales of its
CD-ROM controller products will continue to decline. The Company is no longer
developing any CD-ROM controllers, but is instead focusing its development
efforts on controllers for CD-RW and DVD applications. If the Company
experiences delays in its product development efforts or fails to achieve market
acceptance, the Company will need other sources of revenue to offset the
continued decline in sales of its CD-ROM controllers.
Although the Company was a leading supplier of CD-RW controllers, due to
product delays in its second generation CD-RW product, the Company lost its
leadership in this market. While the Company is currently sampling its next
generation CD-RW product, no assurance can be given this product will be
competitive in the marketplace or accepted by the Company's targeted customers.
In addition, even if this product proves to be competitive and is accepted by
targeted customers, there is no assurance that the Company's customers will be
successful.
The Company also faces increased competition in the emerging CD-RW and DVD
markets. See "--Competitive Market." Moreover, the current trend toward
integrating increased functionality on the CD-ROM, CD-RW or DVD controller
potentially adds to the development and manufacturing costs of producing the
controller. The Company's revenues and gross margins from its optical storage
controller products will be dependent on the Company's ability to introduce
these integrated products in a commercially competitive manner.
The decrease in the overall level of sales of, and prices for, the Company's
CD-ROM and older generation CD-RW controller product due to introductions of
newer products by competitors, the decline in demand for CD-ROM controller
products generally, product obsolescence and delays in the Company's integrated
CD-ROM controller product and its next generation CD-RW product, have had a
material adverse effect on the Company's business, financial condition and
results of operations, and will continue to have that effect if the Company
fails to successfully introduce new products to the market and have these
products accepted by targeted customers.
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 optical
storage and digital video disk segment of the consumer electronics market, 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 financial performance is highly dependent
upon timely and successful execution of next generation and new products,
particularly in light of the continued decline in sales from the Company's
mature CD-ROM and CD-RW products and the Company's failure to timely develop new
products for the optical storage market in fiscal
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1998 and 1999. Specifically, the Company's performance is highly dependent upon
the successful development, timely introduction and customer acceptance of its
next generation CD-RW controller, MPEG-2 decoder for the DVD player market, and
imaging processing chip for the digital imaging equipment market.
If the Company fails to introduce new products successfully or its new
products fail to achieve market acceptance, its business, financial condition
and results of operations will be materially adversely affected. The success of
new product introductions is dependent on several factors, including:
recognition of market requirements; product cost; timely completion and
introduction of new product designs; quality of new products; differentiation of
the Company's products from those of its competitors; improvements in existing
technologies; and development and implementation of new process technologies to
reduce semiconductor die size, improve device performance in manufacturing
yield, adapt product and processes to technological changes, and adopt emerging
industry standards.
In both the optical storage and consumer electronics markets, particularly
DVD, a variety of standards and formats are being proposed, making it difficult
to develop product to market requirements, and making it even more difficult for
the market to develop.
The success of the Company's efforts 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.
(See the discussion of risks related to foundry capacity under the heading
"Risks of Supply Constraints and Manufacturing Process" above). Due to the
design complexity of the Company's products, especially with the increased
levels of integration that are required, the Company has experienced delays in
completing development and introduction of new products, particularly in its
products for the optical storage and the digital imaging equipment markets.
No assurance can be given that the Company will successfully identify new
product opportunities and develop and bring new products to market in a timely
manner or that its products will be selected for design into the products of its
targeted customers. Also, there can be no assurance that the products of the
Company's customers will be successfully introduced into the market. If the
Company fails in its new product development efforts or its products fail to
achieve market acceptance, the Company's business, financial condition and
results of operations will be materially adversely affected.
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 an alternative to developing such technology
internally. On July 29, 1999, the Company announced its intention to acquire
Xionics Document Technology, Inc., a leading supplier of embedded software for
the digital imaging market. 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.
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
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development (which was expensed) and approximately $2.2 million to purchased
technology, goodwill 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 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. For the
ODEUM acquisition, the acquired in-process research and development valuation
was based on Oak management's best estimate based on their 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
amounts of the recorded in-process research and development expense are
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.
THE COMPANY'S MARKETS EXPERIENCE RAPID TECHNOLOGICAL CHANGE. The markets in
which the Company competes are intensely competitive and are characterized by
rapid technological change. 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. Moreover, the Company is currently attempting to enter
several new segments of the consumer electronics market 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,
some of whom have long standing relationships with the Company's target
customers. The Company must continue to enhance its current product line and
develop and introduce new products that keep pace with the technological
developments of its competitors. The Company must also satisfy increasingly
sophisticated customer requirements. If the Company cannot successfully respond
to the technological advances of others or if its new products or product
enhancements do not achieve market acceptance, the Company's business, operating
results and financial condition could be seriously harmed.
COMPETITIVE MARKETS. The optical storage and consumer electronics markets
in which the Company competes is intensely competitive and is characterized by
rapid technological change, declining unit average sales prices and rapid
product obsolescence. In these two markets 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. Furthermore, the Company is currently attempting to
enter the digital broadcast market in which
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it has not previously operated. This market is intensely competitive and the
Company will have to compete with large domestic and international companies
that have long standing relationships with target customers.
The willingness of prospective customers to design the Company products into
their products depends, to a significant extent, upon the Company's ability to
have product available at the appropriate market window and to price these
products at a level that is cost effective for these 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 these products mature and competition
increases, as has been the trend for the optical storage and DVD segment of the
consumer electronics market, the Company anticipates that average sales prices
on products will decline. If the Company is unable to reduce costs sufficiently
to offset declines in average sales prices or is unable to successfully
introduce new higher performance products with higher average sales prices,
operating results will be materially adversely affected. In addition, if the
Company experiences yield or other production problems or shortages of supply
that increase manufacturing costs, fail to reduce manufacturing costs or fail to
utilize prepaid deposits with foundries, the Company's business, financial
condition and operating results will be materially adversely affected.
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 the digital imaging market, the
most intense competition comes from captive suppliers, and increased competition
is anticipated from captive suppliers to the optical storage market as this
market transitions to DVD. Also, the ability to compete successfully in the PC
and consumer DVD market and digital broadcast markets depends on the ability to
develop partnerships with other companies established in the industry and to
gain recognition in such markets. There can be no assurance that participation
in these new markets will produce positive results.
The Company believes that its ability to compete successfully depends on a
number of factors, both within and outside of its control, including the
following: 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 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 its customers design its products
into their products; the market acceptance of the products of its customers; the
number and nature of its competitors in a given market; the ability to protect
its proprietary information and to obtain or preserve its rights to the
intellectual property of other parties necessary in its business; and general
market and economic conditions.
There can be no assurance that the Company will be able to compete
successfully against respective current or future competitors, or that
competitive pressures faced by it and its customers will not have a material
adverse effect on the business, results of operations or financial condition of
the combined company.
THE COMPANY MAY BE UNABLE TO PROTECT ITS INTELLECTUAL PROPERTY AND
PROPRIETARY RIGHTS. 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 intellectual property rights. However, these measures afford only
limited protection. Competitors of the Company may be able to effectively 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 under those patents will provide competitive advantages to the
Company. Moreover, while the Company holds or has applied for patents relating
to the design of its products, some of the Company's products are based in part
on standards, for which the Company does not hold patents or other intellectual
property rights. In addition, 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
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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. Moreover, the Company intends to seek additional international and
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.
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 International Trade Commission
("ITC") against certain Asian manufacturers of optical storage controller
devices based on the Company's belief that those 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
infringing CD-ROM controllers. The Company has incurred significant legal
expenses in connection with each of these lawsuits. Any 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 that
litigation results in a favorable determination for the Company. In the event of
an adverse result in any litigation, the Company could be required to pay
substantial damages, cease the manufacture, use and sale of infringing products,
expend significant resources to develop noninfringing 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 developing new
technology or that those licenses would be available on reasonable terms, or at
all, and any development or license could require expenditures by the Company of
substantial time and other resources.
The Company also generally enters into confidentiality agreements with its
employees and consultants 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.
THE COMPANY MAY BE UNABLE TO OBTAIN THIRD PARTY INTELLECTUAL PROPERTY
RIGHTS. Certain technology used in the Company's products is licensed from
third parties, and in connection with these licenses, the Company is required to
fulfill confidentiality obligations and, in some cases, pay royalties. Some of
the Company's products, require various 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'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 Company's business
could be adversely affected by the loss for any reason of these third-party
agreements. Given the trend to include increasing levels of functionality on a
chip, 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 with respect to some
or all of its product offerings. There can be no assurance that those licenses
or purchases will be available on terms acceptable to the Company, if at all.
The inability of the Company to enter into those license arrangements on
acceptable terms or to maintain its current licenses on acceptable
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terms could have a material adverse effect on the Company's business, financial
condition and results of operations.
In addition, the semiconductor industry is characterized by vigorous
protection and pursuit of intellectual property rights, which has resulted in
significant, often protracted and expensive litigation. The Company 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 those
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 suspend the manufacture of products or the use
by the Company's foundries of processes requiring the technology.
Although patent disputes in the semiconductor industry have often been
settled through cross-licensing arrangements, the Company may not be able in any
or every instance, to settle an alleged patent infringement claim through a
cross-licensing arrangement, especially given that the Company has a limited
patent portfolio. 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.
RISKS ASSOCIATED WITH THE USE OF INDEPENDENT FOUNDRIES AND ASSEMBLY AND TEST
VENDORS AND MINIMUM PURCHASE SUPPLY CONTRACTS. The Company contracts with
independent foundries to manufacture all of its products, and with independent
vendors to assemble and test its products. Under its foundry agreements, the
Company is required to place non-cancelable orders and purchase its products on
an approximately three-month rolling basis. The Company is currently committed
under an agreement with two of its foundries to purchase certain minimum amounts
of capacity. In the fourth quarter of fiscal 1999, the Company recorded a $2.8
million loss provision against its deposit with one of its foundries.
The Company's customers, on the other hand, generally place purchase orders
with the Company less than four weeks prior to delivery that may be rescheduled
or under certain circumstances may be cancelled, without significant penalty.
Due to the Company's relatively narrow customer base for certain devices and the
short product life cycles of the Company's products, these cancellations can
leave the Company with significant inventory exposure. Consequently, if
anticipated sales and shipments in any quarter are rescheduled, canceled or do
not occur as quickly as expected, the Company's expense in inventory levels
could be disproportionately high, which would materially adversely affect its
business, financial condition and results of operations for that quarter or for
the year.
In addition, the Company is dependent on its foundries to allocate to the
Company a portion of their foundry capacity sufficient to meet its needs to
produce products of acceptable quality and with acceptable manufacturing yield
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. 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,
which may materially adversely affect the Company's results of operations and
financial condition. In periods of manufacturing capacity shortages, the Company
may not be able to meet its customers' required delivery time. Also, if the
Company is unable to timely respond to its customers' needs, the Company may
lose customer orders. Insufficient orders will result in under-utilization of
the Company manufacturing facilities and prepayments with two of the Company's
foundries for certain minimum amounts of capacity, which also will adversely
affect the Company's business, financial condition and operating results.
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
addition of manufacturing capacity in large increments. The industry has
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moved from a period of capacity shortages in 1995 to what has been a period of
excess capacity for approximately the last twelve months, although capacity has
recently tightened. 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. No
assurance can be given that the Company can or will achieve timely,
cost-effective access to that capacity when needed.
Factors which could damage relationships with the Company's current and
prospective customers or provide an advantage to its competitors include: the
loss of any foundry as a supplier; inability in a period of increased demand for
the Company's products to expand foundry capacity; inability to obtain timely
and adequate deliveries from current or future suppliers; delays in shipments of
the Company's products; disruption of operations at any of the Company's
manufacturing facilities; and product defects and the difficulty of detecting
and remedying product defects.
The Company's reliance on independent manufacturers and third party assembly
and testing vendors involve 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.
Any problems with supply could adversely affect the Company's business,
financial condition and operating results. As the Company generally does not use
multiple services of supply for its products, the consequences of these factors
occurring is magnified.
In addition, as a result of the Company's dependence on foreign
subcontractors, the Company is subject to the risks of conducting business
internationally, including foreign government regulation and general political
risks, which include the risks described under the heading "Risks Pertaining to
International Business" below.
RISKS PERTAINING TO INTERNATIONAL BUSINESS. During fiscal 1999, 1998 and
1997, 86%, 92% and 96%, respectively, of the Company's net revenues were derived
from international sales. A large portion of the Company's revenues are derived
from international sales. A substantial portion of the Company's international
revenues are derived from manufacturers of CD-ROM drives in Japan, Taiwan, Korea
and Singapore. Most of the Company's foreign sales are negotiated in US dollars,
although invoicing is often done in local currency. As a result, the Company may
be subject to the risks of currency fluctuations in these and other countries.
The Company is subject to the additional risks of conducting business
outside of the United States. These risks include: unexpected changes in, or
impositions of, foreign 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 collecting accounts receivable; potentially adverse taxes and
adverse tax consequences; the burdens of complying with a variety of foreign
laws; political, social and economic instability; potential hostilities; changes
in diplomatic and trade relationships; and fluctuations in foreign currencies.
For example, the Company has made a significant investment in foundry
capacity in Taiwan and is subject to the risk of political instability in
Taiwan, including the potential for conflict between Taiwan and the People's
Republic of China. In addition, China is the primary market for the Company's
consumer DVD and cable and satellite products, and, therefore, any political or
economic instability in China could significantly reduce the demand for these
products.
While these factors or the impact of these factors are difficult to
forecast, any one or more of these factors could adversely affect the Company's
operations in the future or require the Company to modify its current business
practices.
LIMITED CUSTOMER BASE. The Company has derived a substantial portion of its
net revenues from a limited number of customers and expects this concentration
to continue. These customers were all purchasers of the Company's CD-ROM and
CD-RW products. (Please see the discussion above under the heading "Dependence
on CD-ROM and CD-RW Controller Product" for a description of the decline in
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revenues the Company has experienced in connection with sales of our CD-ROM
product.) At June 30, 1999, one international customer accounted for
approximately 40% of accounts receivable. In addition, the Company has
experienced significant changes from year to year in the composition of its
major customer base, including the loss in the past year of two customers who
combined were responsible for approximately 24% of the Company's sales in fiscal
year 1998. The Company believes this pattern will continue. Customers generally
purchase the Company's products pursuant to short-term purchase orders, and the
Company has no long term purchase agreements with any of its customers. The loss
of or significant reduction in purchases by, current major customers of the
Company would have a material adverse effect on the Company's business,
financial condition and operating results.
NEED FOR ADDITIONAL CAPITAL. In order to remain competitive, the Company
must continue to make investments in new facilities and capital equipment, and
significant amounts of capital additions could be required in subsequent years.
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 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. 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 the level of
a company's 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 those funds will be available on terms
acceptable to the Company when needed. Any future equity financing will also
lead to dilution to existing shareholders.
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. In February 1999,
the Company appointed a new President and Chief Executive Officer,
Young K. Sohn. It is important for the Company to retain the services of
Mr. Sohn. In fiscal 1999, the Company also appointed a new Vice President and
General Manager to head its Optical Storage Group, a new Chief Financial
Officer, a new Vice President of Sales, and a new Vice President of Human
Resources. The Company is in the process of recruiting additional senior
management positions as well as technical personnel. Competition for these
persons is intense and there can be no assurance that the Company will be able
to attract and retain additional senior managers and technical personnel.
IMPACT OF YEAR 2000. The "Year 2000 Issue" is the result of computer
programs being written using two digits rather than four to define the
applicable year. The Company is dependent, to a significant extent, on computer
technology with date-sensitive functions. If the Company's computer programs
with date-sensitive functions are not Year 2000 compliant, they may recognize a
date using "00" as the year 1900 rather than the Year 2000. This could result in
a system failure or miscalculations causing incorrect reporting and disruptions
of operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The issue spans both information technology and non-information technology
systems that use date data. In addition to the Company's own systems, the
Company relies, directly and indirectly, on external systems of its customers,
suppliers, creditors, financial organizations, utilities providers and
government entities, both domestic and international.
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The Company's committee for the Year 2000 issue has a year 2000 project plan
consisting of the following five phases: Inventory/Assessment, Conversion,
Vendor Readiness, Contingency Planning, Testing and Implementation. The
Inventory/Assessment, Conversion, Testing and Implementation phases of the
project were complete as of August 31, 1999, and the Company is in the process
of concluding the Vendor Readiness and developing the Contingency Planning
phases. The entire Year 2000 project is expected to be completed in the fall of
1999.
In its Inventory/Assessment phase, the Company examined well over two
thousand items for Year 2000 compliance. For internal systems, the Company
examined all network components, PCs, Unix workstations, business applications,
CAD systems, desktop applications, operating systems, testers, telephone system,
FAX, copiers, security and environmental systems. The Company purchased a Y2K
tool and repaired all PC BIOS and converted all Excel and Access data files. The
Company has also upgraded all servers, workstations and network components.
Major business application systems including the Oracle Enterprise Resource
Planning system and FactoryWorks Manufacturing Execution System have been fully
upgraded and tested to Y2K compliance status. The Company's Wide Area Network
was successfully tested to be Y2K ready. The security system was upgraded to be
Y2K compliant. The Company also obtained Y2K compliance statements from CAD
systems, telephone, energy and environmental system vendors. Further upgrades
are to be applied to some desktop applications before the end of year.
The Company is actively responding to all customer requests for compliance,
surveys and other general information related to its Year 2000 programs. The
Company will also request assurance from its key customers that they, and their
products which incorporate the Company products, are Year 2000 compliant.
The Company will develop a Contingency Plan that will address the
non-compliance of vendors/ suppliers and any "worst case" Year 2000 issues that
the Company may be confronted with. In the worst case, the Company or the key
customers and/or suppliers on which it depends may be unable to produce reliable
information or process routine transactions. Furthermore, in the worst case, the
Company or parties on which it depends may, for an extended period of time be
incapable of conducting critical business activities, which include but are not
limited to, manufacturing and shipping products, invoicing customers and paying
vendors.
All product related assessments and testing were completed as of June 30,
1999. Updates or status on products are available on the Company's web site
(www.oaktech.com). The Company considers a product or system to be Year 2000
compliant if the date/time data is accurately processed (including, but not
limited to, calculating, comparing, and sequencing) from, into and between the
twentieth and twenty-first centuries, and the years 1999 and 2000 along with
leap year calculations. To date, the Company has not identified any
non-compliant products and therefore, no material costs have been incurred with
respect to remediation. The Company believes that it is unlikely to experience a
material adverse impact on its financial condition or results of operations due
to product related Year 2000 compliance issues.
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.
As the Year 2000 project continues, the Company may discover additional Year
2000 problems, may not be able to develop, implement, or test remediation or
contingency plans in a timely manner, or may find that the costs of these
activities exceed current expectations and become material. In many cases, the
41
<PAGE>
Company is relying on assurances from suppliers and customers that new and
upgraded information systems and other products will be Year 2000 compliant. The
Company is testing certain third-party products, but cannot be sure that its
tests will be adequate or that, if problems are identified, they will be
addressed by the supplier in a timely and satisfactory way.
Because the Company uses a variety of information systems and has additional
systems embedded in its operations and infrastructure, the Company cannot be
sure that all of its systems will work together in a Year 2000-compliant
fashion. Furthermore, the Company cannot be sure that it will not suffer
business interruptions, either because of its own Year 2000 problems or those of
its customers or suppliers whose Year 2000 problems may make it difficult or
impossible for them to fulfill their commitments to the Company. If the Company
fails to satisfactorily resolve Year 2000 issues related to its products in a
timely manner, it could be exposed to liability to third parties.
If the Company or the third parties with which it has relationships were to
cease or not successfully complete its or their Year 2000 remediation efforts,
the Company would encounter disruptions to its business that could have a
material adverse effect on its business, financial position and results of
operations. The Company could be materially and adversely impacted by widespread
economic or financial market disruption or by Year 2000 computer system failures
at third parties with which it has relationships.
The Company has not yet developed a contingency plan that addresses how it
plans to handle any of the "worst-case" Year 2000 issues that may confront it,
but instead has focused its resources on identifying material, remediable
problems and reducing uncertainties generally, through the Year 2000 project
described 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.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its cash requirements from
cash generated from operations, the sale of equity securities, bank lines of
credit and long-term and short-term debt. The Company's principal sources of
liquidity as of June 30, 1999 consisted of approximately $133.2 million in cash,
cash equivalents and short-term investments. The Company also has approximately
$14.0 million in lines of credit with Taiwanese financial institutions, all of
which was available at June 30, 1999. Additionally, approximately $12 million in
lines of credit exist with a Japanese financial institution, all of which was
available at June 30, 1999.
In fiscal 1999, operating activities used net cash of approximately $10.5
million. The Company's net loss of approximately $50.7 million was offset by
reduction in accounts receivable and inventories of $15.1 million, as well as
the non-cash effect of depreciation and amortization of $11.5 million,
in-process research and development write-offs of $7.2 million, and deferred
taxes of $4.2 million. Investing activities utilized cash of approximately $26.3
million primarily due to the ViewPoint and XLI acquisitions ($15.2 million, net
of cash acquired) and additions to property, plant and equipment of $6.0
million. The proceeds of the sale of the Company's investment in the UICC
foundry were used to purchase additional short-term investments. Borrowings
under the Company's line of credit in Japan were paid in full as of June 30,
1999 and resulted in a net $2.4 million use of cash during fiscal 1999.
Additionally, the Company repurchased 858,000 shares of its common stock in
fiscal 1999, for a total of approximately $2.7 million.
In July 1999, the Company announced it had entered into a definitive
agreement to acquire Xionics Document Technologies, Inc. Under the terms of the
agreement, which is subject to approval by the shareholders of both companies,
the Company would issue approximately 10.6 million shares of common stock and
approximately $38.7 million in cash to acquire all of the common stock of
Xionics.
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<PAGE>
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, the Xionics
acquisition, and any other investments it may make through at least the next
twelve months. If, however, during the next 12 to 18 month period the Company
fails to increase its revenue or is unable to reduce its expenses below its
revenues, then the Company may be in a position where it will need to seek
additional financing. 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 available 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, other than
the Xionics acquisition noted above.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 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. As of
June 30, 1999 and 1998, the Company had foreign currency exchange contracts to
exchange Yen for approximately $1,030,000 and $4,690,000, respectively. 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. If foreign
currency rates fluctuate by 10% from rates at June 30, 1999 and 1998, the effect
on the company's consolidated financial statements would not be material.
However, there can be no assurance that there will not be a material impact in
the future.
The Company's cash equivalents and short-term investments ("investments")
are exposed to financial market risk due to fluctuation in interest rates, which
may affect its interest income and the fair values of its investments. The
Company manages the exposure to financial market risk by performing ongoing
evaluation of its investment portfolio and investing in short-term investment
grade corporate securities and U.S. government and other agencies' obligations
which mature with the next 24 months. In addition, the Company does not use
investments for trading or other speculative purposes. Due to the short
maturities of its investments, the carrying value approximates the fair value.
If market rates were to increase immediately and uniformly by 10% from levels as
of June 30, 1999 and 1998, the decline in the fair value of the portfolio would
not be material. Further, the Company has the ability to hold its fixed income
investments until maturity and, therefore, the Company would not expect to
recognize such an adverse impact in income or cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data of the Company required by
this item are set forth at the pages indicated at Item 14(a).
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As of August 31, 1999, the Directors of the Company, and the executive
officers of the Company, who are elected by and serve at the discretion of the
Board of Directors, were as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- -----------------------------------
<S> <C> <C>
David D. Tsang...................... 57 Chairman of the Board of Directors
Young K. Sohn....................... 43 Chief Executive Officer, President,
and Director
Ta-Lin Hsu, Ph.D.................... 56 Director
Timothy Tomlinson................... 49 Director
Richard B. Black.................... 66 Director
Albert Y.C. Yu, Ph.D................ 58 Director
Robert O. Hersh..................... 44 Vice President, Finance, and Chief
Financial Officer
William Housley..................... 43 Vice President of Oak, General
Manager of Optical Storage Group
Paul H.F. Vroomen................... 42 Vice President of Oak, General
Manager of Consumer Group
Peter Besen......................... 44 Vice President of Oak, General
Manager of Imaging Group
Abel S. Lo.......................... 49 Vice President of Oak, General
Manager, Oak Technology, Taiwan
Shawn M. Soderberg.................. 38 Vice President, General Counsel and
Secretary
</TABLE>
Mr. Tsang has served as Chairman of the Board of Directors of the Company
since January 1991. He was also President and Chief Executive Officer of the
Company from July 1987, when he founded the Company, until February 1999, and a
Director of the Company since October 1987. Mr. Tsang has also held the
positions of Chief Financial Officer from July 1987 to March 1993 and Secretary
of the Company from July 1987 to December 1994. He also is a Director of ASE
Test, a semiconductor assembly and testing company. Prior to joining the
Company, Mr. Tsang was the founder and served in various positions including
President, Chief Executive Officer and Chairman of Data Technology Corp., a
manufacturer of disk controllers and high density disk drives, from 1979 to
1987, and co-founded Xebec, a manufacturer of disk controllers, where he was
employed from 1974 to 1979. Mr. Tsang holds a B.S.E.E. degree in electrical
engineering from Brigham Young University and an M.S. degree in electrical
engineering from the Santa Clara University. On September 1, 1999 David D. Tsang
and certain of his relatives entered into a consent decree with the Securities
and Exchange Commission in connection with an insider trading investigation.
Pursuant to the terms of the settlement, Mr. Tsang neither admits nor denies the
allegation that he provided nonpublic information to certain relatives. He did
not profit personally from any transaction in question.
Mr. Sohn joined the Company as President and Chief Executive Officer in
February 1999. He has also been a Director of the Company since January 1998.
Prior to joining the Company, and since January 1993, Mr. Sohn was employed by
Quantum Corporation, most recently as President of its Hard Drive Business. From
August 1983 to January 1993, he acted as Director of Marketing at Intel
Corporation. Mr. Sohn
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<PAGE>
currently serves on the Board of Directors of PLX Corporation, Inc. He holds a
B.S. in electrical engineering from the University of Pennsylvania and an M.S.
(M.B.A) from Massachusetts Institute of Technology.
Dr. Hsu has been a Director of the Company since January 1991. He has been
employed by H&Q Asia Pacific, the parent company of H&Q Taiwan Co., Ltd., since
February 1985, most recently as Chairman. He is also a Director of Headway
Technologies, ASE Technology Corporation, and Macronix Corporation. Dr. Hsu
holds a B.S. degree in physics from National Taiwan University, an M.S. degree
in electrophysics from Polytechnic Institute of Brooklyn and a Ph.D. in
electrical engineering from the University of California, Berkeley.
Mr. Tomlinson has been a Director of the Company since June 1988. He has
been a partner of Tomlinson Zisko Morosoli & Maser LLP, a law firm, since 1983.
Mr. Tomlinson is also a Director of Portola Packaging, Inc., a manufacturer of
tamper evident closures and related equipment, Verisign, Inc., and SmartDisk
Corporation. Mr. Tomlinson holds a B.A. degree in economics, an M.B.A. and a
J.D. from Stanford University.
Mr. Black has been a Director of the Company since November 1992 and was
also a Director from December 1989 to January 1991. He also served as President
of the Company from January 1998 to February 1999, as well as acting President
of the Company's Optical Storage Group from August 1998 to February 1999.
Mr. Black is also a director of Gabelli Funds, Inc., Gabelli Asset Management
Inc., Morgan Group Inc., and GSI Lumonics. Mr. Black holds a B.S. degree in
civil engineering from Texas A&M University and an M.B.A. from Harvard
University.
Dr. Yu has been a Director of the Company since August 1999. He is currently
Senior Vice President of the Microprocessor Products Group of Intel Corporation,
where he has been employed for the last 23 years. Prior to joining Intel,
Dr. Yu was the head of Device Physics at Fairchild Semiconductor.
Robert O. Hersh joined the Company as Vice President and Chief Financial
Officer in December, 1998. Prior to joining Oak, from April of 1997, Mr. Hersh
was Vice President of Operations and CFO at Network Peripherals. Prior to that
he was Vice President of Finance and CFO at SEEQ Technology, and Executive Vice
President and Chief Financial Officer at Alps Electric, Inc. (North America).
Mr. Hersh holds an M.B.A. from California State University, Sacramento and a
B.A. in accounting from California State University, Stanislaus, in addition to
a California CPA certification.
William L. Housley joined the Company as General Manager of the Optical
Storage Group in March 1999. Prior to joining Oak, he was Director of Business
Operations at Motorola's Semiconductor Products Sector in Austin, Texas. In
addition, he was Vice President of Motorola's Mass Storage Controller Division.
Housley holds a B.S. Electronics (Computer Science and Digital emphasis) from
Northeastern State University, Tahlequah, Oklahoma.
Mr. Vroomen joined the Company as Vice President, Strategic Marketing in
September 1997. He has been Vice President and General Manager of the Consumer
Products Group since January 1998. From May 1996 to June 1997, Mr. Vroomen was
Vice President and General Manager of the Consumer Digital Entertainment
business unit at VLSI Technology, Inc. From November 1994 to April 1996,
Mr. Vroomen was Vice President, Sales & Marketing at Array Microsystems, Inc., a
developer of codec chips for digital video applications and from April 1989 to
November 1994, Mr. Vroomen was at Zilog, Inc. where he was Vice President of the
Computer Peripherals business unit. He holds an M.S.E.E. from the Philips
International Institute in Eindhoven, the Netherlands, and a Managerial
Advancement Program diploma from the University of the Witwatersrand Graduate
School of Business in Johannesburg, South Africa.
Mr. Besen joined the Company as General Manager of Pixel Magic in October of
1995. He was appointed as a Vice President and General Manager of the Company in
July of 1998. Prior to joining the Company, Mr. Besen spent eight years at
LaserData, Inc., a document image processing company, most
45
<PAGE>
recently as Vice President of OEM sales. Mr. Besen holds an S.B.E.E. from
Massachusetts Institute of Technology.
Mr. Lo joined the Company as Engineering Design Manager in 1987. He has been
General Manager, the Company Technology, Taiwan since 1989 and became a Vice
President of the Company in April 1995. Prior to joining the Company, he was
Software Manager at Convergent Technologies, a computer system manufacturer,
from June 1986 to May 1987, and Software Manager at the Systems Division of ITT
Corp. from May 1985 to June 1986. Mr. Lo holds a B.S. degree in electrical
engineering from Seattle University, an M.S. degree in electrical engineering
from the University of Washington and an M.S. degree in computer science from
Rensselaer Polytechnic Institute.
Ms. Soderberg was appointed Vice President, General Counsel and Secretary in
May of 1998. She joined the Company in February of 1996 as General Counsel.
Prior to joining the Company, she was General Counsel for Microtec
Research, Inc., a software provider for embedded systems from April 1994 to
February 1996. Ms. Soderberg holds a B.S. in accounting from the University of
Santa Clara, a J.D. from Seattle University and an L.L.M. in taxation from New
York University.
Section 16(a) of the Securities Exchange Act of 1934 requires Oak's
executive officers, directors and persons who beneficially own more than 10% of
Oak's common stock to file initial reports of ownership and reports of changes
in ownership with the Securities and Exchange Commission ("SEC"). Such persons
are required by SEC regulations to furnish Oak with copies of all Section 16(a)
forms filed by such persons.
During fiscal 1999, Mr. Besen did not timely file his Statement of
Beneficial ownership on Form 3, Mr. Sohn filed an amended Form 3 to report an
additional 10,000 shares of Oak common stock, and Mr. Chu failed to report a
holding of an employee stock option on his Form 3.
Except for these three instances and based solely on its review of such
forms furnished to it and written representations from certain reporting
persons, Oak believes that all executives officers, directors and more than 10%
stockholders complied with all filing requirements applicable to them with
respect to transactions during fiscal 1999.
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<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth information for the fiscal years ended June
30, 1999, June 30, 1998 and June 30, 1997 concerning compensation paid or
accrued by Oak to (i) both the current and former Chief Executive Officer of
Oak, (ii) the four most highly compensated executive officers of Oak whose total
annual salary and bonus for fiscal year 1999 exceeded $100,000 and who were
serving as executive officers as of June 30, 1999, and (iii) two additional
individuals who otherwise would have been included in the table but for the fact
that they were not serving as executive officers as of June 30, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
------------------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) COMPENSATION OPTIONS COMPENSATION
- --------------------------- -------- --------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Young K. Sohn(2)........... 1999 $151,731 $ 0 $2,000,000 2,040,000 $ 56,245
President and Chief 1998 N/A N/A N/A 20,000
Executive Officer 1997 N/A N/A N/A N/A
David D. Tsang(3).......... 1999 $330,833 $ 0 -- 90,000 $ 5,246
Chairman of the Board and 1998 $300,000 $ 0 -- 100,000
former Chief Executive
Officer 1997 $302,825 $180,000 -- 0
Shawn M. Soderberg(4)...... 1999 $203,681 $ 76,000 -- 140,000 $ 2,429
Vice President, General 1998 $166,290 $ 61,281 -- 15,000
Counsel and Secretary 1997 $149,697 $ 36,593 -- 35,000
Peter D. Besen(5).......... 1999 $188,810 $ 41,200 $ 250,000 297,500 $ 2,208
General Manager, Digital 1998 $139,441 $ 47,819 -- 30,000 2,670
Imaging Group 1997 $125,500 $ 3,700 -- 60,000 1,636
Paul H.F. Vroomen(6)....... 1999 $196,076 $ 8,547 -- 212,500 $ 2,663
General Manager, 1998 $145,161 $ 34,797 -- 80,000
Consumer Group 1997 N/A N/A N/A N/A
Robert O. Hersh(7)......... 1999 $122,207 $ 48,000 -- 170,000 $ 700
Vice President and Chief 1998 N/A N/A N/A N/A
Financial Officer 1997 N/A N/A N/A N/A
Richard Simone(8).......... 1999 $213,327 $ 6,000 -- 130,000 $104,366
Vice President,
Technology 1998 $ 11,195 $ 31,000 -- 0
and Operations 1997 N/A N/A N/A N/A
Richard B. Black(9)........ 1999 $227,789 $ 0 -- 140,000 $331,356
Vice-Chairman of the
Board 1998 $111,376 $ 0 -- 156,000
1997 N/A N/A N/A 6,000
</TABLE>
- ------------------------
(1) The award of any bonus is subject to the discretion of the compensation
committee of the Oak Board and if awarded, will be based upon achievement of
targets established for financial performance and attainment of other annual
goals as determined by the compensation committee. No bonus will be
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<PAGE>
paid for achievement of any of the designated levels of operating results
unless a specified minimum level of income before income taxes is achieved
by Oak.
(2) Mr. Sohn's current salary rate is $450,000 per annum, and he is eligible in
fiscal 2000 for a performance bonus of between 60% and 120% of his annual
salary. Mr. Sohn served as a director of Oak from January 1998 until
February 1999 when he became President and Chief Executive Officer.
Long-term compensation awards in fiscal 1999 include an option for 40,000
shares granted in July, 1998 while serving as a non-employee director of
Oak, and an option for 2,000,000 shares granted in February 1999 upon
acceptance of the position of chief executive officer and president.
Mr. Sohn was awarded a $2,000,000 loan, for which the payment of principal
and interest are to be forgiven in three equal annual installments over a
three-year period measured from the first anniversary of the loan provided
Mr. Sohn remains an employee of Oak during that term. Mr. Sohn is entitled
to the first installment if he is terminated during his first year. All
other compensation for fiscal 1999 includes $27,000 for director fees,
$29,000 for special committee fees and $245 group term life insurance
premium paid by Oak.
(3) Mr. Tsang served as Chief Executive Officer and President until February
1999 when he resigned from these offices, but he continues to serve Oak as
chairman of the board. His current salary rate is $325,000 per annum, and he
is eligible in fiscal 2000 for a target bonus of between 60% and 90% of his
annual salary. All other compensation for fiscal 1999 includes 401(k)
matching contribution of $2,000 and Oak's payment of $3,240 group term life
insurance premium.
(4) Ms. Soderberg joined Oak in February 1996. Her current salary rate is
$190,000 per annum, and she is eligible in fiscal 2000 for a target bonus of
up to 40% of her annual salary. Long-term compensation awards for fiscal
1999 include options for 20,000 shares originally granted in prior fiscal
years that were repriced in fiscal 1999. All other compensation for fiscal
1999 includes 401(k) matching contribution of $2,000 and Oak's payment of
$929 group term life insurance premium.
(5) Mr. Besen's current salary rate is $180,000 per annum, and he is eligible
for a target bonus of up to 40% of his annual salary. Long-term compensation
awards for fiscal 1999 include options for 90,000 shares originally granted
in prior fiscal years that were repriced in fiscal 1999. Mr. Besen was
awarded a $250,000 loan, for which the payment of principal and interest are
to be forgiven in three equal annual installments over a four-year period
commencing on the second anniversary of the loan. All other compensation for
fiscal 1999 includes 401(k) matching contribution of $2,208.
(6) Mr. Vroomen joined Oak in September of 1997. His current salary rate is
$190,000 per annum, and he is eligible in fiscal 2000 for a target bonus of
up to 40% of his annual salary. Long-term compensation awards include
options for 70,000 shares granted in a prior fiscal year and repriced in
fiscal 1999. All other compensation for fiscal 1999 includes 401(k) matching
contribution of $2,000 and Oak's payment of $663 group term life insurance
premium.
(7) Mr. Hersh joined Oak in November of 1998. His current salary rate is
$190,000 per annum and he is eligible in fiscal 2000 for a target bonus of
up to 40% of his annual salary. All other compensation represents Oak's
payment of $700 group term life insurance premium.
(8) Mr. Simone joined Oak in June 1998 and resigned his position June 23, 1999.
Long-term compensation awards include an option for 70,000 shares granted
and repriced in fiscal 1999. All other compensation for fiscal 1999 includes
a $99,750 severance payment, 401(k) matching contributions of $1,675, and
Oak's payment of $2,940 group term life insurance premium.
(9) Mr. Black served as president of Oak from January 1998 through February
1999, and he now serves as vice-chairman of the board. Long-term
compensation awards include a performance-based option for 90,000 shares
subsequently cancelled without value when Mr. Black ceased serving as
president, and an option for 50,000 shares granted under the 1994 Employee
Stock Option Plan. All other compensation for fiscal 1999 includes Oak's
payment of $186,693 for relocation expenses, $121,356 as
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<PAGE>
severance payment, $16,500 in director fees, and Oak's payment of $6,804
group term life insurance premium.
The following table contains information concerning the stock options
granted to the persons named in the Summary Compensation Table during the fiscal
year ended June 30, 1999. No stock appreciation rights were granted in fiscal
1999.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------- POTENTIAL REALIZABLE VALUE($)
NUMBER OF PERCENT OF AT ASSUMED ANNUAL RATES
SECURITIES TOTAL OPTIONS OF STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERM(1)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION -----------------------------
NAME GRANTED(2) FISCAL YEAR ($/SH)(3) DATE 5% 10%
- ---- ---------- ------------- ----------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Young K. Sohn............. 40,000(4) 0.3689 $3.2500 07/30/08 $ 81,756 $ 207,187
2,000,000(5) 18.4443 $3.0000 02/21/09 $3,773,368 $9,562,455
David D. Tsang............ 90,000(6) 0.8300 $3.2500 08/12/08 $ 183,952 $ 466,170
Shawn M. Soderberg........ 60,000(6) 0.5533 $3.2500 08/12/08 $ 122,634 $ 310,780
20,000(7) 0.1844 $3.2500 08/12/08 $ 40,878 $ 103,593
60,000 0.5533 $3.0000 05/18/09 $ 113,201 $ 286,874
Peter B. Besen............ 82,500(6) 0.7608 $3.2500 08/12/08 $ 168,622 $ 427,322
90,000(7) 0.8380 $3.2500 08/12/08 $ 183,952 $ 466,170
125,000 1.1528 $3.0000 05/18/09 $ 235,835 $ 597,653
Paul Vroomen.............. 82,500(6) 0.7608 $3.2500 08/12/08 $ 168,622 $ 427,322
80,000(7) 0.7378 $3.2500 08/12/08 $ 163,513 $ 414,373
50,000 0.4611 $3.0000 05/18/09 $ 94,334 $ 239,061
Robert O. Hersh........... 50,000(4) 0.4611 $3.6250 11/16/08 $ 113,987 $ 288,866
60,000(6) 0.5533 $3.6250 11/16/08 $ 136,785 $ 346,639
60,000 0.5533 $3.0000 05/18/09 $ 113,201 $ 286,874
Richard B. Black.......... 90,000(6) 0.8300 $3.2500 08/12/08 $ 183,952 $ 466,170
50,000(4) 0.4611 $3.0000 05/18/09 $ 94,334 $ 239,061
Richard Simone(1)......... 70,000(7) 0.6455 $4.5625 07/01/08 $ 88,237 $ 194,982
60,000(6) 0.5533 $3.2500 08/12/08 $ 122,634 $ 310,780
70,000 0.6455 $3.2500 08/12/08 $ 143,074 $ 362,576
</TABLE>
- ------------------------
(1) Potential realizable value is based on an assumption that the stock price of
the Common Stock appreciates at the annual rate shown (compounded annually)
from the date of grant until the end of the 10-year option term. These
numbers are calculated based on the requirements promulgated by the
Securities and Exchange Commission and do not reflect Oak's estimate of
future stock price growth.
(2) All options except those noted, become vested for (i) 24% of the underlying
shares on the first anniversary of the grant date and (ii) for the balance
of the shares in a series of successive equal monthly installments of 2% of
the remaining option shares measured from the first anniversary of the
vesting commencement date. Each option, unless noted was granted with a term
of ten (10) years.
(3) The exercise price may be paid in (i) cash, (ii) shares of Common Stock held
for the requisite period to avoid a charge tot he Company's earnings for
financial reporting purposes, (iii) through a same-day sale program or
(iv) subject to the discretion of the Plan Administrator, by delivery of a
full-recourse, secured promissory note payable to Oak.
(4) The options all accelerate in full upon a change of control of Oak.
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<PAGE>
(5) The option is immediately exercisable with rights of repurchase lapsing
monthly at the rate of 2.0833%. In addition, the option will accelerate upon
achievement of certain performance goals and certain terminations of
employment. See "Employment and Change of Control Arrangements" below.
(6) Options noted become fully exercisable on the seventh (7th) anniversary of
the date of grant. These options have vesting acceleration provisions upon
the attainment of certain earnings per share targets. An additional 33 1/3%
of shares become exercisable in the event Oak reports increasing earnings
per share (EPS) for one or more fiscal years equal to or in excess of $.40,
$.80, and $1.20. In the event the EPS for a fiscal year is less than the EPS
for any earlier fiscal year, no additional shares of Common Stock shall
accelerate with respect to such later fiscal year. Options become fully
exercisable in the event of a change of control.
(7) The options noted were granted in prior fiscal years, cancelled and
regranted in fiscal 1999 at fair market value with a restart of vesting.
OPTION EXERCISES AND FISCAL 1999 YEAR-END VALUES
The following table provides certain information concerning exercises of
options to purchase Oak's Common Stock in the fiscal year ended June 30, 1999 by
the persons named in the Summary Compensation Table and sets forth certain
information concerning the number of shares covered by both exercisable and
unexercisable stock options as of June 30, 1999. Also reported are values of
"in-the-money" options that represent the positive spread between the respective
exercise prices of outstanding stock options and the fair market value of Oak's
Common Stock as of June 30, 1999. Oak has not issued any stock appreciation
rights.
AGGREGATE OPTION EXERCISES AND FISCAL 1999 YEAR-END VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
ON VALUE --------------------------- ---------------------------
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
-------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Young K. Sohn............... 200,000 $0.00 1,840,134(2) 19,966 $0.00 $1,140,000.00
David D. Tsang.............. 0 $0.00 38,000 152,000 $0.00 $ 33,750.00
Shawn M. Soderberg.......... 0 $0.00 23,400 146,600 $0.00 $ 67,500.00
Peter D. Besen.............. 0 $0.00 0 297,500 $0.00 $ 142,812.50
Paul Vroomen................ 0 $0.00 0 212,500 $0.00 $ 92,187.50
Robert O. Hersh............. 0 $0.00 0 170,000 $0.00 $ 37,500.00
Richard B. Black(3)......... 0 $0.00 61,560 156,440 $0.00 $ 31,250.00
Richard Simone(4)........... 0 $0.00 0 130,000 $0.00 $ 48,750.00
</TABLE>
- ------------------------
(1) Calculated by determining the difference between the fair market value of
the securities underlying the options at June 30, 1999 (based on the closing
price of $3.625 for Oak's Common Stock on the Nasdaq National Stock Market
on June 30, 1999) and the exercise price of the options.
(2) Includes options to purchase 1,833,334 shares that are immediately
exercisable but unvested and are subject to Oak's right of repurchase.
(3) Mr. Black is Vice-Chairman of the Oak Board and served as President of Oak
from January 1998 through February 1999.
(4) Mr. Simone resigned as Vice President on June 23, 1999.
50
<PAGE>
SPECIAL OPTION REGRANT PROGRAM
During the 1999 fiscal year, the compensation committee felt that
circumstances had made it necessary for Oak to implement an option
cancellation/regrant program. Accordingly, on August 12, 1998, all of Oak's
employees (including those executive officers who were new officers for fiscal
1998) were given the opportunity to surrender their outstanding options issued
under the 1988 and 1994 Stock Option Plans with exercise prices in excess of
$3.50 per share could be exchanged at the election of the optionee for a new
option grant for the same number of shares with a lower exercise price of $3.25
per share, the fair market value per share of Oak's Common Stock on the regrant
date. A restart of vesting was imposed, and the new options become exercisable
as follows: twenty-four percent at the end of the first anniversary of the date
of grant and the balance in a series of thirty-eight equal monthly installments.
The compensation committee determined that this program was necessary
because equity incentives are a significant component of the total compensation
package of each Company employee and play a substantial role in Oak's ability to
retain the services of individuals essential to Oak's long-term financial
success. Prior to the implementation of the program, the market price of Oak's
Common Stock had fallen as a result of market factors which adversely impacted
Oak's financial results and which did not necessarily reflect the employees'
contributions to Oak's progress. The compensation committee felt that Oak's
ability to retain key employees would be significantly impaired, unless value
was restored to their options in the form of regranted options at the current
market price of Oak's Common Stock. However, in order for the regranted options
to serve their primary purpose of assuring the continued service of each
optionee, a new vesting schedule was imposed with respect to the regranted
option shares. The new options do not continue to vest in accordance with their
original option vesting schedule, but may only be exercised for twenty-four
percent of the total shares after the optionee has completed one year of service
measured from the regrant date. Thereafter, the options may be exercised for an
additional two percent of the total shares on each monthly anniversary date
until fully vested. Accordingly, an employee or officer who elected to reprice
his or her current options was required to restart the fifty month vesting that
applied to a canceled option.
As a result of the new exercise schedules imposed on the regranted options,
the compensation committee believes that the program strikes an appropriate
balance between the interests of the option holders and those of the
stockholders. The lower exercise prices in effect under the regranted options
make those options valuable once again to the new executive officers and key
employees critical to Oak's financial performance. However, those individuals
will enjoy the benefits of the regranted options only if they in fact remain in
Oak's employ and contribute to Oak's financial success.
51
<PAGE>
The following table sets forth information with respect to all repricings of
options held by any executive officer of Oak since February 13, 1995, the date
of Oak's initial public offering.
<TABLE>
<CAPTION>
NUMBER OF LENGTH OF
SECURITIES MARKET OPTION TERM
UNDERLYING PRICE OF STOCK EXERCISE PRICE REMAINING AT
OPTIONS AT TIME OF AT TIME NEW DATE OF
REPRICING REPRICED REPRICING OR OF REPRICING EXERCISE REPRICING OR
NAME DATE OR AMENDED AMENDMENT OR AMENDMENT PRICE AMENDMENT
- ---- --------- ---------- -------------- -------------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Peter D. Besen............. 08/01/96 20,000 $6.50 $28.50 $6.50 4 yrs, 97 days
General Manager, 08/01/96 10,000 $6.50 $19.38 $6.50 4 yrs, 174 days
Digital Imaging Group 08/12/98 20,000 $3.25 $ 6.50 $3.25 2 yrs, 86 days
08/12/98 10,000 $3.25 $ 6.50 $3.25 2 yrs, 163 days
08/12/98 30,000 $3.25 $ 9.38 $3.25 3 yrs, 294 days
08/12/98 30,000 $3.25 $ 9.63 $3.25 4 yrs, 83 days
Richard Simone(1).......... 08/12/98 70,000 $3.25 $ 4.5625 $3.25 4 yrs, 323 days
Vice President,
Technology and
Operations
Shawn M. Soderberg......... 08/01/96 30,000 $6.50 $25.13 $6.50 4 yrs, 212 days
Vice President, 08/12/98 5,000 $3.25 $13.50 $3.25 3 yrs, 203 days
General Counsel & 08/12/98 15,000 $3.25 $ 7.00 $3.25 4 yrs, 202 days
Secretary
Paul H. F. Vroomen......... 08/12/98 80,000 $3.25 $10.875 $3.25 4 yrs, 21 days
General Manager, Consumer
Group
Ronald E. Wilderink(2)..... 08/01/96 20,000 $6.50 $13.81 $6.50 3 yrs, 274 days
Vice President, Corporate
Controller
</TABLE>
- ------------------------
(1) Mr. Simone resigned as Vice President on June 23, 1999
(2) Mr. Wilderink resigned as Vice President on August 24, 1998
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee (the "Committee") is comprised of two
independent, non-employee directors of Oak, none of whom are former employees of
Oak. The compensation committee was comprised of Young Sohn and Ta-Lin Hsu until
Mr. Sohn became an employee of Oak in February 1999. Effective August of 1999
the compensation committee was comprised of Ta-Lin Hsu and Albert Yu; (between
February and August the full board performed the functions of the compensation
committee). For a description of transactions between Oak and members of the
compensation committee and entities affiliated with such members, see "Certain
Relationships and Related Transactions."
No executive officer of Oak served on the compensation committee of another
entity or on any other Committee of the Oak Board of another entity performing
similar functions, during the last fiscal year.
52
<PAGE>
EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENTS
On February 22, 1999, Oak entered into an employment agreement with
Mr. Sohn in connection with his employment as Oak's President and Chief
Executive Officer. Pursuant to this agreement, Mr. Sohn will be paid an annual
base salary of $450,000 and will be eligible to receive a performance bonus of
60% to 120% of his base salary for each fiscal year beginning with fiscal 2000
based on the achievement of certain fiscal and performance based objectives as
agreed to with the Oak Board. Mr. Sohn also executed a promissory note on
February 22, 1999 for $2,000,000 with interest payable at a rate of 4.62% per
annum, compounded annually. Oak will forgive the repayment of principal and
accrued interest on the note in three equal annual installments beginning
February 25, 2000 provided Mr. Sohn is continuously employed with Oak during
each year in the three-year note term, but if Mr. Sohn is terminated during the
first year of the three-year term, the first installment of principal and
accrued interest will be forgiven.
Mr. Sohn was granted an option to purchase 2,000,000 shares of the company's
common stock with an exercise price of $3.00 per share. The option shares vest
in 48 equal monthly installments over his 4-year period of service. In the event
that Oak's common stock has an average closing price of at least $20 per share
for a period of 30 consecutive calendar days, Mr. Sohn will vest in 50% of any
unvested shares. In addition, all shares will vest upon a change in control of
Oak (whether by merger, asset sale or sale of stock by the stockholders) or a
dissolution of Oak. If Mr. Sohn's employment is terminated for any reason during
this first year of employment, the number of shares in which he will be vested
will be increased to the greater of (A) 25% of the total option shares or
(B) the number of shares in which he is otherwise vested plus 12.5% of the
option shares. If his employment is terminated without cause after one year,
then the number of shares in which he will be vested will be increased to the
number of shares in which he is otherwise vested plus 12.5% of the option
shares. Mr. Sohn exercised the option on February 22, 1999, subject to Oak's
right to repurchase any shares in which he is not vested upon his termination of
employment.
In the event that Mr. Sohn is terminated for any reason during his first
year of employment, he will receive (i) his base salary for a period of 12
months, (ii) 50% of his target performance bonus and (iii) the first installment
of his special bonus (the loan forgiveness). If his employment is terminated
without cause after the first year of employment, Mr. Sohn will receive his base
salary for 6 months and 50% of his target performance bonus. In the event that
Mr. Sohn's employment is terminated without cause or if he resigns for good
reason (including as a result of a decrease in his salary or performance bonus
or a change in his title, authority or responsibilities) within 12 months of a
change in control of Oak, he will receive (i) his base salary for a period of 12
months and (ii) his target performance bonus.
In August of 1998, Oak issued non-qualified stock options that will
accelerate upon a change in control of Oak to Peter Besen, Abel Lo, Shawn
Soderberg, David Tsang, and Paul Vroomen. In November of 1998 and in April 1999,
similar stock options were issued to Robert Hersh and William Housley,
respectively.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The compensation committee (the "Committee") is comprised of two
independent, non-employee directors of Oak, none of whom are former employees of
Oak. The compensation committee was comprised of Young Sohn and Ta-Lin Hsu until
Mr. Sohn became an employee of Oak in February 1999. Effective August of 1999
the compensation committee was comprised of Ta-Lin Hsu and Albert Yu; (between
February and August the full board acted as the compensation committee). The
compensation committee's primary function is to provide guidance and leadership
to the Chief Executive Officer, the Chief Financial Officer and the VP, Human
Resources to enable them to design an executive compensation program which
attracts and retains executive management. The primary role of the Committee is
to review and approve the salary, bonus, stock options and other benefits,
direct or indirect, of Oak's officer group.
53
<PAGE>
Oak has considered the potential impact of Section 162(m) of the Internal
Revenue Code ("Section 162(m)") adopted under the federal Revenue Reconciliation
Act of 1993. Section 162(m) of the Internal Revenue Code disallows a Federal
income tax deduction to publicly held companies for compensation paid to certain
of their executive officers, to the extent that compensation exceeds $1 million
per covered officer in any fiscal year. This limitation applies only to
compensation which is not considered to be performance based. Oak's 1994 Option
Plan has been structured so that any compensation deemed paid in connection with
the exercise of option grants made under the plan will qualify as performance-
based compensation and will not be subject to the $1 million limitation.
Mr. Sohn's option grant and special bonus for fiscal 1999 were approved by the
entire Oak Board and will not qualify as performance-based compensation.
Additional non-performance based compensation paid to Oak's executive officers
for the 2000 fiscal year will exceed the $1 million limit per officer only by an
insubstantial amount for one executive officer, and the Committee has decided
not to take any action at this time to limit or restructure the elements of cash
compensation payable to Oak's executive officers. Oak's policy is to qualify to
the extent reasonable its executive officers' compensation for deductibility
under applicable tax laws.
The compensation program and policies of Oak are designed to enhance
stockholder value by aligning the financial interests of the executive officers
of Oak with those of its stockholders. Oak's compensation program utilizes base
salary, performance based cash bonuses and stock options to motivate executive
officers to achieve Oak's business objectives and to recognize the value
achieved by the executive team for Oak's stockholders.
SALARY
During the fiscal year, the Committee reviews with the Chief Executive
Officer, and approves, with modifications it deems appropriate, an annual salary
plan for Oak's executive officers. In making individual base salary decisions,
the Committee reviews each officer's duties and the contributions the officer
has made to Oak's overall performance. The Committee also compares the salary of
each officer with other officers' salaries, taking into consideration the number
of years employed by Oak, the possibility of future promotions and the extent
and frequency of prior salary adjustments.
INCENTIVE COMPENSATION
The company has continued an executive bonus plan, which is based upon
achievement of targets established for financial performance and attainment of
other annual goals as determined by the Committee. For the purposes of the bonus
calculation under the bonus plan, performance is measured according to
achievement of approved targets in specified categories. If the targeted levels
are met, generally, each participant in the bonus plan may earn a bonus of up to
40% of such executives officer's base salary, with the exception of the Chief
Executive Officer who is eligible to earn a bonus from 60--120% of base salary.
Payment of this performance bonus is based upon the achievement or fiscal and
performance-based objectives as agreed to by the board. If the targeted levels
are exceeded, additional bonuses are earned. The maximum bonus, which can be
earned in any year by an executive under the plan, is 150% of the targeted
bonus. No bonus will be paid for achievement of any of the designated levels of
operating results unless Oak achieves a specified minimum level of income before
income taxes. In addition, regardless of whether targeted performance levels are
met, any award is subject to the discretion of the compensation committee of the
Oak Board. In general, for fiscal year 1999, no executive incentive cash bonuses
were paid in keeping with the performance of the company.
STOCK OPTIONS
The Committee believes that equity ownership provides significant additional
motivation to executive officers to maximize value for Oak's stockholders.
Generally the committee grants stock options at the commencement of an executive
officer's employment and, depending upon that officer's performance and the
appropriateness of additional awards to retain key employees, periodically
thereafter. In making its
54
<PAGE>
determination as to grant levels, the committee takes into consideration prior
grants to such executive, the number of years such officer has been employed by
Oak, grants made in the broad high tech industry to similarly situated
executives, and, in the case of an initial grant, the sufficiency of such grant
to attract the executive to accept employment with Oak. In fiscal year 1999,
executive officers and technical employees were granted stock options above the
market median, to achieve retention objectives as appropriate to their level of
contribution, thus shifting the emphasis in pay from cash to equity.
CEO COMPENSATION
The committee independently determined the base salary for Mr. Tsang as the
Chief Executive Officer based on the assessment of Oak's performance against its
present goals, Oak's performance within the semiconductor industry, the overall
performance of the Chief Executive Officer, and the compensation levels of
similarly situated chief executive officers. Based upon such assessment,
Mr. Tsang's annual base salary was $325,000. Mr. Tsang has continued to earn
this salary as Oak's chairman of the board and is expected to work with the
chief executive officer on strategic technology initiatives and vendor/customer
relationships. Mr. Tsang is currently eligible in fiscal 2000 to receive a
performance bonus of between 60% to 120% of his annual salary upon achievement
of pre-specified objectives approved by the Oak Board. In addition, Mr. Tsang
received options to purchase 90,000 shares during fiscal 1999. Mr. Tsang did not
earn a cash bonus under Oak's executive bonus plan for fiscal 1999.
Mr. Sohn's compensation was negotiated by the Oak Board in light of the
objectives and assessment mentioned above. Pursuant to his employment agreement
dated February 22, 1999, Mr. Sohn's annual base salary is $450,000. In fiscal
2000, he will be entitled to receive a performance bonus of between 60% to 120%
of his base salary upon achievement of pre-specified objectives, of which the
Oak Board has reviewed. Mr. Sohn also received a special bonus of $2,000,000
(adjusted for inflation), structured as a loan forgiven in three equal annual
installments upon completion of each year of service measured from February 26,
1999. Mr. Sohn is entitled to the first installment if he is terminated during
his first year. Mr. Sohn was also granted an option to purchase 2,000,000 shares
of common stock at an exercise price of $3.00 per share. The option shares vest
monthly over a four-year period, and the vesting will accelerate upon a change
of control of Oak or certain terminations of Mr. Sohn's employment.
COMPENSATION COMMITTEE
Ta-Lin Hsu
Albert Yu
COMPARISON OF STOCKHOLDER RETURN
Set forth below is a line graph comparing the annual percentage change in
the cumulative total return on Oak's Common Stock with the cumulative total
return of the H&Q Semiconductor Sector Index and the Nasdaq Stock Market
Index--U.S. for the period commencing on February 13, 1995 and ending on June
30, 1999.
55
<PAGE>
COMPARISON OF CUMULATIVE TOTAL RETURN FROM FEBRUARY 13, 1995(1) THROUGH JUNE 30,
1999(2)(3)
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
-----------------------------------------------------------------
OAK TECHNOLOGY INC (OAKT) 02/13/1995 6/95 6/96 6/97 6/98 6/99
- ------------------------- ---------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
OAK TECHNOLOGY, INC.................................... 100 263 134 139 65 52
NASDAQ STOCK MARKET (U.S.)............................. 100 119 152 185 244 349
HAMBRECHT & QUIST SEMICONDUCTORS....................... 100 150 112 203 166 352
</TABLE>
- ------------------------
(1) Oak's initial public offering became effective on February 13, 1995 and
trading commenced on February 14, 1995. For purposes of this presentation,
Oak has assumed that its initial offering price of $14.00 would have been
the closing sales price on February 13, 1995, the day prior to commencement
of trading. Oak effected a 2-for-1 split of its Common Stock on March 28,
1996.
(2) June 30, 1999 was the last day of trading for Oak's fiscal year ended June
30, 1999.
(3) Assumes that $100.00 was invested on February 13, 1995 in Oak's Common Stock
at Oak's initial offering price of $14.00 ($7.00 on a post-split basis) and
at the closing sales price for each index on that date and that all
dividends were reinvested. No dividends have been declared on Oak's Common
Stock. Stockholder returns over the indicated period should not be
considered indicative of future stockholder returns.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with his employment arrangement, Mr. Sohn also executed a
promissory note on February 22, 1999 for $2,000,000 with interest payable at a
rate of 4.62% per annum, compounded annually. Oak will forgive the repayment of
principal and accrued interest on the note in three equal annual installments
beginning February 25, 2000 provided Mr. Sohn is continuously employed with Oak
during each year in the three-year note term. Notwithstanding the above,
Mr. Sohn will receive the first installment if he is terminated for any reason
during his first year of employment. Upon Mr. Sohn's termination of service with
Oak after his first year of service, any remaining unforgiven note principal and
accrued interest becomes due and payable. As of September 30, 1999, the balance
owed on this note was $2,055,693, representing $2,000,000 principal and $55,693
accrued interest.
Oak loaned Mr. Besen the principal sum of $250,000 during fiscal 1999. Under
the terms of this loan arrangement, Oak will forgive repayment of the principal
(together with accrued interest at the rate of 5.82% per annum) in three equal
annual installments, with the first such installment occurring in July 2000.
Upon Mr. Besen's termination of service with Oak, any remaining unforgiven note
principal and interest becomes immediately due and payable. As of September 30,
1999, the balance owed on this note was $252,631, representing $250,000
principal and $2,631 accrued interest.
Oak has a similar arrangement with William Housley, its general manager of
its Optical Storage Group. Mr. Housley's loan was for the principal sum of
$100,000 paid during fiscal 1999, and the first of his three equal annual
installments for loan forgiveness (together with accrued interest at the rate of
5.82% per annum) occurs in July 2001. Upon Mr. Housley's termination of service
with Oak, any remaining unforgiven note principal and interest becomes
immediately due and payable. As of September 30, 1999, the balance owed on this
note was $101,052, representing $100,000 principal and $1,052 accrued interest.
Mr. Tomlinson is a general partner of Tomlinson Zisko Morosoli & Maser LLP,
a law firm that provides legal services to Oak.
ITEM 13. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of September 30,
1999, with respect to the beneficial ownership of Oak's common stock by (i) all
persons known by Oak to be the beneficial owners of
56
<PAGE>
more than 5% of the outstanding common stock of Oak, (ii) each director and
nominee for director of Oak, (iii) the chief executive officer and the other
executive officers named in the summary compensation table below and (iv) all
current executive officers and directors of Oak as a group.
<TABLE>
<CAPTION>
SHARES OWNED(2)(3)
--------------------------------------
NAME OF BENEFICIAL OWNERS(1) NUMBER OF SHARES PERCENTAGE OF CLASS
- ---------------------------- ---------------- -------------------
<S> <C> <C>
David D. Tsang(4)........................................... 4,530,949 11.0%
Young K. Sohn(5)............................................ 2,030,800 4.93%
Shawn M. Soderberg(6)....................................... 37,303 *
Peter B. Besen(7)........................................... 33,241 *
Paul Vroomen(8)............................................. 29,102 *
Robert O. Hersh(9).......................................... 12,000 *
Richard B. Black(10)........................................ 466,109 1.1%
Richard Simone(11).......................................... 16,800 *
Ta-Lin Hsu(12).............................................. 134,360 *
Timothy Tomlinson(13)....................................... 51,002 *
Albert Y. C. Yu(14)......................................... 28,000 *
Executive officers and directors as a group (15
persons)(15).............................................. 7,895,676 19.2%
</TABLE>
- ------------------------
* Less than 1%
(1) The address of Messrs. Sohn, Tsang, Vroomen, Hersh, and Simone and
Ms. Soderberg is c/o Oak Technology, Inc., 139 Kifer Court, Sunnyvale, CA
94086. The address of Mr. Besen is c/o Oak Technology, Inc., 200 Brickstone
Square, Andover, MA 01810. The address of Mr. Black is 10655 N. Upper
Meadow Road, Moose, WY 83012. The address of Mr. Hsu is c/o H&Q Asia
Pacific International Trade Bldg., 32nd Fl., 333 Keelung Road, Taipei,
Taiwan 10548, Republic of China. The address of Mr. Tomlinson is c/o
Tomlinson Zisko Morosoli & Maser LLP, 200 Page Mill Road, 2nd Floor, Palo
Alto, CA 94306.
(2) Unless otherwise indicated below, the persons and entities names in the
table have sole voting and sole investment power with respect to all shares
beneficially owned, subject to community property laws where applicable.
All options granted under Oak's 1994 Stock Option Plan ("1994 Option Plan")
and Oak's 1994 Outside directors' Stock Option Plan ("1994 Directors'
Option Plan") become exercisable in accordance with their respective
vesting terms.
(3) Percentage ownership is based on 41,194,077 shares of common stock
outstanding on September 30, 1999. Shares of Common Stock subject to stock
options which are currently exercisable or will become exercisable within
60 days after September 30, 1999 are deemed outstanding for computing the
percentage of the person or group holding such options, but are not deemed
outstanding for computing the percentage of any other person or group.
(4) Represents 200,000 shares held of record by Mr. Tsang; 3,162,949 shares
held by Mr. Tsang as Trustee for the Golden Rainbow Trust; and an aggregate
of 1,120,000 shares held of record by four trusts for Mr. Tsang's children
of which Mr. Tsang's brother and brother-in-law are trustees and 48,000
shares subject to options exercisable within 60 days of September 30, 1999.
Mr. Tsang is Chairman of the Oak Board of Oak.
57
<PAGE>
(5) Includes 1,800,000 shares subject to options granted pursuant to the
Executive Stock Option Plan, which options are immediately exercisable
subject to Oak's right of repurchase lapsing over time; and 20,800 shares
subject to options exercisable within 60 days of September 30, 1999.
Mr. Sohn served as a non-employee director until February 26, 1999 when he
joined Oak as President and Chief Executive Officer.
(6) Includes 32,400 shares subject to options exercisable within 60 days of
September 30, 1999. Ms. Soderberg is Vice President, General Counsel and
Secretary of Oak.
(7) Includes 27,000 shares subject to options exercisable within 60 days of
September 30, 1999. Mr. Besen is President and General Manager of Oak's
Digital Imaging Group.
(8) Includes 24,000 shares subject to options exercisable within 60 days of
September 30, 1999. Mr. Vroomen is General Manager of Oak's Consumer Group.
(9) Represents 12,000 shares subject to options exercisable within 60 days of
September 30, 1999. Mr. Hersh joined Oak in November 1998 as Vice President
and Chief Financial Officer.
(10) Includes 78,360 shares subject to options exercisable within 60 days of
September 30, 1999. Mr. Black is Vice-Chairman of the Oak Board and served
Oak as President until February, 1999.
(11) Represents 16,800 shares subject to options exercisable within 60 days of
September 30, 1999. Mr. Simone was Vice President, Technology and
Operations until his resignation on June 23, 1999.
(12) Includes 24,360 shares subject to options exercisable within 60 days of
September 30, 1999. Dr. Hsu is a director of Oak.
(13) Includes 24,360 shares subject to options exercisable within 60 days of
September 30, 1999. Mr. Tomlinson is a director of Oak.
(14) Represents 28,000 shares subject to options exercisable within 60 days of
September 30, 1999. Dr. Yu became a director on August 2, 1999 and
received a stock option for 50,000 shares, of which 25,000 shares were
immediately vested, and the remaining shares vest in 25 equal monthly
installments of 1,000 shares each.
(15) Includes 2,167,280 shares subject to options exercisable within 60 days of
September 30, 1999.
58
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
1. Financial Statements.
Independent Auditors Report................................. 47
Consolidated Balance Sheets--As of June 30, 1999 and 1998... 48
Consolidated Statements of Operations--For the Three Year
Period Ended June 30, 1999.................................. 49
Consolidated Statements of Stockholders' Equity--For the
Three Year Period Ended June 30, 1999....................... 50
Consolidated Statements of Cash Flows--For the Three Year
Period Ended June 30, 1999.................................. 51
Notes to Consolidated Financial Statements.................. 52
Financial Statement Schedule. The following Financial
Statement Schedule of the Registrant is filed as part of
2. this report:
Schedule II--Valuation and Qualifying Accounts.............. 81
All other schedules are omitted because they are not
applicable or the required information is shown in the
Consolidated Financial Statements or notes thereto.
Exhibits. The following Exhibits are filed as part of, or
3. incorporated by reference into, this report:
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- --------------------- -------------
<C> <S>
3.01 The Company's Restated Certificate of Incorporation,
amended(1)
3.02 The Company's Restated Bylaws(2)
3.03 Certificate of Correction to the Restated Certificate of
Incorporation of the Company(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)*
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- --------------------- -------------
<C> <S>
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 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)
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- --------------------- -------------
<C> <S>
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)
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 be and between Taiwan
Semiconductor Manufacturing Co., Ltd., and the Company(19)**
10.27 Settlement Agreement between Winbond Electronics Corporation
and the Company(19)**
10.28 Amendment Agreement (No. 3) to Deposit Agreement dated
November 8, 1995 between Chartered Semiconductor
Manufacturing Ltd. and Oak Technology Inc.(20)
10.29 Employment Agreement between Oak Technology Inc. and
Young K. Sohn dated February 27, 1999(21)
10.30 Loan agreement between Oak Technology Inc. and Young K. Sohn
dated February 27, 1999(21)
10.31 Oak Technology Inc. Executive Stock Option Plan(21)
10.32 Letter Agreement dated January 22, 1999 between the Special
Committee of the Board of Directors of Oak Technology, Inc.
and David T. Tsang and Ta-Lin Hsu(21)
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- --------------------- -------------
<C> <S>
+10.33 Amendment to Option Agreement dated June 30, 1999 between
Oak Technology Inc. and Taiwan Semiconductor Manufacturing
Co., Ltd.
+10.34 Agreement and Plan of Merger and Reorganization between Oak
Technology, Inc., Vermont Acquisition Corp. and Xionics
Document Technologies, Inc. dated July 29, 1999.
+23.01 Consent of Independent Auditors
+24.01 Power of Attorney
+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.
62
<PAGE>
(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.
(20) 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, 1998.
(21) 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, 1999.
+ Previously Filed
* Indicates Management incentive plan.
** Confidential treatment granted and/or requested as to portions of the
exhibit.
(b) Reports on Form 8-K.
The Company filed a Report on Form 8-K on August 12, 1999, making an item 5
disclosure that it had announced that it had entered into an Agreement and Plan
of Merger and Reorganization dated as of July 29, 1999 with Xionics Document
Technologies, Inc.
TRADEMARK ACKNOWLEDGMENTS
- Oak Technology, Inc. and the Oak logo are registered trademarks of the
Company. Pixel Magic, XLI Corporation, iDSP, iCodec, and iRET, are
trademarks of the Company.
- All other brand names or trademarks appearing in the Form 10-K are the
property of their respective owners.
63
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Oak Technology, Inc.:
We have audited the accompanying consolidated balance sheets of Oak
Technology, Inc. and subsidiaries as of June 30, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended June 30, 1999. In connection
with our audits of the consolidated financial statements, we have also audited
the consolidated financial statement schedule, insofar as it relates to the
three-year period ended June 30, 1999. These consolidated financial statements
and consolidated financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and consolidated financial statement schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Oak
Technology, Inc. and subsidiaries as of June 30, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-year
period ended June 30, 1999, in conformity with generally accepted accounting
principles. Also, in our opinion, the related consolidated financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG LLP
Mountain View, California
July 30, 1999
64
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 19,500 $ 59,803
Short-term investments.................................... 113,703 57,422
Accounts receivable, net of allowance for doubtful
accounts of $555 and $809, respectively................. 8,251 17,605
Inventories, net.......................................... 1,819 7,558
Current portion of foundry deposits....................... 9,061 2,944
Deferred tax asset........................................ -- 5,356
Prepaid expenses and other current assets................. 11,120 10,967
-------- --------
Total current assets.................................. 163,455 161,655
Property and equipment, net................................. 22,039 25,114
Foundry deposits............................................ 7,760 18,231
Investment in ventures...................................... -- 51,216
Other assets................................................ 10,587 5,195
-------- --------
Total assets.......................................... $203,841 $261,411
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt....... $ 25 $ 2,625
Accounts payable.......................................... 3,648 6,236
Accrued expenses.......................................... 8,467 8,217
Deferred revenue.......................................... 379 263
-------- --------
Total current liabilities............................. 12,519 17,341
Long-term debt.............................................. 5 27
Deferred income taxes....................................... 1,438 2,607
Other long-term liabilities................................. 457 228
-------- --------
Total liabilities..................................... 14,419 20,203
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value; 2,000,000 shares
authorized; none issued and outstanding as of June 30,
1999 and 1998........................................... -- --
Common stock, $0.001 par value; 60,000,000 shares
authorized; 42,916,721 shares issued and 40,915,241
shares outstanding as of June 30, 1999; and 42,290,549
shares issued and 41,147,969 shares and outstanding as
of June 30, 1998........................................ 42 42
Additional paid-in capital................................ 164,784 163,172
Treasury stock............................................ (9,437) (6,708)
Retained earnings......................................... 34,033 84,702
-------- --------
Total stockholders' equity............................ 189,422 241,208
-------- --------
Total liabilities and stockholders' equity............ $203,841 $261,411
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
65
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net revenues................................................ $ 71,051 $157,106 $167,395
Cost of revenues............................................ 39,619 82,558 73,214
-------- -------- --------
Gross profit................................................ 31,432 74,548 94,181
Research and development expenses........................... 51,107 49,658 34,660
Selling, general, and administrative expenses............... 35,109 30,905 21,673
Acquired in-process research and development................ 7,161 1,323 --
Acquisition related compensation expense.................... -- -- 5,000
Restructuring charges....................................... -- 1,766 --
-------- -------- --------
Operating income (loss)..................................... (61,946) (9,104) 32,848
on-operating income, net.................................... 5,530 16,101 5,408
-------- -------- --------
Income (loss) before income taxes........................... (56,416) 6,997 38,256
Income taxes (benefit)...................................... (5,747) 1,050 14,537
-------- -------- --------
Net income (loss)........................................... $(50,669) $ 5,947 $ 23,719
======== ======== ========
Net income (loss) per share:
Basic..................................................... $ (1.24) $ 0.14 $ 0.58
======== ======== ========
Diluted................................................... $ (1.24) $ 0.14 $ 0.55
======== ======== ========
Shares used in computing net income (loss) per share:
Basic..................................................... 40,819 41,739 40,751
======== ======== ========
Diluted................................................... 40,819 42,493 42,757
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
66
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK TOTAL
---------------------- ADDITIONAL --------------------- STOCKHOLDERS'
NUMBER OF $.001 PAR PAID-IN RETAINED NUMBER OF EQUITY
SHARES VALUE CAPITAL EARNINGS SHARES COST (DEFICIT)
---------- --------- ---------- -------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, June 30, 1996..... 40,196,796 $40 $155,751 $ 55,036 -- -- $210,827
Exercise of stock options... 748,682 1 1,048 -- -- -- 1,049
Employee stock purchase
plan...................... 141,276 -- 1,169 -- -- -- 1,169
Tax benefit on exercise of
stock options............. -- -- 1,933 -- -- -- 1,933
Net income.................. -- -- -- 23,719 -- -- 23,719
---------- --- -------- -------- ---------- ------- --------
Balances, June 30, 1997..... 41,086,754 41 159,901 78,755 -- -- 238,697
Exercise of warrants........ 150,339 -- -- -- -- -- --
Repurchase of common stock.. -- -- -- -- (1,142,580) $(6,708) (6,708)
Exercise of stock options... 798,730 1 1,196 -- -- -- 1,197
Employee stock purchase
plan...................... 254,726 -- 1,555 -- -- -- 1,555
Tax benefit on exercise of
stock options............. -- -- 520 -- -- -- 520
Net income.................. -- -- -- 5,947 -- -- 5,947
---------- --- -------- -------- ---------- ------- --------
Balances, June 30, 1998..... 42,290,549 42 163,172 84,702 (1,142,580) (6,708) 241,208
Repurchase of common stock.. -- -- -- -- (858,900) (2,729) (2,729)
Exercise of stock options... 346,504 -- 713 -- -- -- 713
Employee stock purchase
plan...................... 279,668 -- 899 -- -- -- 899
Net loss.................... -- -- -- (50,669) -- -- (50,669)
---------- --- -------- -------- ---------- ------- --------
Balances, June 30, 1999..... 42,916,721 $42 $164,784 $ 34,033 (2,001,480) $(9,437) $189,422
========== === ======== ======== ========== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements
67
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------
1999 1998 1997
---------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................... $ (50,669) $ 5,947 $ 23,719
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 11,486 7,386 5,502
Inventory reserve adjustments......................... -- 3,545 (21,754)
Foundry deposit reserve adjustments................... 2,800 -- --
Equity in (income) or loss of unconsolidated
affiliates.......................................... 194 -- 602
Acquisition-related charges........................... 7,161 1,323 5,000
Restructuring related charges......................... -- 1,047 --
Loss on disposal of fixed assets...................... 1,293 -- --
Deferred income taxes................................. 4,187 (4,743) 9,448
Foundry deposits utilized............................. 1,554 12,985 11,035
Changes in operating assets and liabilities:
Accounts receivable................................. 9,354 7,267 (4,700)
Inventories......................................... 5,739 1,219 21,195
Prepaid expenses and other current assets........... (153) (3,056) (298)
Accounts payable and accrued expenses............... (4,156) (13,566) 10,315
Other assets.................................... 925 (732) (1,993)
Income taxes payable, deferred revenue and other
liabilities....................................... (226) (7,139) 5,286
---------- --------- ---------
Net cash provided by operating activities....... (10,511) 12,215 65,350
---------- --------- ---------
Cash flows from investing activities:
Purchases of short-term investments..................... (114,021) (65,290) (66,791)
Proceeds from matured short-term investments............ 57,740 65,528 77,481
Additions to property and equipment, net................ (5,998) (12,035) (6,908)
Acquisition of ViewPoint, Inc., net of cash acquired.... (9,467) -- --
Acquisition of XLI Inc. common stock.................. (3,675) -- --
Payment of certain XLI, Inc. liabilities at
acquisition date.................................... (2,094) -- --
Acquisition of ODEUM Microsystems..................... -- (4,010) --
Investment in Omni Peripherals Pte. Ltd............... -- (802) --
Proceeds from sale of (investment in) foundry venture... 51,234 (11,616) (25,922)
---------- --------- ---------
Net cash used in investing activities........... (26,281) (28,957) (24,133)
---------- --------- ---------
Cash flows from financing activities:
Issuance of debt........................................ 3,773 12,544 32,730
Repayment of debt....................................... (6,167) (19,652) (33,490)
Treasury stock acquisition.............................. (2,729) (6,708) --
Issuance of common stock................................ 1,612 2,752 2,218
---------- --------- ---------
Net cash provided by (used in) financing activities......... (3,511) (11,064) 1,458
---------- --------- ---------
Net increase (decrease) in cash and cash equivalents........ (40,303) (27,806) 42,675
Cash and cash equivalents, beginning of period.............. 59,803 87,609 44,934
---------- --------- ---------
Cash and cash equivalents, end of period.................... $ 19,500 $ 59,803 $ 87,609
========== ========= =========
Supplemental information:
Cash paid during the period:
Interest............................................ $ 52 $ 280 $ 465
========== ========= =========
Income taxes........................................ $ -- $ 14,548 $ --
========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements
68
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY
Oak Technology, Inc. (the "Company") commenced operations in August 1987, as
a California corporation. The Company is engaged in the design, development and
marketing of high performance multimedia semiconductors and related software to
the PC, consumer electronics, and digital imaging equipment markets. The Company
formed subsidiaries in Taipei, Taiwan, in January 1989; in Tokyo, Japan, in
January 1991; in Bristol, United Kingdom in February 1998; and in Munich,
Germany in September 1998. In December 1994, the Board of Directors approved the
re-incorporation of the Company as a Delaware corporation.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND PREPARATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
transactions and accounts have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS AND INVESTMENTS
The Company's policy is to invest cash in excess of operating requirements
in interest-bearing investments. Securities purchased with remaining maturities
of three months or less at the date of acquisition are considered to be cash
equivalents. Securities purchased with remaining maturities greater than three
months at the date of acquisition are included in short-term investments.
The Company accounts for its investments under Statement of Financial
Accounting Standards ("SFAS") No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN
DEBT AND EQUITY SECURITIES. SFAS No. 115 requires entities to classify
investments in debt and equity securities with readily determined fair values as
"held-to-maturity," "available-for-sale" or "trading" and establishes accounting
and reporting requirements for each classification. In accordance with SFAS No.
115, the Company has classified all securities held as available-for-sale
securities. Such securities are reported at fair value with unrealized gains or
losses, if material, excluded from earnings and reported as a separate component
of stockholders' equity. To date, unrealized gains and losses have not been
significant.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, foreign currency forward exchange
contracts and notes payable and long-term debt approximates fair market value.
Cash and cash equivalents and accounts receivable approximate fair market value
due to their short term nature. Notes payable and long-term debt approximate
fair market value as interest rates on these notes approximate market rates.
Financial instruments that subject the
69
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company to concentrations of credit risk consist primarily of cash and cash
equivalents and trade accounts receivable.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company periodically enters into forward foreign currency exchange
contracts primarily to hedge the value of accounts receivable denominated in
foreign currencies against fluctuations in exchange rates until such receivables
are collected. The Company does not enter into forward foreign currency exchange
contracts for speculative or trading purposes. The Company's accounting policies
for these contracts are based on the Company's designation of the contracts as
hedges of firm foreign currency commitments. Gains and losses on forward
currency foreign exchange contracts are deferred and recognized in income in the
same period as losses and gains on the underlying transactions are recognized
and generally offset.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily cash and cash equivalents,
short-term investments and accounts receivable. The Company's cash equivalents
and short-term investments are primarily in money market accounts, certificates
of deposit, corporate notes and US government obligations. The Company's
short-term investments have maturities ranging from 1999 through 2000. Also
included in cash and cash equivalents as of June 30, 1999 and 1998, are
approximately $2,600,000 and $3,500,000, respectively, in accounts with foreign
banks and financial institutions (in Taiwan, Japan and the UK). The Company
periodically discounts notes receivable with recourse due from some customers
with banks in Japan. As of June 30, 1999 and 1998, the Company had no discounted
notes receivable outstanding.
Generally, the Company requires no collateral on trade receivables, although
a substantial portion of export sales are guaranteed by letters of credit. The
Company believes that any credit risks are substantially mitigated by its credit
evaluation process and its maintenance of reserves for estimated credit losses.
INVENTORIES
Inventories are stated at the lower of cost (first in, first out) or market.
The Company periodically reviews its inventories for potential slow-moving or
obsolete items and writes down specific items to net realizable value as
appropriate.
DEPRECIATION AND AMORTIZATION
Property and equipment is stated at cost. Depreciation and amortization are
computed using the straight-line method. Useful lives of three to five years are
used for computer equipment, purchased software and furniture and fixtures;
useful lives of up to five years are used for leasehold improvements and a
useful life of 60 years is used for a building.
FOUNDRY DEPOSITS PAID UNDER AGREEMENTS
Deposits and prepayments paid under agreements to secure additional wafer
capacity are carried at the lesser of cost or net realizable value.
70
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENT IN OMNI PERIPHERALS
The Company accounts for its investment in Omni Peripherals under the equity
method in which the Company records its pro-rata share of the income/(loss) in
the Omni as other non-operating income, net of non-operating expenses.
LONG LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets held and used is measured by a
comparison of the carrying amount of an asset to the future undiscounted net
cash flows expected to be generated by such asset. If the carrying amount is in
excess of the future undiscounted net cash flows of such assets, an impairment
is recognized and is measured by the amount by which the carrying value of the
asset exceeds its fair value. Assets to be disposed of are reported at the lower
of their carrying amount or fair value less cost to sell.
REVENUE RECOGNITION
Product revenue is recognized upon shipment, with provisions for estimated
returns and allowances. Revenue from non-refundable technology license fees is
recognized upon transfer of the associated technology.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The majority of the Company's purchasing and sales transactions are
denominated in US dollars, which is considered to be the functional currency of
the Company and its subsidiaries. Certain sales to customers in Japan and Taiwan
are invoiced in local currencies. Assets and liabilities of the Company's
foreign subsidiaries are remeasured into the functional currency from the local
currency at rates in effect at period-end except for inventories, property and
equipment, and intangible assets, which are remeasured at historical rates.
Revenues and expenses are remeasured at average rates during the period.
Adjustments arising from the remeasurement of local currency financial
statements are included in non-operating income.
The Company enters into forward currency exchange contracts to hedge certain
exposures related to certain foreign currency transactions. Gains and losses on
contracts are recognized in the same period as the transactions being hedged and
are charged to non-operating income. As of June 30, 1999 and 1998, the Company
had forward currency exchange contracts to exchange yen for approximately
$1,030,000 and $4,690,000 respectively.
STOCK-BASED COMPENSATION
The Company accounts for stock option grants as permitted by Statement of
Financial Accounting Standards (SFAS) No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, in accordance with the provisions of the Accounting Principles
Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES As such,
compensation expense is recorded on the date of grant only if the current market
price of the underlying stock exceeds the exercise price. In accordance with
SFAS No. 123 the Company discloses pro forma net income/loss and pro forma
earnings per share amounts assuming the Company had accounted for employee stock
option grant using the fair value-based method defined in SFAS No. 123 had been
applied.
71
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OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company records income taxes using an asset and liability approach that
results in the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized differently
in the Company's consolidated financial statements and tax returns. In
estimating future tax consequences, all expected future events other than
enactment of changes in tax laws or rates are considered. A valuation allowance
is established when necessary to reduce deferred tax assets to amounts expected
to be realized. Under certain provisions of the Internal Revenue Code of 1986,
as amended, the availability of the Company's net operating loss and tax credit
carryforwards may be subject to limitation if it should be determined that there
has been a change in ownership of more than 50% of the value of the Company's
stock. Such determination could limit the utilization of net operating loss and
tax credit carryforwards.
US income taxes are provided on income from foreign subsidiaries to the
extent the Company plans to repatriate such income.
NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed using the weighted average
number of common shares outstanding during the period. Diluted net income per
share is computed using the weighted average number of common and dilutive
common equivalent shares outstanding during the period, using the treasury stock
method for options and warrants. The computation of diluted net loss per share
excludes common equivalent shares since they are anti-dilutive in a loss period.
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share (EPS) computations for the periods
presented (in thousands except per share amounts):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net income (loss)................................ $(50,669) $5,947 $23,719
======== ====== =======
Shares:
Weighted average common shares................... 40,819 41,739 40,751
Dilutive stock options and other common stock
equivalents.................................... -- 754 2,006
-------- ------ -------
Dilutive potential common shares................. 40,819 42,493 42,757
-------- ------ -------
Earnings (loss) per share:
Basic.......................................... $ (1.24) $ 0.14 $ 0.58
======== ====== =======
Diluted........................................ $ (1.24) $ 0.14 $ 0.55
======== ====== =======
</TABLE>
For fiscal year 1999, approximately 309,000 of stock options with exercise
prices below the average market price of the common shares for the year were
excluded from the loss per share computation since they were anti-dilutive
during the loss periods. For fiscal years 1998 and 1997, the number of
anti-dilutive shares excluded from the diluted EPS computations, representing
options outstanding with an exercise price greater than the average market price
for the periods, was 1,694,000 and 345,000, respectively.
72
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OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME
The Company has no components of comprehensive income other than its net
income/loss for all periods presented.
SEGMENT REPORTING
In July 1998, the Company adopted SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 supercedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," and replaces the
"industry segment" approach with the "management" approach. The management
approach designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of a
company's reportable segments. SFAS No. 131 also requires disclosures about
products and services, geographic areas, and major customers. The adoption of
SFAS No. 131 did not affect the results of operations or financial position, but
did impact required disclosures.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities", which will be
effective for the Company's fiscal year 2001. SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument,
including certain derivative instruments imbedded in other contracts, be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The statement also requires that changes in the derivative's fair
value be recognized in earnings unless specific hedge accounting criteria are
met. The Company is currently assessing the impact of this new statement on its
consolidated financial position, liquidity, and results of operations.
73
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
As of June 30, 1999, all investments were considered available-for-sale
securities and consisted of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
ACCRUED FAIR
COST INTEREST VALUE
-------- -------- ---------
<S> <C> <C> <C>
Money market funds.............................. $ 19,500 $ 23 $ 19,523
Certificates of deposit......................... 714 -- 714
Corporate notes................................. 53,226 408 53,634
US government obligations....................... 59,763 412 60,175
-------- ---- --------
$133,203 $843 $134,046
======== ==== ========
</TABLE>
As of June 30, 1999, approximately $72.1 million of these investments had
contractual maturities within one year and approximately $63.1 million had
contractual maturities between one and two years. These investments were
classified on the consolidated balance sheet as follows (in thousands):
<TABLE>
<S> <C>
Cash and cash equivalents................................... $ 19,500
Short-term investments...................................... 113,703
--------
$133,203
========
</TABLE>
As of June 30, 1998, all investments were considered available-for-sale
securities and consisted of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
ACCRUED FAIR
COST INTEREST VALUE
-------- -------- ---------
<S> <C> <C> <C>
Money market funds.............................. $ 47,945 $ 6 $ 47,951
Certificates of deposit......................... 12,047 -- 12,047
Corporate notes................................. 28,708 462 29,170
US government obligations....................... 28,525 226 28,751
-------- ---- --------
$117,225 $694 $117,919
======== ==== ========
</TABLE>
As of June 30, 1998, approximately $60.3 million of these investments had
contractual maturities within one year and approximately $57.2 million had
contractual maturities between one and two years. These investments were
classified on the consolidated balance sheet as follows (in thousands):
<TABLE>
<S> <C>
Cash and cash equivalents................................... $ 59,803
Short-term investments...................................... 57,422
--------
$117,225
========
</TABLE>
74
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) INVENTORIES
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Purchased parts and work in process........................ $ 1,269 $ 5,612
Finished goods............................................. 4,385 6,572
Reserve for obsolescence................................... (3,835) (4,626)
------- -------
$ 1,819 $ 7,558
======= =======
</TABLE>
During the quarter ended March 31, 1998 the Company recorded a $3.5 million
write-off of inventory related to the discontinuation of the graphics and
audio/communications businesses. See note 17 for a discussion of the business
restructuring.
(5) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Land...................................................... $ 3,487 $ 3,487
Building and leasehold improvements....................... 2,741 2,687
Computers, equipment and purchased software............... 36,891 31,636
Furniture and fixtures.................................... 1,587 2,463
------- -------
44,707 40,273
Less accumulated depreciation and amortization............ 22,667 15,159
------- -------
$22,039 $25,114
======= =======
</TABLE>
(6) OTHER ASSETS
Other assets consisted of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Purchased technology, net of amortization.................. $ 7,569 $1,567
Note receivable from officer (see note 19)................. 2,000 --
Investment in Omni Peripherals............................. 434 820
Deposits................................................... 425 2,207
Other...................................................... 159 601
------- ------
$10,587 $5,195
======= ======
</TABLE>
Purchased technology represents the portions of the purchase prices of ODEUM
Microsystems, ViewPoint Technology, and XLI Incorporated allocated to developed
technology acquired as discussed in
75
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) OTHER ASSETS (CONTINUED)
Note 10 and is being amortized on a straight-line basis over a period of three
years from each acquisition. Accumulated amortization as of June 30, 1999 and
1998 was $3,877,000 and $224,000, respectively.
(7) ACCRUED EXPENSES
Accrued expenses consisted of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Compensation and benefits related items..................... $3,922 $4,345
Accrued legal and other fees................................ 1,456 476
Taxes payable............................................... 825 --
Royalties................................................... 750 963
Current portion of acquisition-related accrued liability to
former Pixel Magic shareholders........................... -- 1,986
Other....................................................... 1,515 447
------ ------
$8,467 $8,217
====== ======
</TABLE>
(8) NON-OPERATING INCOME AND LICENSE FEES
NON-OPERATING INCOME, NET
Non-operating income, net consisted of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Interest income.................................... $5,617 $ 7,665 $6,614
Interest expense................................... (52) (286) (468)
Foreign currency translation/transaction loss...... 147 (2,521) (722)
Income (loss) on equity method investee............ (368) -- (602)
Settlement proceeds................................ -- 10,589 --
Other income (expense)............................. 186 654 586
------ ------- ------
$5,530 $16,101 $5,408
====== ======= ======
</TABLE>
During the year ended June 30, 1998 the Company recorded as non-operating
income the proceeds from a Settlement Agreement entered into on July 31, 1997.
The settlement agreement was between the Company and United Microelectronics
Corporation ("UMC") in connection with a complaint the Company had filed with
the International Trade Commission on July 21, 1997 based on the Company's
belief that certain UMC CD-ROM controllers infringed on one of the Company's
patents.
LICENSE FEES
Non-refundable technology license fees of approximately $2,890,000,
$1,191,000, and $235,000 were recorded as revenue in fiscal 1999, 1998 and 1997
respectively. Technology fees in fiscal 1999 were primarily received pursuant to
technology license agreements with Matsushita and Dell.
76
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Short-term bank loans....................................... $-- $2,482
Short-term notes............................................ -- 109
Capital lease obligations................................... 30 61
--- ------
30 2,652
Less current portion........................................ 25 2,625
--- ------
$ 5 $ 27
=== ======
</TABLE>
Short-term bank loans at June 30, 1998 consisted of borrowings from two
Japanese financial institutions, collateralized by standby letters of credit
drawn on U.S. banks, which bore interest based on the Japanese prime rate. As of
June 30, 1999, there were no borrowings outstanding with either institution.
Under the current arrangement with one of the financial institutions, the
Company may borrow up to an aggregate of approximately $12 million subject to
annual renewal.
Short-term notes at June 30, 1998 consisted primarily of revolving
borrowings from three Taiwanese financial institutions, collateralized by land
and a building in Taiwan, which bore interest at rates determined at the time of
each borrowing. Compensating balances ranging from 20% to 30% of outstanding
borrowings are required for individual balances exceeding established minimums,
however no compensating balances were required as of June 30, 1998. Borrowings
as of June 30, 1998 bore interest at 6.55%. As of June 30, 1999, there were no
borrowings outstanding with any of the institutions. Under arrangements with the
three financial institutions, as of June 30, 1999, the Company may borrow up to
an aggregate of approximately $14,000,000 subject to annual renewal.
Future principal payments under all outstanding obligations as of June 30,
1999 are approximately $30,000, of which $25,000 is due in fiscal 2000.
(10) ACQUISTIONS AND INVESTMENT
ACQUISTIONS
On July 2, 1998, the Company acquired ViewPoint Technology, Inc.
("ViewPoint"), a privately held development stage company that was developing
high performance solutions for the growing compact disc-read write market,
specifically a controller device to support high encoding speeds for
next-generation CD-RW drives, which was its only technology. At the date of
acquisition, ViewPoint was in the process of developing its VPT8008 product, but
still required key firmware, drivers, design changes and silicon testing prior
to achieving technological feasibility. ViewPoint's technology was only valuable
when integrated into the Company" server technology and physically redesigned to
add significant key features. Company management determined that there were no
alternative uses for their CD-RW technology and that significant additional
engineering and development expenses would be required to bring a product to
market in fiscal year 2000. The Company believes it will generate significant
revenues from its CD-RW products incorporating Viewpoint's technologies in
fiscal year 2000.
The Company paid $10.1 million in cash for all the outstanding shares of
ViewPoint. The purchase method of accounting was used to record the acquisition
and approximately $4.8 million of the purchase
77
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) ACQUISTIONS AND INVESTMENT (CONTINUED)
price was allocated to in-process research and development, which was charged to
operations in the quarter ended September 30, 1998. The remaining costs of the
acquisition were recorded on the Company's balance sheet. Approximately
$4.4 million of the purchase price was allocated to purchased technology and
other intangible assets and is being amortized to operations on a straight-line
basis over three years, and $0.9 million was allocated to cash , fixed assets
and other tangible assets. The estimated value of in-process research and
development was derived using the "Income Approach". The future cash flows were
discounted to their present value utilizing a discount rate of 28%. The Company
did not anticipate any material changes from historical pricing, margins and
expense levels in its valuation assumptions.
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. The Company acquired XLI in order to gain
access to imaging technology and expertise that would complement its own image
process solutions. XLI had a number of products in the development stage, none
of which had reached the level of prototype or working sample. Company
management determined that there were no alternative uses for their specific
technologies outside of the digital office market and that approximately $1.0
million in additional engineering and development expenses would be required to
bring in-process products to market beginning in fiscal year 2000.
The Company paid $3.7 million in cash for all the outstanding shares of XLI.
The purchase method of accounting was used to record the acquisition and
approximately $2.4 million was allocated to in-process research and development,
which was charged to operations in the quarter ended September 30, 1998. The
remaining costs of the acquisition were recorded on the Company's balance sheet
and are being amortized to operations on a straight-line basis over three years.
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>
In addition to the purchase price, at the date of the merger, XLI
shareholders had the right to receive additional payments of up to $11.4
million, subject to the achievement of certain milestones by XLI. Under the
terms of the merger agreement, revenue levels from products utilizing XLI's
technologies in excess of a base amount of $3.7 million for each year of a three
year period ending December 31, 2000 must be attained for XLI to receive
additional contingency payments up to a maximum of $10.3 million. Pursuant to a
post-closing audit and related post-closing adjustment set forth in the
acquisition agreement, it was determined that XLI had a net deficit (for
purposes of calculating a contingent cash adjustment, as defined in the
acquisition agreement) of $1.9 million, thereby reducing the contingent payment
amount to $10.3 million. To date, these milestones have not been achieved and no
additional payments have been made to XLI shareholders. Such payments would be
recorded on the Company's balance sheet as an adjustment to the purchase price
of XLI.
The estimated value of in-process research and development was derived using
the "Income Approach". The future cash flows were discounted to their present
value utilizing a discount rate of 25%.
78
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) ACQUISTIONS AND INVESTMENT (CONTINUED)
The Company did not anticipate any material changes from historical pricing,
margins and expense levels in its valuation assumptions.
On April 2, 1998, the Company acquired certain assets from Odeum
Microsystems, Inc., a subsidiary of Hyundai Electronics America. With the
acquisition, the Company acquired an integrated MPEG-2 audio/video decoder and
transport demultiplexor and a DVB-S compliant QSPK demodulator as well as a core
group of hardware and software engineers.
Company management determined that there were no alternative uses for their
specific technologies outside the digital broadcast market and that
approximately $3.0 million in additional engineering and development expenses
would be required to bring in-process products to market beginning in fiscal
year 2000. The Company believes that significant revenues could be generated
from products integrating Odeum's technologies in fiscal year 2000.
The assets of Odeum were acquired for $4.1 million in cash. The acquisition
was accounted for using the purchase method of accounting and the product
acquired was integrated into the Company's product offerings from the date of
acquisition. Approximately $1.3 million of the purchase price was allocated to
in-process research and development with the remaining amount was allocated to
purchased technology. The estimated value of in-process research and development
was derived using the "Income Approach". The future cash flows were discounted
to their present value utilizing a discount rate of 35%. The Company did not
anticipate any material changes from historical pricing, margins and expense
levels in its valuation assumptions."
The purchased technology and other intangible assets acquired from
ViewPoint, XLI and Odeum are being amortized over three years. The amounts of
the purchase price assigned to the fair value of such assets and in-process
research and development represent Company management's best estimate.
INVESTMENT
On April 30, 1998, the Company entered into several agreements with Omni
Peripherals Pte. Ltd., a private Singaporean company ("Omni") and two other
investors pursuant to which the Company acquired a preferred equity interest in
Omni. Omni was incorporated in Singapore on January 2, 1996, and is in the
business of designing, developing, and marketing mechatronics modules for
optical storage drives. The Company is assisting Omni in the design and
marketing of its mechatronics modules thereby enabling the Company to offer a
complete solution to its customers. The Company paid $802,124 for its interest,
representing approximately 20% of the issued stock of Omni.
79
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) INCOME TAXES
The components of the income tax expense (benefit) are as follows (in
thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal and state............................. $(10,259) $ 2,448 $ 1,087
Foreign....................................... 325 2,825 2,069
Deferred:
Federal and state............................. 5,366 (1,146) 9,771
Foreign....................................... (1,179) (3,597) (323)
Charge in lieu of taxes attributable to
employee stock option plans................... -- 520 1,933
-------- ------- -------
Total tax provision (benefit)............... $ (5,747) $ 1,050 $14,537
======== ======= =======
</TABLE>
A reconciliation between the income tax provision (benefit) computed at the
federal statutory rate and the effective tax rate is as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Expense (benefit) at federal statutory tax
rate.......................................... $(19,181) $ 2,379 $13,390
State income tax, net of federal benefit........ 867 300 523
Rate differential on foreign income............. 428 (538) (327)
Pixel Magic acquisition......................... -- -- 1,667
Research credit................................. -- (1,650) (1,033)
Change in valuation allowance................... 4,501 -- --
Change in estimate.............................. (2,806) -- --
Net operating loss not utilized................. 10,444 -- --
Other........................................... -- 559 317
-------- ------- -------
Total tax provision (benefit)................. $ (5,747) $ 1,050 $14,537
======== ======= =======
</TABLE>
80
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Various reserves and accruals............................ $ 2,963 $ 2,632
Acquired intangibles..................................... 4,395 556
Net operating loss carryforwards......................... 7,474 --
Tax credits.............................................. 6,996 3,190
Other foreign deferred asset............................. 756 --
Other.................................................... 194 53
-------- -------
Total gross deferred tax assets........................ 22,778 6,431
Less valuation allowance............................... (21,694) (1,075)
-------- -------
1,084 5,356
-------- -------
Fixed assets depreciation differences.................... (1,074) (546)
Other foreign liabilities................................ (1,448) (2,061)
-------- -------
Total gross deferred tax liabilities................... (2,552) (2,607)
-------- -------
Net deferred tax assets (liabilities)................ $ (1,438) $ 2,749
======== =======
</TABLE>
The Company has set up a valuation allowance of $21,694,000 as of June 30,
1999, which represented an increase of $20,619,000 from the valuation allowance
of $1,075,000 at June 30, 1998. Based upon the results of the current year
operations, the Company's projected operating results, and all other available
objective information, the Company's management does not believe it is more
likely that not that sufficient future taxable income will be generated to
sufficiently realize all of the net deferred tax assets.
As of June 30, 1999, the Company has federal and state net operating loss
carryforwards of approximately $19,773,000 and $8,503,000, respectively,
available to reduce future income subject to income taxes. The federal net
operating loss carryforwards expire in fiscal year 2019. State net operating
loss carryforwards expire in fiscal year 2004. The NOL carryforwards available
for use in any given year may be limited in the event of a significant change in
ownership, as defined by the Internal Revenue Code.
As of June 30, 1999 the Company has federal research and experimentation
credit carryforwards of approximately $3,162,000 which expire from 2013 to 2019.
The Company also has state tax credit carryforwards of approximately $2,932,000;
if not utilized, approximately $273,000 of these credits will expire beginning
in 2006 through 2007. As of June 30, 1999 and 1998, the cumulative amount of
unremitted earnings of non-US subsidiaries on which the Company had not provided
US taxes approximated $11,658,000 and $12,900,000, respectively. The additional
taxes that could arise if those earnings were to be remitted to the US would not
be material after consideration of existing foreign taxes. It is management's
intent that these earnings will remain indefinitely invested.
The Company is currently undergoing examination by the Internal Revenue
Service. The Company believes that additional liabilities, if any, that may
arise from this examination will not be material to the Company's consolidated
financial statements.
81
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) FOUNDRY AGREEMENTS AND INVESTMENT IN FOUNDRY VENTURE
FOUNDRY AGREEMENTS
In June and November 1995, the Company entered into agreements with Taiwan
Semiconductor Manufacturing Company, Ltd. (TSMC) and Chartered Semiconductor
Manufacturing Ltd. (Chartered) to obtain certain additional wafer capacity
through the year 2001. The original agreements called 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 would be determined in the future
periods in which specific orders were 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.
The Company has subsequently twice amended its previous agreement with TSMC.
The most recent amendment, dated June 1999, covered the remaining $16.1 million
of wafer deposits held be TSMC as of that date. Under the terms of the existing
agreement (as previously amended), the Company was to have utilized the entire
remaining amount of the prepayment by December 31, 1999. Under the new
amendment, the period of time over which the Company can utilize the deposit was
extended to December 31, 2000. A maximum of $9.1 million can be utilized in
calendar 1999, and the remaining $7.0 million can be utilized in calendar 2000.
Including excess wafer purchases applied from calendar 1998, the Company has
already made the maximum amount of wafer purchases required for calendar 1999
and has earned the maximum credit of $9.0 million which will be used to offset
future payments to TSMC. The Company currently believes the terms and conditions
of the agreement, as amended, will be met although no assurance can be given in
this regard.
As of June 30, 1999, the Company has $3.5 million of deposits with
Chartered. The fourth amendment to the Company's foundry agreement with
Chartered, which was negotiated during the third quarter of fiscal 1999 but made
effective as of November 6, 1998, resulted in the elimination of Chartered's
right to reinstate required future cash deposits of approximately $36 million
which had been suspended in the first amendment subject to certain conditions
being met. The new amendment extends the period of time over which the Company
may utilize the existing $3.5 million deposit by three years to December 31,
2002, but provides limitations on the maximum amounts of the deposit which can
be utilized by the Company in each of the four calendar years 1999-2002.
Under the newly amended agreement, should the Company fail to utilize the
maximum amount of the deposit for a given calendar year, the remainder of the
deposit available to be utilized for that calendar year may be forfeited to
Chartered. Additionally, should the Company fail to make certain minimum amounts
of wafer purchases in any given calendar year, pursuant to the terms of the
agreement, as amended, Chartered may elect to terminate the agreement and retain
any unused portion of the total deposit. During the fourth quarter of fiscal
1999, the Company completed its reassessment of wafer purchasing forecasts. The
Company determined that its wafer purchases for calendar 1999 and beyond would
be significantly below the minimum amounts required, and that Chartered will
have the right to terminate the agreement and retain the unused deposit. As a
result, the Company recorded a $2.8 million reserve in the fourth quarter to
reduce the deposit asset to its estimated realizable value.
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
82
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OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) FOUNDRY AGREEMENTS AND INVESTMENT IN FOUNDRY VENTURE (CONTINUED)
Integrated Circuits Corporation ("UICC"), for the purpose of building and
managing a semiconductor manufacturing facility in the Science Based Industrial
Park in Hsin Chu City, Taiwan, Republic of China. The Company paid approximately
$51.2 million for approximately 9.3% of the total outstanding shares of the
foundry venture. The Company accounted for the investment under the cost method.
In March 1999, the Company entered into an agreement to sell all of its
shares in the joint venture to UMC, at the shares' carrying cost as recorded by
the Company. Accordingly, no gain or loss was recorded related to this
transaction.
(13) COMMITMENTS
LEASES
The Company leases its US headquarters and certain facilities and equipment
under non-cancelable operating leases. The Company is responsible for its share
of expenses under the terms of certain of the leases.
Future minimum lease payments under non-cancelable operating leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
- --------------------
<S> <C>
2000........................................................ $2,789
2001........................................................ 2,141
2002........................................................ 1,295
2003........................................................ 711
2004........................................................ 503
Thereafter.................................................. 1,042
------
$8,481
======
</TABLE>
Rent expense was approximately $3,467,000, $2,498,000, and $1,781,000 for
the years ended June 30, 1999, 1998 and 1997, respectively.
INVENTORY PURCHASE COMMITMENTS
The Company subcontracts all of its manufacturing to independent foundries.
As of June 30, 1999 and 1998, the Company had approximately $1,600,000 and
$3,164,000, respectively, in non-cancelable purchase commitments with various
wafer fabrication subcontractors.
CAPITAL EXPENDITURE COMMITMENTS
The Company had outstanding commitments to purchase capital equipment of
approximately $1.3 million at June 30, 1999.
83
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OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) CONTINGENCIES
The Company and various of its current and former officers and Directors are
parties to several class action lawsuits filed on behalf of all persons who
purchased or acquired the Company's common 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 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 alleged 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 the plaintiffs' First Amended Consolidated
Complaint, but allowed the 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 the
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, the plaintiffs
elected not to amend this claim. Accordingly, the only remaining claim in state
court action, 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.
Plaintiffs have recently filed a motion to reinstate the California Corporation
Code Sections 25400/25500 claims against the company and the remaining Oak
defendants have filed a cross-motion to dismiss this remaining claim against
them. These motions are scheduled for hearing on October 1, 1999. 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 Sections 25400/25500 claim. This issue was resolved in favor of allowing
such nationwide class actions by the California Supreme Court, Case
No. 5058723, on January 4, 1999, in the DIAMOND MULTIMEDIA SECURITIES LITIGATION
appeal by the California Supreme Court. Discovery has commenced in this action.
The defendants and certain third parties have produced documents and a small
number of depositions have been taken.
The Company and several 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 common
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 the plaintiffs leave to amend
most claims. The plaintiffs' Second Amended Consolidated Complaint was filed on
September 4, 1997. The 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. Plaintiffs have recently filed a motion seeking the Court's
permission to voluntarily dismiss this action without prejudice. Defendants have
requested that the dismissal be with prejudice. This motion is scheduled for
hearing on September 29, 1999.
84
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OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) 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, Master File No. CV758510. 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 state and putative 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 shares of
the Company's common stock and the payment of monetary damages to the Company.
All of these actions are in the early stages of proceedings. Based on its
current information, the Company believes the suits to be without merit and will
defend its position vigorously. Although it is reasonably possible the Company
may incur a loss upon conclusion of these claims, an estimate of any loss or
range of loss cannot be made. No provision for any liability that may result
upon adjudication has been made in the Company's Consolidated Financial
Statements.
In connection with these legal proceedings, the Company has incurred and
expects to continue to incur legal and other expenses.
The Company and its current Directors were also parties to six putative
class actions filed on behalf of all of the Company's Stockholders (other than
defendants and parties related to them) in the Court of Chancery of the State of
Delaware in and for New Castle County concerning a proposal by a management led
investor group known as "Gold Acquisition Group" to acquire all of the
outstanding shares of the Company for a price of $4.50 per share. The plaintiffs
have requested consolidation of the actions under the caption IN RE OAK
TECHNOLOGY, INC. SHAREHOLDERS LITIGATION, C.A. No. 16789 ("Delaware Shareholders
Litigation"). The other civil action numbers are 16792, 16793, 16794, 16818, and
16831. The plaintiffs alleged that the offer was inadequate and that the
defendants breached their fiduciary duties of loyalty and entire fairness. On
December 14, 1998, a Special Committee of the Board of Directors that had been
formed to evaluate the proposal announced that it would not recommend the
proposal to the Company's full Board of Directors. In addition, on December 21,
1998, Gold Acquisition Group announced that its proposal had expired and to
date, it has not been renewed. On January 27, 1999, David Tsang and Ta-Lin Hsu,
members of Gold Acquisition Group, signed a Letter Agreement agreeing that they
would not, without the prior written consent of a majority of the Board of
Directors of the Company, acquire or offer to acquire any voting securities of
the Company (or take additional actions concerning the voting securities of the
Company as set forth in the Letter Agreement) for a period of one year from the
date of the Letter Agreement. On June 28, 1999, the plaintiffs voluntarily
dismissed the actions without prejudice. The Court entered an order dismissing
the action on July 2, 1999.
The Company and its current Directors were also parties to a putative class
action filed on behalf of all of the Company's Stockholders (other than
defendants and parties related to them) in Santa Clara County Superior Court,
designated KRIM V. OAK TECHNOLOGY, INC., ET AL., Case No. 778281. The
allegations of the plaintiffs in this action were nearly identical to the
Delaware Shareholders Litigation. This action was stayed by agreement of the
parties as a result of the Special Committee's announcement that it would not
recommend to the full Board of Directors the proposal made by Gold Acquisition
Group to acquire all of the outstanding shares of the Company for a price of
$4.50 per share as well as the subsequent announcement of the expiration of the
proposal by Gold Acquisition Group. On April 28, 1999, the
85
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) CONTINGENCIES (CONTINUED)
plaintiffs filed a dismissal without prejudice. The Court entered an order
dismissing the action on May 3, 1999.
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 alleged violations of the Delaware General Corporation
Law and breaches of fiduciary duty and was brought on behalf of all of the
Company's common stockholders at any time between August 19, 1997 and November
25, 1998. The plaintiffs' claims are based upon the Board of Directors' adoption
on or about August 19, 1997 of a Stockholder Rights Plan (the "Rights Plan")
that included a provision that limited the redemption or modification of the
Rights Plan to its Continuing Directors or their designated successors. The
plaintiffs alleged that the Rights Plan with the Continuing Directors provision
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. The plaintiffs sought an injunction and a declaratory
judgment that the Rights Plan is invalid and unenforceable and monetary damages
for the alleged violations of fiduciary duty. On November 18, 1998, in light of
the change in the law due to the decision in CARMODY V. TOLL BROS., the
Company's Board of Directors voted to amend the Rights Plan to eliminate all
Continuing Directors provisions. On December 11, 1998, the plaintiffs
amended their complaint to include a cause of action which asserted that the
Company's Directors elected after the adoption of the Company's Rights Plan were
not validly elected and another cause of action for breach of fiduciary duty
related to the proposal by the Gold Acquisition Group to acquire all of the
outstanding shares of stock of the Company for $4.50 per share (also the subject
of the DELAWARE SHAREHOLDERS LITIGATION and the KRIM litigation described
above). Pursuant to a settlement reached with the plaintiffs, the action has
been dismissed with prejudice, except for the claims out of the Gold Acquisition
Group, which have been dismissed without prejudice. The Company agreed to pay
the plaintiffs' attorneys fees, which the Court awarded in the amount of
$90,000, a portion of which were paid by the Company's Directors' and Officers'
liability insurers. On July 29, 1999, the Court entered an Order approving the
settlement and dismissing the action. The settlement will not have a material
effect on the Company's Consolidated Financial Statements.
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
86
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OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) CONTINGENCIES (CONTINUED)
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, Case
No. C-97-20959. 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 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) under Case No. C-97-20959. On the same date, pursuant
to UMC's request, the federal court judge ordered the consolidated action stayed
under 28 U.S.C. Section 1659, based on the judge'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). The stay
will be lifted upon final resolution of Investigation No. 337-TA-409, at which
time the Company intends to pursue its action against UMC for breach of
contract, breach of the covenant of good faith and fair dealing and fraud.
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, Case
87
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OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) CONTINGENCIES (CONTINUED)
No. C-97-21126. 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) under Case No. C-97-20959. On the same date, pursuant to UMC's request,
the federal court judge ordered the consolidated action stayed under 28 U.S.C.
Section 1659, based on the judge'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). The stay will be lifted
upon final resolution of Investigation No. 337-TA-409.
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 of 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. The following respondents, all
Taiwanese drive manufacturers, were later added to the proceeding pursuant to an
Initial Determination by the Administrative Law Judge (ALJ) supervising the
Investigation following a motion brought by the Company on August 6, 1998 to add
these respondents: Actima Technology Corp., ASUSTek Computer, Inc., Behavior
Tech Computer Corp., Delta Electronics, Inc. Momitsu Multi Media Technologies,
Pan-International Industrial Corp. and Ultima Electronics Corp. On August 28,
1998, the ALJ 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. On December
23, 1998, the ALJ issued another Initial Determination terminating the
investigation as to respondent UMC for a second time. On December 31, 1998, the
Company filed a petition with the Commission for review of the Initial
Determination. On February 3, 1999, the Commission reversed the Initial
Determination of the ALJ for a second time on the grounds that the Company's
complaint against UMC does state an unfair trade practices claim under Section
337 of the Tariff Act. On May 10, 1999, the ALJ issued another Initial
Determination terminating the investigation as to respondent UMC for a third
time, finding that UMC's activities were licensed On May 17, 1999, the Company
filed a petition with the Commission for review of the Initial Determination and
on June 28, 1999, the Commission determined to review the Initial Determination.
Trial before the ALJ as to all respondents except UMC commenced on January
11, 1999 and concluded on January 28, 1999. On May 14, 1999, the ALJ entered an
Initial Determination that no unfair trade practices were committed by Mediatek
under Section 337 of the Tariff Act. On May 24, 1999, the Company filed a
petition requesting the Commission to review the Initial Determination and on
June 28, 1999 the Commission determined to review it. The Company believes that
both the May 14, 1999 and May 17, 1999 Initial Determinations are incorrect and
the Company intends to pursue its right to seek protection from importation of
UMC's and Mediatek's CD-ROM controllers under the trade laws of the United
States. The Commission's decision with respect to both Initial Determinations is
scheduled to be
88
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OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) CONTINGENCIES (CONTINUED)
announced in October, 1999. In connection with this legal proceeding, the
Company has incurred and will continue to incur substantial legal and other
expenses.
Based on this current information, the Company believes that the complaint
brought by MediaTek and the counter claims made by UMC to be without merit and
the company will defend its position vigorously. At this time, the Company does
not believe it is probable that it will incur a loss on conclusion of the ITC
action or Federal District action described above. No provision for any
liability that may result upon adjudication has been made in the Company's
Consolidated Financial Statements. In connection with all of the above-described
legal proceedings, the Company has incurred and expects to continue 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 other legal 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.
(15) STOCKHOLDERS' EQUITY
The Company is authorized to issue two classes of stock, preferred stock and
common stock, each with a par value of $0.001 per share.
STOCK REPURCHASE PLAN
On January 22, 1998, the Company announced that its board of directors had
authorized the repurchase of up to 2.0 million shares of its common stock,
either in the open market or in private transactions. As of June 30, 1999, the
Company had purchased all 2.0 million shares for approximately $9.4 million.
PREFERRED STOCK
The Company's Board of Directors has authorized 2,000,000 undesignated
shares of preferred stock; none of these preferred shares have been issued. The
Board is authorized, subject to any limitations prescribed by Delaware law, to
provide for the issuance of shares of preferred stock in one or more series, to
establish the number of shares to be included in each series, and to fix the
powers, preferences and rights of the shares.
WARRANTS
Warrants to purchase an aggregate of 796,644 shares of Series D preferred
stock at $2.25 per share were outstanding as of June 30, 1994. The warrants are
exercisable at any time on or prior to December 15, 1997. Following the
conversion of Series D preferred stock to common stock upon the Company's
initial public offering in February 1995, these warrants represented the right
to purchase 1,194,948 shares of common stock at $1.50 per share. Warrants
representing the right to purchase 807,448 shares of common stock were exercised
under the warrants' cashless exercise provisions, resulting in the issuance of
749,650 shares of common stock in 1996. Warrants representing the right to
purchase 182,528 shares of common stock were outstanding as of June 30, 1997 and
in fiscal 1998 resulted in the issuance of 150,339 shares of
89
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OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) STOCKHOLDERS' EQUITY (CONTINUED)
common stock under the warrants' cashless exercise provision. There were no
warrants outstanding during fiscal year 1999.
STOCK OPTIONS
Upon the re-incorporation of the Company in Delaware in February 1995, the
Company assumed the obligations of its predecessor under the 1988 Stock Option
Plan (the "1988 Plan"), as amended and restated. The Company does not intend to
issue any additional options under the 1988 Plan.
In December 1994, the Board of Directors approved the 1994 Stock Option Plan
(the "1994 Plan") under which 6,000,000 shares of Common Stock, determined after
the effect of a two for one stock split, were reserved for issuance. 6,000,000
additional shares were approved in November 1998. Under the 1994 Plan, either
incentive or non-qualified options to purchase the Company's common stock may be
granted to employees as determined by the Board of Directors at prices generally
at fair market value at the date of grant (110% in certain cases of
non-qualified options). Non-qualified options may be granted to employees and
consultants as determined by the Board of Directors at prices not lower than 85%
of fair market value at the date of grant. The Board of Directors also has the
authority to set exercise dates (generally no longer than five years from date
of grant), payment terms and other provisions for each grant.
On August 1, 1996 the Company repriced 1,800,370 options under the 1994 Plan
to $6.50, the fair market value as of that date. The repriced shares were
treated as canceled and re-granted; however, they retained their original
vesting terms and were not exercisable until after April 30, 1997. In December
1994 the Board of Directors also approved the 1994 Outside Directors' Stock
Option Plan (the "Directors Plan"), under which 500,000 shares of Common Stock
were reserved for issuance. The Directors Plan provides for the automatic grant
of options to purchase shares of Common Stock to non-employee Directors of the
Company.
On August 12, 1998, the Company repriced 2,638,750 options under the 1994
Plan to $3.25, the fair market value as of that date. The repriced options were
treated as cancelled and regranted and did not retain their original vesting
terms.
Stock options are subject to vesting, generally over 50 months. Under the
1988 Plan, shares are exercisable prior to vesting and are held in escrow until
vested; however, unvested shares are subject to a right of repurchase by the
Company at their original purchase price upon termination of employment.
Unexercised options expire 90 days after termination of employment with the
Company.
90
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OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) STOCKHOLDERS' EQUITY (CONTINUED)
A summary of all the Company's stock option plans is set forth below:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
OPTIONS EXERCISE OPTIONS EXERCISE
OUTSTANDING PRICE EXERCISABLE PRICE
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Balances, June 30, 1996............. 3,991,510 $10.08 2,257,424 $2.11
Granted........................... 3,118,240 7.69
Exercised......................... (748,682) 1.41
Canceled.......................... (2,579,072) 15.82
----------- ------ --------- -----
Balances, June 30, 1997............. 3,781,996 5.91 1,459,573 $3.33
Granted........................... 2,730,900 8.29
Exercised......................... (798,330) 1.50
Canceled.......................... (1,352,928) 7.83
----------- ------ --------- -----
Balances, June 30, 1998............. 4,361,638 $ 7.61 1,153,658 $6.06
Granted........................... 10,973,478 3.14
Exercised......................... (346,504) 2.35
Canceled.......................... (4,637,448) 6.73
----------- ------ --------- -----
Balances, June 30, 1999............. 10,351,164 $ 3.44 2,417,486 $3.90
=========== ====== ========= =====
</TABLE>
The weighted average fair values of options granted in fiscal years 1999 and
1998 were $4.60 and $3.82, respectively.
The following table summarizes information about the stock options
outstanding as of June 30, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
OPTIONS AT REMAINING AVERAGE SHARES AT AVERAGE
JUNE 30, CONTRACTUAL LIFE EXERCISE JUNE 30, EXERCISE
EXERCISE PRICES 1999 (YEARS) PRICE 1999 PRICE
- --------------- ---------- ---------------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$0.83 to $2.97 715,327 8.82 $ 2.75 57,156 $1.86
$3.00 to $5.88 8,935,407 9.50 3.14 1,941,140 3.10
$6.50 to $9.75 664,430 7.46 7.35 394,350 7.06
$14.25 18,000 7.57 14.25 10,440 14.25
$25.00 18,000 6.59 25.00 14,400 25.00
---------- ----- ------ --------- -----
$0.83 to $25.00 10,351,164 9.31 $ 3.44 2,417,486 $3.90
========== ===== ====== ========= =====
</TABLE>
91
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) STOCKHOLDERS EQUITY (CONTINUED)
STOCK PURCHASE PLAN
In December 1994, the Board of Directors approved the 1994 Stock Purchase
Plan (the "Stock Purchase Plan") under which 600,000 shares of common stock were
reserved for issuance with the stock split; 1,000,000 additional shares were
approved in November 1998. The Stock Purchase Plan permits eligible employees to
purchase shares at a price equal to 85% of the lower of the fair market value at
the beginning or end of each six-month offering period. Under the Stock Purchase
Plan, 279,668 and 254,726 shares were issued in fiscal years 1999 and 1998 at
weighted average prices of $2.68 and $6.10, and weighted average fair values of
$1.16 and $2.94, respectively.
On August 19, 1997 the Board of Directors of the Company declared a dividend
of one preferred share purchase right (a "Right") for each outstanding share of
Common Stock, par value $0.001 per share (the "Common Stock") of the Company.
The dividend is payable on August 29, 1997 (the "Record Date") to the
stockholders of record on that date. Each Right entitles the registered holder
to purchase from the Company one one-thousandth of a share (a "Unit") of Series
A Junior Participating Preferred Stock, par value $0.001 per share of the
Company at a price of $60.00 per Unit subject to adjustment. The description and
terms of the Rights are set forth in a Rights Agreement dated as of August 19,
1997 between the Company and BankBoston, N.A., as Rights Agent. The Rights
expire on August 19, 2007.
FAIR VALUE INFORMATION
The Company applies APB Opinion 25 and related Interpretations in accounting
for its stock options plans. As the fair value of the options at the date of
grant were equivalent to the exercise price, no compensation cost has been
recognized for its stock option plans or its Stock Purchase Plan. Had
compensation cost for the Company's option plans been determined consistent with
FASB Statement No. 123, the Company's net income and net income per share would
have been reduced to the pro forma amounts indicated below (in thousands, except
per share data)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net income (loss):
As reported.................................... $(50,669) $5,947 $23,719
Pro forma...................................... $(57,765 $ (197) $18,890
Basic net income (loss) per share:
As reported.................................... $ (1.24) $ 0.14 $ 0.58
Pro forma...................................... $ (1.42) $ 0.00 $ 0.46
Diluted net income (loss) per share:
As reported.................................... $ (1.24) $ 0.14 $ 0.55
Pro forma...................................... $ (1.42) $ 0.00 $ 0.44
</TABLE>
Pro forma net income (loss) reflects options granted subsequent to July 1,
1995. Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options' vesting
period of three to four years and compensation cost for options granted prior to
July 1, 1995, is not considered.
92
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) STOCKHOLDERS EQUITY (CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with a dividend yield of 0% and the
following weighted average assumptions:
<TABLE>
<CAPTION>
STOCK OPTION PLANS STOCK PURCHASE PLAN
------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Expected life (years)............. 3.760 3.760 3.745 0.500 0.500 0.500
Expected volatility............... 75% 70% 85% 75% 70% 85%
Risk-free interest rate........... 5.18% 5.73% 6.51% 5.02% 5.51% 5.29%
</TABLE>
(16) EMPLOYEE BENEFIT PLAN
In July 1990, the Company adopted a 401(k) Profit Sharing Plan ("401(k)
Plan") which is intended to qualify under section 401(k) of the Internal Revenue
Code of 1986, as amended. The 401(k) Plan covers substantially all of the
Company's US employees. Participants may elect to contribute a percentage of
their compensation to this plan, up to the statutory maximum amount. The Company
makes contributions to the 401(k) Plan based on 25% of an employee's
contribution up to a maximum of 1.25% of total compensation; approximately
$242,000, $288,000 and $199,000 in matching contributions were recorded during
fiscal years 1999, 1998 and 1997, respectively.
(17) RESTRUCTURING
During the third quarter of 1998, the Company completed a thorough review of
its operations and market opportunities. The Company concluded it was necessary
to write-down assets dedicated to the Audio division, primarily prepaid
royalties, and reduce headcount due to the Company's decision to exit the Audio
and Graphics businesses.
In connection with the reorganization, the Company recorded a charge of $1.8
million which included non-cash expense of $1.0 million and cash expense of $0.8
million. The non-cash charge was related to prepaid royalties which will not be
utilized. This write-off was completed by the end of the third quarter of fiscal
1999. Cash outlays related to the headcount reduction of 56 individuals. As of
June 30, 1998 all amounts have been paid and there is no accrual remaining
relating to the restructuring.
(18) SEGMENT INFORMATION
SFAS No. 131 establishes standards for the reporting by public business
enterprises of information about operating segments, products and services,
geographic areas, and major customers. The method for determining what
information to report is based on the way that management organizes the
operating segments within the Company for making operational decisions and
assessments of financial performance. The Company's chief operating
decision-maker is considered to be the chief executive officer (CEO).
For fiscal year 1999, Oak Technology has three reportable segments which
offer different product lines to each of its target markets: Optical Storage
Group, Consumer Group and Digital imaging Equipment Group. The Optical Storage
Group provides high-performance controllers for CD-ROM and CD-RW to OEM's who
serve the optical storage market. The Consumer Group is targeting its products
for the emerging digital entertainment system market, with focus on integrated
circuits for video disk player systems (DVD and VCD) and digital broadcast
applications. The Digital imaging Equipment Group provides high-performance
imaging systems for the digital imaging environment, including products used
93
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(18) SEGMENT INFORMATION (CONTINUED)
in digital laser copiers and printers as well as multifunction peripherals. The
Company evaluates operating segment performance based on net revenues and direct
operating expenses of the segment. The accounting policies of the operating
segments are the same as those described in the summary of accounting policies.
No segments have been aggregated. The Company does not allocate assets to its
individual operating segments.
Information about reported segment income or loss is as follows for the
years ended June 30, 1999, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net Revenues
Optical Storage........................................... $ 46,992 $129,170 $144,760
Digital imaging Equipment................................. 20,897 19,406 8,444
Consumer.................................................. 3,162 4,912 12,251
PC Audio and 3D Graphics.................................. -- 3,618 1,940
-------- -------- --------
$ 71,051 $157,106 $167,395
======== ======== ========
Cost of Goods Sold and Direct Operating Expenses, less
Depreciation:
Optical Storage........................................... $ 39,582 $ 73,263 $ 76,854
Digital imaging Equipment................................. 19,131 11,866 5,413
Consumer.................................................. 20,817 13,946 13,803
PC Audio and 3D Graphics.................................. -- 12,946 15,265
-------- -------- --------
$ 79,530 $112,021 $111,335
======== ======== ========
Depreciation and Amortization
Optical Storage........................................... $ 2,043 $ 364 $ 271
Digital imaging Equipment................................. 1,626 499 372
Consumer.................................................. 1,487 277 206
PC Audio and 3D Graphics.................................. -- 768 572
-------- -------- --------
$ 5,156 $ 1,908 $ 1,421
======== ======== ========
Contribution Margin:
Optical Storage........................................... $ 5,366 $ 55,543 $ 67,635
Digital imaging Equipment................................. 140 7,041 2,659
Consumer.................................................. (19,142) (9,311) (1,758)
PC Audio and 3D Graphics.................................. -- (10,096) (13,897)
-------- -------- --------
$(13,636) $ 43,177 $ 54,639
======== ======== ========
</TABLE>
For the years ended June 30, 1999, 1998 and 1997, the "Other" revenue
category consists of various corporate revenues. A reconciliation of the totals
reported for the operating segments to the applicable
94
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(18) SEGMENT INFORMATION (CONTINUED)
line items in the consolidated financial statements for the years ended June 30,
1999, 1998 and 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Contribution margin from operating segments..... (13,636) 43,177 54,639
Indirect costs of goods sold and operating
expenses...................................... 41,149 49,192 16,791
Acquisition-related/restructuring expenses...... 7,161 3,089 5,000
--------- ------- -------
Total operating income (loss)................... (61,946) (9,104) 32,848
Other income.................................... 5,530 16,101 5,408
--------- ------- -------
Income (loss) before taxes...................... $ (56,416) $ 6,997 $38,256
========= ======= =======
</TABLE>
Indirect costs of goods sold and operating expenses includes all costs and
expenses not specifically charged to the operating segments in the financial
information reviewed by the Company's chief decision making officer. These
include inventory reserve provisions and adjustments; operating overhead
included in consolidated cost of goods sold; corporate research and development
expenses; and most of the Company's selling, general and administrative
expenses.
The Company maintains significant operations in the United States, United
Kingdom, Taiwan and Japan. Activities in the United States consist of corporate
administration, product development, logistics and worldwide sales management.
Foreign operations consist of regional sales and limited board-level
manufacturing.
95
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(18) SEGMENT INFORMATION (CONTINUED)
The following distribution of net revenues, identifiable assets by
geographic areas, and property and equipment for the years ended June 30, 1999,
1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenue from unaffiliated customers
Originating from:
United States........................................... $ 10,147 $ 13,155 $ 6,239
Japan................................................... 36,728 60,360 67,389
Korea................................................... 7,002 31,364 38,402
Taiwan.................................................. 2,104 21,414 26,288
Other Asia.............................................. 6,962 16,823 27,484
Europe.................................................. 8,108 13,990 1,593
-------- -------- --------
$ 71,051 $157,106 $167,395
======== ======== ========
Identifiable assets:
United States........................................... $181,699 $232,689 $234,121
Japan................................................... 7,750 14,563 25,731
Taiwan.................................................. 8,917 12,679 27,743
Europe.................................................. 5,475 2,036 --
-------- -------- --------
$203,841 $261,967 $287,595
======== ======== ========
Property and equipment, net:
United States........................................... $ 15,472 $ 18,831 $ 14,534
Japan................................................... 551 677 433
Taiwan.................................................. 5,175 5,147 4,991
Europe.................................................. 841 459 --
-------- -------- --------
$ 22,039 $ 25,114 $ 19,958
======== ======== ========
</TABLE>
The following table summarizes the annual percentage contribution to net
revenues by customers when sales to such customers exceeded 10% of net revenues
and the percentage of total accounts
96
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(18) SEGMENT INFORMATION (CONTINUED)
receivable due from these customers. Customers included herein were primarily
from the Optical Storage business segment.
<TABLE>
<CAPTION>
PERCENTAGE OF NET
REVENUES
------------------------------
YEAR ENDED
JUNE 30,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Yamaha Corporation......................................... 17% --% --%
Mitsumi Electronic Co., Ltd................................ 10% 17% 14%
LG Electronics............................................. --% 14% 13%
NEC Home Electronics, Ltd.................................. --% 10% --%
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
ACCOUNTS RECEIVABLE
------------------------------
AS OF JUNE 30,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Yamaha Corporation......................................... 21% --% --%
Mitsumi Electronic Co., Ltd................................ 10% 19% 23%
LG Electronics............................................. --% --% --%
NEC Home Electronics, Ltd.................................. --% 13% 22%
</TABLE>
Major customers disclosed above were primarily in the Optical Storage market
segment.
(19) RELATED PARTY TRANSACTION
At June 30, 1999 the Company had an outstanding note receivable from one of
its officers, totaling $2.0 million, with full recourse. The note incurs
interest at 4.62% per year, and is payable in three equal annual installments
(plus interest), due on the anniversary dates of the note.
(20) SUBSEQUENT EVENTS
STOCK REPURCHASE
On July 28, 1999, the Company announced that its Board of Directors approved
a stock repurchase plan authorizing the purchase of up to four million shares of
the Company's common stock. Repurchases will be made from time to time in open
market or privately negotiated transactions over one year, unless further
extended by the Board.
XIONICS ACQUISITION
On July 29, 1999, the Company announced it had entered into a definitive
agreement to acquire Xionics Document Technologies, Inc. Under the terms of the
agreement, which is subject to approval by the shareholders of both companies,
Oak would issue approximately 10.6 million shares of its common stock and
approximately $38.7 million in cash to acquire all of the common stock of
Xionics. The transaction will be accounted for under the purchase method of
accounting, and is expected to be completed in the second quarter of fiscal
2000.
97
<PAGE>
SCHEDULE II
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
CHARGED TO
BEGINNING COSTS AND DEDUCTIONS ENDING
ALLOWANCE FOR DOUBTFUL ACCOUNTS BALANCE EXPENSES WRITE-OFFS BALANCE
- ------------------------------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Year ended June 30, 1999.............................. $ 809 $ -- $ (254) $ 555
Year ended June 30, 1998.............................. 663 353 (207) 809
Year ended June 30, 1997.............................. 916 286 (539) 663
</TABLE>
98
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
Date: October 25, 1999 OAK TECHNOLOGY, INC.
By: /s/ YOUNG K. SOHN
-----------------------------------------
Young Sohn,
PRESIDENT
</TABLE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DAVID D. TSANG
-------------------------------------- Chairman of the Board of October 25, 1999
David D. Tsang Directors
/s/ YOUNG K. SOHN Chief Executive Officer,
-------------------------------------- President, and Director October 25, 1999
Young K. Sohn (Principal Executive Officer)
Vice President and Chief
/s/ *ROBERT O. HERSH Financial Officer (Principal
-------------------------------------- Financial and Accounting October 25, 1999
Robert O. Hersh Officer)
/s/ *RICHARD B. BLACK
-------------------------------------- Director October 25, 1999
Richard B. Black
/s/ *TA-LIN HSU
-------------------------------------- Director October 25, 1999
Ta-Lin Hsu
/s/ *TIMOTHY TOMLINSON
-------------------------------------- Director October 25, 1999
Timothy Tomlinson
/s/ *ALBERT YU
-------------------------------------- Director October 25, 1999
Albert Y.C. Yu
</TABLE>
Pursuant to a Power of Attorney previously filed as Exhibit 24.01 to this
report, this report is signed by Young K. Sohn as attorney-in-fact.
<TABLE>
<S> <C> <C> <C>
By: --------------------------------------
Young K. Sohn,
ATTORNEY-IN-FACT
</TABLE>
99
