<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from __________ to __________
COMMISSION FILE NO. 0-25298
OAK TECHNOLOGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0161486
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
139 KIFER COURT
SUNNYVALE, CALIFORNIA 94086
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(408) 737-0888
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES X NO .
--- ---
As of March 31, 1999, there were outstanding 40,874,921 shares of the
Registrant's Common Stock, par value $0.001 per share.
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
- ------------------------------- ----
<C> <S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1999
and June 30,1998........................................... 3
Condensed Consolidated Statements of Operations for the Three
Months and Nine Months ended March 31, 1999 and 1998....... 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended March 31, 1999 and 1998....................... 5
Notes to Condensed Consolidated Financial Statements.......... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 27
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings............................................. 28
Item 2. Changes in Securities......................................... 31
Item 6. Exhibits and Reports on Form 8-K.............................. 32
SIGNATURES ....................................................... 36
EXHIBIT INDEX ....................................................... 37
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
ASSETS
March 31, June 30,
1999 1998
-------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 25,577 $ 59,803
Short-term investments 61,858 57,422
Accounts receivable, net of allowance for doubtful accounts of
$824 and $809, respectively 14,429 17,605
Inventories 1,700 7,558
Investment in foundry venture 51,234 --
Current portion of foundry deposits 8,360 2,944
Prepaid expenses and other current assets 14,409 16,323
-------------- --------------
Total current assets 177,567 161,655
Property and equipment, net 24,151 25,114
Foundry deposits 11,872 18,231
Investment in foundry venture -- 51,216
Purchased technology 8,528 1,567
Other assets 4,136 3,628
-------------- --------------
Total assets $ 226,254 $ 261,411
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 2,190 $ 2,625
Accounts payable 5,314 6,236
Other accrued liabilities 10,684 8,480
-------------- --------------
Total current liabilities 18,188 17,341
Deferred income taxes 2,990 2,607
Other long-term liabilities 368 255
-------------- --------------
Total liabilities 21,546 20,203
-------------- --------------
Stockholders' equity:
Preferred stock, $0.001 par value; 2,000,000 shares authorized;
None issued and outstanding as of March 31, 1999 and
June 30, 1998 - -
Common stock, $0.001 par value; 60,000,000 shares authorized;
40,874,921 and 41,147,969 shares issued and outstanding as of
March 31, 1999 and June 30, 1998, respectively 41 42
Additional paid-in capital 154,881 156,464
Retained earnings 49,786 84,702
-------------- --------------
Total stockholders' equity 204,708 241,208
-------------- --------------
Total liabilities and stockholders' equity $ 226,254 $ 261,411
============== ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Net revenues $ 15,965 $ 35,550 $ 57,793 $ 128,196
Cost of revenues 8,590 21,145 30,615 65,133
----------- ----------- ----------- ----------
Gross profit 7,375 14,405 27,178 63,063
Research and development expenses 12,536 12,394 37,847 35,400
Selling, general and administrative expenses 8,630 8,823 26,817 22,970
Restructuring charges -- 1,766 -- 1,766
Acquired in-process technology -- -- 7,161 --
----------- ----------- ----------- ----------
Operating income (loss) (13,791) (8,578) (44,647) 2,927
Nonoperating income, net 839 2,342 4,326 12,060
----------- ----------- ----------- ----------
Income (loss) before income taxes (12,952) (6,236) (40,321) 14,987
Income taxes (benefit) (1,907) (3,332) (5,404) 4,196
----------- ----------- ----------- ----------
Net income (loss) $ (11,045) $ (3,004) $ (34,917) $ 10,791
=========== =========== =========== ==========
Net income (loss) per share:
Basic $ (0.27) $ (0.07) $ (0.86) $ 0.26
=========== =========== =========== ==========
Diluted $ (0.27) $ (0.07) $ (0.86) $ 0.25
=========== =========== =========== ==========
Shares used in computing net income (loss) per share:
Basic 40,768 42,000 40,791 41,809
=========== =========== =========== ==========
Diluted 40,768 42,000 40,791 42,644
=========== =========== =========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
---------------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (34,917) $ 10,791
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 8,693 5,309
Acquired in-process technology 7,161 --
Inventory-related adjustments -- 3,630
Restructuring charges -- 1,766
Deferred income taxes 383 (2,193)
Foundry deposits utilized 943 5,831
Changes in operating assets and liabilities:
Accounts receivable 3,176 4,248
Inventories 5,858 (445)
Prepaid expenses and other current assets 1,914 (1,418)
Accounts payable and accrued expenses (878) (21,127)
--------------- ---------------
Net cash provided by (used in) operating activities (7,667) 6,392
--------------- ---------------
Cash flows from investing activities:
Purchases of short-term investments (47,642) (57,235)
Proceeds from matured short-term investments 43,206 57,141
Additions to property and equipment, net (4,787) (9,450)
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) --
Investment in foundry venture -- (11,616)
Other assets (194) (97)
--------------- ---------------
Net cash used in investing activities (24,653) (21,257)
--------------- ---------------
Cash flows from financing activities:
Issuance of debt 3,675 12,497
Repayment of debt (3,997) (14,442)
Issuance of common stock, net 1,136 2,496
Treasury stock acquisitions (2,720) (1,787)
--------------- ---------------
Net cash provided by (used in) financing activities (1,906) (1,236)
--------------- ---------------
Net decrease in cash and cash equivalents (34,226) (16,101)
Cash and cash equivalents, beginning of period 59,803 87,609
--------------- ---------------
Cash and cash equivalents, end of period $ 25,577 $ 71,508
=============== ===============
Supplemental information:
Cash paid (refunded) during the period:
Interest $ 48 $ 246
=============== ===============
Income taxes $ (8,033) $ 13,654
=============== ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PREPARATION
The accompanying unaudited consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission (the "Commission"). In the opinion of management, the consolidated
financial statements reflect all adjustments considered necessary for a fair
presentation of the consolidated financial position, operating results and
cash flows for those periods presented. The results of operations for the
interim periods presented are not necessarily indicative of the results that
may be expected for the full fiscal year or in any future period. This
quarterly report on Form 10-Q should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended June
30, 1998, included in the Oak Technology, Inc. (the "Company") 1998 Annual
Report on Form 10-K filed with the Commission.
Effective July 1, 1998, the Company adopted the provisions of the
Financial Accounting Standards Board's (FASB) Statement of Financial
Accounting Standards (SFAS) No. 130, REPORTING OF COMPREHENSIVE INCOME. SFAS
No. 130 established standards for the display of comprehensive income and its
components in a full set of financial statements. Comprehensive income
includes all changes in equity during a period (including foreign currency
translation adjustments) except those resulting from the issuance of shares
of stock and distributions to shareholders. There were no differences between
net income (loss) and comprehensive income (loss) during the three and nine
month periods ended March 31, 1999 and 1998.
RECENT ACCOUNTING PRONOUNCEMENTS. In June 1997, the FASB issued SFAS No
131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION.
SFAS No. 131 establishes standards for the way public business enterprises
report information about operating segments in annual financial statements
and requires those enterprises to report selected information about operating
segments in interim financial reports issued to stockholders. SFAS No. 131 is
effective for financial statements for periods beginning after December 15,
1997. The Company will provide the segment information required by SFAS No.
131 beginning with its annual financial statements for the fiscal year ended
June 30, 1999.
The FASB recently issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 addresses the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts. Under SFAS No. 133, entities are required to carry all
derivative instruments in the balance sheet at fair value. The accounting for
changes in fair value (i.e. gains or losses) of a derivative instrument
depends on whether it has been designated and qualifies as part of a hedging
relationship and, if so, the reason for holding it. The Company must adopt
SFAS No. 133 effective July 1, 1999 onward. The Company does not anticipate
that SFAS No. 133 will have a material impact on its financial statements.
2. INVENTORIES
Inventories are stated at the lower of cost (first in, first out) or
market and consisted of the following (in thousands):
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
------------- -------------
<S> <C> <C>
Purchased parts and work in process....... $ 741 $ 5,612
Finished goods............................ 959 1,946
------------- -------------
$ 1,700 $ 7,558
============= =============
</TABLE>
6
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. FOUNDRY DEPOSITS
In June and November 1995, the Company entered into agreements with
Taiwan Semiconductor Manufacturing Company ("TSMC") and Chartered
Semiconductor Manufacturing Pte. Ltd. ("Chartered") to obtain certain
additional wafer capacity. The TSMC Agreement was amended in October 1996 and
March 1998, and the Chartered Agreement was amended in September 1996, April
1997, September 1997 and again during the third quarter of fiscal year 1999.
The agreements call for the Company to commit to certain future wafer
purchases and to deposit funds with the suppliers as either a portion of the
price of the additional wafers in advance of their delivery or as a
non-interest bearing deposit to secure the availability of additional wafers.
The price of such wafers will be determined in the future periods in which
specific orders are actually placed. If the Company is not able to use,
assign, or sell the additional wafer quantities, all or a portion of the
deposits may be forfeited.
As of March 31, 1999, the Company has $16.7 million of deposits with
TSMC which under the agreement (as previously amended) must be utilized
against calendar year 1999 wafer purchases. Should the Company not purchase
sufficient wafers from TSMC during calendar year 1999 (the final year of the
amended agreement) to utilize the entire amount of the remaining prepayment,
the unused portion of the prepayment may be forfeited.
As of March 31, 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.
Based on its most recent wafer purchasing forecasts for TSMC for the
remainder of calendar year 1999, the Company currently believes it is highly
unlikely that it will purchase sufficient quantities of wafers from TSMC to
utilize the entire amount of the remaining deposit with TSMC. As a result,
the Company has entered into negotiations with TSMC to amend the agreement,
which would likely include an extension of its term. Based on its discussions
to date with TSMC, the Company believes it will be successful in negotiating
an amendment to the agreement or other supplemental agreement which will
enable the Company to utilize the remaining deposit in its entirety, and
therefore, no adjustment has been made to the $16.7 million carrying value of
the deposit with TSMC at March 31, 1999.
The Company has also reviewed its foundry agreement (as amended during
the third quarter of fiscal year 1999) and related wafer purchasing forecast
with Chartered, and has also determined that additional amendments to the
agreement will be necessary in order to ensure full utilization of the
remaining deposit with Chartered. The Company has entered into negotiations
with Chartered for a fifth amendment to the agreement, and based on its
discussions to date with Chartered, the Company believes it will be
successful in negotiating an amendment to the agreement or other supplemental
agreement which will enable to Company to utilize the remaining deposit in
its entirety, and therefore, no adjustment has been made to the $3.5 million
carrying value of the deposit with Chartered at March 31, 1999.
7
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. INVESTMENT IN FOUNDRY VENTURE
In October 1995, the Company entered into a series of agreements with
United Microelectronics Corporation ("UMC") to form, along with other
investors, a separate Taiwanese company, United Integrated Circuits
Corporation ("UICC"), for the purpose of building and managing a
semiconductor manufacturing facility in the Science Based Industrial Park in
Hsin Chu City, Taiwan, Republic of China. The Company paid approximately
$51.2 million for approximately 9.3% of the total outstanding shares of the
foundry venture, and accounted for the investment under the cost method.
In April 1999, the Company entered into an agreement to sell all of its
shares in the joint venture to UMC, at the shares' book value. Accordingly,
no gain or loss will be recorded related to this transaction. The Company
received the proceeds from this transaction on April 16, 1999.
5. NET INCOME (LOSS) PER SHARE
Basic and diluted net income (loss) per share have been computed using
the weighted average number of shares of common stock and dilutive common
equivalent shares from stock options and warrants outstanding in accordance
with Statement of Financial Accounting Standards No. 128, "Earnings per
Share." The following table provides a reconciliation of the components of
the basic and diluted earnings (loss) per share computations:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income (loss)........................................... $ (11,045) $ (3,004) $ (34,917) $ 10,791
=========== =========== =========== ===========
Weighted average number of common
shares outstanding....................................... 40,768 42,000 40,791 41,809
----------- ----------- ----------- -----------
Shares used in computing basic net income (loss) per share.. 40,768 42,000 40,791 41,809
----------- ----------- ----------- -----------
Weighted average number of dilutive common
equivalent shares used in computing diluted net
income per share:
Options................................................ -- -- -- 756
Warrants............................................... -- -- -- 79
----------- ----------- ----------- -----------
Shares used in computing diluted net income (loss) per share 40,768 42,000 40,791 42,644
=========== =========== =========== ===========
Net income (loss) per share:
Basic.................................................. $ (0.27) $ (0.07) $ (0.86) $ 0.26
=========== =========== =========== ===========
Diluted................................................ $ (0.27) $ (0.07) $ (0.86) $ 0.25
=========== =========== =========== ===========
</TABLE>
Approximately 284,000 and 185,000 of stock options with exercise prices
below the average market price of the common shares for the periods were
excluded from the computation for the three and nine months ended March 31,
1999, respectively, since they were antidilutive during the loss periods.
Approximately 320,000 of stock options were similarly excluded from the
computation for the three months ended March 31, 1998. For the nine months
ended March 31, 1998, approximately 1,520,000 stock options were excluded
from the computation of diluted net income per share as the option price was
greater than the average market price of the common shares for that period
and, therefore, would be anti-dilutive under the treasury stock method.
8
<PAGE>
OAK TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. STOCKHOLDERS' EQUITY
During the third quarter of fiscal year 1999, pursuant to a plan
previously approved by the Company's Board of Directors on January 22, 1998
to repurchase up to two million shares of its common stock, the Company
repurchased approximately 200,000 shares of its common stock at a cost of
approximately $630,000. The Company has now repurchased all two million
shares authorized.
On November 18, 1998, the Company amended the Rights Agreement dated as
of August 19, 1997 between the Company and BankBoston, N.A., as Rights Agent,
to eliminate all of the "Continuing Director" provisions. The "Continuing
Director" provisions in the Rights Plan were those provisions that required
that certain actions, including, but not limited to, the redemption and
termination of the Rights Plan could only be taken by those directors who
were members of the Company's Board of Directors at the time the Rights Plan
was adopted and any person who subsequently became a member of the Company's
Board if such person's nomination for election to the Board was recommended
or approved by a majority of the Continuing Directors then on the Company's
Board.
This amendment to the Rights Plan was made in response to the Delaware
Court of Chancery's recent decision in CARMODY V. TOLL BROTHERS, INC., which
in the view of the Company's Board of Directors, based on advice of counsel,
cast doubt on the legality of "Continuing Director" provisions under Delaware
law.
On August 12, 1998, the Company re-priced 2,638,750 stock options to
employees and certain officers under its 1994 Stock Option Plan to $3.25, the
fair market value as of that date. The re-priced options were treated as
cancelled and re-granted and vesting was restarted on a 50-month vesting
schedule.
7. ACQUISITIONS
On July 2, 1998, the Company acquired ViewPoint Technology, Inc.
("ViewPoint"), a privately held company that was developing solutions for the
CD-RW drive market. ViewPoint had developed a controller that supports high
encoding speeds for CD-RW drives which 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 of the outstanding shares of ViewPoint. The transaction was
accounted for under the purchase method of accounting, and Viewpoint's
development programs were integrated into the Company's overall development
programs from the date of acquisition. Of the $10.1 million purchase price,
$0.9 million was allocated to cash, fixed assets, and other tangible assets;
$4.4 million was allocated to purchased technology and other intangible
assets; and $4.8 million was allocated to in-process research and development
programs and, accordingly, was charged to operations in the quarter ended
September 30, 1998.
On August 11, 1998 the Company acquired Xerographic Laser Images
Corporation ("XLI"), a provider of print quality enhancement technology for
the digital office equipment market. XLI will operate as a division of the
Company's wholly owned subsidiary, Pixel Magic, and will serve to leverage
Pixel Magic's position in the digital office equipment market by broadening
its expertise in resolution enhancement technology. The Company paid $3,7
million 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 $11.4 million subject to the achievement of certain milestones by XLI
over a three-year period ending December 31, 2000. Pursuant to a post-closing
audit and related post-closing adjustment set forth in the 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 at the acquisition date which resulted in a
contingent cash adjustment of $1.1 million, thereby reducing the contingent
payment amount to $10.3 million. 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.
The cash purchase price for XLI was allocated as follows (in thousands):
9
<PAGE>
OAK TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. ACQUISITIONS (CONTINUED)
<TABLE>
<S> <C>
Net liabilities assumed $ (3,090)
In-process research and development 2,376
Purchased technology and other intangible assets 4,389
---------
$ 3,675
=========
</TABLE>
The purchased technology and other intangible assets acquired from
ViewPoint and XLI will be amortized over three years. The amounts of the
purchase price assigned to the fair market values of in-process research and
development and purchased technology represent Company management's best
estimate. The Company will continue to review these estimates during the
remainder of the current fiscal year, as required by Accounting Principles
Board Opinion No. 16, to ensure the Company's allocation complies with
appropriate financial reporting practices.
8. 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 allege violations of California
securities laws and statutory deceit provisions as well as breaches of
fiduciary duty and abuse of control. On December 6, 1996, the state court
judge sustained the Oak defendants' demurrer to all causes of action alleged
in 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. 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 various of its current and former officers and Directors
are also parties to four putative class action lawsuits pending in the U.S.
District Court for the Northern District of California. These actions have
been consolidated AS IN RE OAK TECHNOLOGY, INC. SECURITIES LITIGATION, Case
No. C-96-20552-SW(PVT). This action alleges certain violations of federal
securities laws and is brought on behalf of purchasers of the Company's
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.
10
<PAGE>
OAK TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. 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 the above-described legal proceedings, the Company
has incurred, and expects to continue to incur legal and other expenses.
The Company and its current Directors are 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 allege that the offer is 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. In January of 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. Based on its
investigation to date, the Company believes the suits to be without merit and
will defend its position vigorously. No provision for any liability that may
result upon adjudication has been made in the Company's Consolidated
Financial Statements.
The Company and its current Directors are 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 plaintiffs in this action are 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 Company's 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 alleges violations of the Delaware
General Corporation Law and breaches of fiduciary duty and is 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 allege that the Rights Plan with
the Continuing Directors provision disenfranchises
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OAK TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. CONTINGENCIES (CONTINUED)
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 are seeking 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). A settlement has been reached with the plaintiffs. The
settlement should not have a material effect on the Company's Consolidated
Financial Statements. To date, no provision for any loss has been made in 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.
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.
The estimate of potential impact on the Company's consolidated financial
position or overall results of operations for all of the aforementioned legal
proceedings could change in the future.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
EXCEPT FOR THE HISTORICAL FINANCIAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS QUARTERLY REPORT ON FORM 10-Q MAY BE CONSIDERED
"FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). SUCH STATEMENTS
INCLUDE DECLARATIONS REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF
THE COMPANY AND ITS MANAGEMENT. PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY
SUCH FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND
INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH IN THIS ITEM 2, THOSE
DESCRIBED ELSEWHERE IN THIS QUARTERLY REPORT AND THOSE DESCRIBED IN THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JUNE 30, 1998, OTHER
QUARTERLY REPORTS ON FORM 10-Q AND OTHER REPORTS FILED UNDER THE EXCHANGE
ACT.
GENERAL
The Company designs, develops and markets high performance integrated
semiconductors and related software to original equipment manufacturers
worldwide that serve the optical storage, consumer electronics and digital
office equipment markets. The Company's products consist primarily of
integrated circuits and supporting software and firmware to provide a
complete solution for customers.
The Company contracts with independent foundries to manufacture all of
its products, enabling the Company to focus on its design strengths, minimize
fixed costs and capital expenditures and gain access to advanced
manufacturing facilities. Except pursuant to its agreements with TSMC and
Chartered, the Company's foundries generally are not obligated to supply
products to the Company for any specific period, in any specific quantity or
at a specific price.
During the third quarter of fiscal 1998, the Company restructured its
operations along three market-focused groups: Optical Storage Group, the
Consumer Group, and the Digital Office Equipment Group (Pixel Magic), and at
the same time, discontinued its product development and marketing efforts in
its PC audio and 3D graphics businesses. Since then, the Company has
completed three acquisitions (ODEUM Microsystems, Viewpoint Technology, Inc.,
and Xerographic Laser Images Corporation), and made a joint venture
investment (Omni Peripherals Pte, Ltd.), all aimed at expanding the potential
product offerings for these three target markets. The ViewPoint and XLI
acquisitions were completed during the first quarter of fiscal year 1999
ended September 30, 1998.
As repositioned, the Company provides high-performance, integrated
semiconductors to original equipment manufacturers (OEMs) worldwide that
serve the optical storage, consumer electronics and digital office equipment
markets. The Company's products, consisting primarily of integrated circuits,
supporting software and firmware and platform solutions all designed to store,
access and manipulate digital content, enabling its OEM customers to deliver
cost-effective, powerful systems to the end-user for the home and enterprise. 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; and multitasking
imaging and compression processors for the emerging class of digital office
equipment. For the majority of fiscal 1999, the Company has been developing
its next generation CD-RW controllers, first generation products for the
terrestrial segment of the digital broadcast market, an imaging processor for
the inkjet multifunction peripheral market, and its next generation MPEG-2
audio/video decoder for DVD players.
In its press release regarding the results for the third quarter of
fiscal 1999, the Company reported a net loss of $11.0 million, its fifth
consecutive quarterly loss. The decrease in third 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
controllers, which are 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 of these products have declined and
will continue to decline as these products mature.
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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 aspect of the Company and is in the
process of building a 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 office equipment 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.
RESULTS OF OPERATIONS
NET REVENUES. The Company's net revenues in the comparison periods were
primarily derived from sales of its CD-ROM and CD-RW controller products
which comprised 57% and 65% of the Company's net revenues in the three months
and nine months, respectively, ended March 31, 1999. Net revenues decreased
55% to $16.0 million in the three months ended March 31, 1999 from $35.6
million in the comparable period of fiscal 1998. For the nine-month period
ended March 31, 1999, net revenues decreased 55% to $57.8 million from $128.2
million in the comparable period of fiscal 1998. For both the three- and
nine-month periods, approximately two-thirds of the revenue decrease was
attributable to a decrease in unit sales of CD-ROM controllers from the
comparable periods of fiscal 1998, with the remainder of the decrease due to
a decline in the average selling price ("ASP") of the CD-ROM controllers. The
decrease in unit sales is primarily the result of a loss of market share in
Taiwan, the maturation of the CD-ROM market, development delays in the
Company's next-generation CD-ROM controller and second generation CD-RW
controller, and to a lesser extent, economic downturns in the Asian markets
to which a large majority of the Company's products are sold. In the three
months ended March 31, 1999 and 1998, sales to the Company's top ten
customers accounted for approximately 71% and 76%, respectively, of the
Company's net revenues, with similar percentages for the six-month periods of
both fiscal years. International sales, principally to Japan, Taiwan, Korea,
Singapore, and Belgium accounted for approximately 89% and 87% of the
Company's net revenues in each of the three months ended March 31, 1999 and
1998, respectively. The comparable percentages for the nine-month periods
ended March 31, 1999 and 1998 were 87% and 93%, respectively.
The Company anticipates that sales of existing CD-ROM and CD-RW
controller products will continue to decline during the remainder of the
calendar year 1999 as these products mature. Revenues for at least the next
two quarters of calendar year 1999 will continue to be significantly less
than the comparable periods in the previous fiscal year. See "Factors That
May Affect Future Results" below.
GROSS MARGIN. Cost of revenues includes the cost of wafer fabrication,
assembly and testing performed by third-party vendors and direct and indirect
costs associated with the procurement, scheduling and quality assurance
functions performed by the Company. The Company's gross margin decreased to
46.2% in the three month period ended March 31, 1999 as compared to 52.9%
during the comparable period in the prior year. Gross margin in the three
month period ended March 31, 1998 included the impact of a $3.5 million
inventory-related charge to cost of revenues related to the discontinuation
of the graphics and audio/communications businesses. Excluding the impact of
the discontinuation of these businesses, gross margin in the three months
ended March 31, 1998 would have been 50.5%. The decrease in gross margin
(before the impact of the prior-year charge) is primarily the result of a
decrease in ASPs for the Company's CD-ROM controller products which was only
partially offset by a decrease in the Company's unit cost for the same
products. The Company's overall gross margin is subject to change due to
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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 in the optical storage and consumer
electronics market 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. Given the
extremely competitive nature of the optical storage and consumer electronics
market, the Company believes that gross margins for new products in its
optical storage market and consumer electronics 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 of $12.5 million for
the three months ended March 31, 1999 did not change significantly from the
comparable period of the previous fiscal year. For the nine months ended
March 31, 1999, R&D expenses were $37.8 million, compared to $35.4 million
for the year-ago nine-month period. The increase in the year-to-date amounts
was principally the result of the hiring of additional technical personnel
and associated expenses since the previous fiscal year periods, 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 the current
fiscal periods over the comparable periods in the prior year due primarily to
the significant decrease in the Company's net revenues in the current periods
compared to the comparable periods of fiscal 1998. The Company will continue
to invest substantial resources in research and development in an effort to
complete the development of its new products in the Company's target markets:
optical storage, consumer electronics and digital office equipment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative (S,G&A) expenses decreased slightly to $8.6 million in the
three months ended March 31, 1999 from $8.8 million in the comparable period
in the prior year. For the nine months ended March 31, 1999, SG&A expenses
increased 17% to $26.8 million from $23.0 million in the comparable period of
the prior fiscal year. During the second and third quarters of fiscal year
1999, the Company incurred approximately $1.9 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 ITC on April 7, 1998 and additional litigation were
higher in the current fiscal nine month period compared to the year-ago nine
month period. See "Legal Proceedings. The increase was also the result of 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 the current fiscal periods
over the comparable periods in the prior year due primarily to a significant
decrease in the Company's net revenues in the comparison periods. The Company
expects to continue to incur higher S,G&A expenses as a percentage of net
revenues during the remainder of fiscal 1999 as compared to comparable
year-ago periods, however, the Company expects to be able to keep absolute
dollar S,G&A expenses in the fourth quarter of fiscal 1999 flat or slightly
less than expenses incurred in the third quarter.
RESTRUCTURING CHARGES. During the three months ended March 31, 1998, the
Company discontinued its graphics and audio/communications businesses and
incurred a charge to operations of $1.8 million related to this divestiture.
The $1.8 million charge consisted of $1.0 million related to a write-off of
prepaid royalties, approximately $0.6 million for severance pay and $0.2 for
miscellaneous charges.
ACQUIRED IN-PROCESS TECHNOLOGY. During the first quarter of fiscal 1999,
the Company acquired ViewPoint and XLI (see note 7 to the condensed
consolidated financial statements). Of the combined purchase prices of the
two companies, $7.2 million was allocated to in-process research and
development (IPR&D) and was charged to operations ($4.8 million related to
ViewPoint, $2.4 million related to XLI). Substantially all of the remainder
of the purchase price of each of the two companies (aside from allocations to
tangible assets totaling $0.9 million) has been allocated to purchased
technology and other intangible assets (totaling $8.8 million) recorded on
the Company's balance sheet, and will be amortized to operations on a
straight-line basis over three years.
NONOPERATING INCOME. During the third quarter of fiscal 1999,
nonoperating income decreased to $0.8 million from $2.3 million during third
quarter of fiscal 1998, and decreased to $4.3 million for the nine month
period from $12.1 million in the year-ago nine-month period. In the year-ago
quarter and nine-month period, the Company recorded as nonoperating income
approximately $0.7 million and $8.1 million, respectively, it received
related to the settlement agreement between the Company and United
Microelectronics Corporation in connection with a complaint the Company had
filed with the International Trade Commission on July 21, 1997. (See "Legal
Proceedings"). Interest income (net of expense) was lower in the three-month
and nine-month periods ended March
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31, 1999 than in the prior year periods due to a reduced invested cash
balance and lower interest rates. Partially offsetting the reductions in
settlement income and interest income were translation gains recorded in the
first nine months of fiscal 1999 (related primarily to the strengthening of
the Japanese Yen), compared to approximately $2.0 million in translation
losses in the first three quarters of fiscal year 1998 when the Yen was
weakening.
INCOME TAXES. The effective tax benefit for the three months ended March
31, 1999 was 14.7%. The overall effective tax benefit rate for the nine
months ended March 31, 1999 is 13.4%. No tax benefit has been assigned to the
write-off of IPR&D, since it is not deductible for tax purposes. Excluding
the impact of the IPR&D, the tax benefit recorded is 16.3% of the pre-tax
loss, and is less than the statutory income tax rates due to limitations on
loss carryback benefits available to the Company. The Company recorded a 35%
effective tax rate in the first and second quarters of fiscal 1998. The
effective tax rate for fiscal 1998 as a whole was subsequently reduced to 15%
as a result of lower taxable income and substantial R&D credits earned by the
Company, offset by a partial valuation allowance.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The following factors should be carefully considered in evaluating the
Company and its business.
QUARTERLY FLUCTUATIONS. The Company's quarterly revenue and operating
results have varied significantly in the past and are likely to vary
substantially from quarter to quarter in the future. The Company's operating
results are affected by a wide variety of factors, many of which are outside
the Company's control, including but not limited to, the gain or loss of
significant customers, increased competitive pressures, the timing of new
product introductions by the Company or its competitors and market acceptance
of new or enhanced versions of the Company's and its customers' products.
Other factors include the availability of foundry capacity, fluctuations in
manufacturing yields, availability and cost of raw materials, the cyclical
nature of the semiconductor industry, the market for PCs and the specific
markets addressed by the Company's products, seasonal customer demand, the
Company's ability to diversify its product offerings, the competitiveness of
the Company's customers, the timing of significant orders and order
cancellations or rescheduling, and changes in pricing policies by the
Company, its competitors or its suppliers, including decreases in ASPs of the
Company's products. In addition, the Company's quarterly operating results
could be materially adversely affected by legal expenses incurred in
connection with, or any adverse judgment in, the Company's ongoing
shareholder legal proceedings. The Company's operating results could also be
adversely affected by economic conditions generally in various geographic
areas where the Company or its customers do business. These factors are
difficult to forecast, and these or other factors could materially affect the
Company's quarterly or annual operating results. There can be no assurance as
to the level of sales or earnings that may be attained by the Company in any
given period in the future.
The semiconductor industry has historically been characterized by rapid
technological change, cyclical market patterns, significant price erosion,
periods of over-capacity and production shortages, variations in
manufacturing costs and yields and significant expenditures for capital
equipment and product development. In addition, the industry has experienced
significant economic downturns at various times, characterized by diminished
product demand and accelerated erosion of product prices. The Company may
experience substantial period-to-period fluctuations in operating results due
to general semiconductor industry conditions. The downturns in the industry
often occur in connection with, or in anticipation of, maturing product
cycles (of both the semiconductor companies and their customers) and declines
in general economic conditions. These downturns have been characterized by
abrupt fluctuations in product demand, production overcapacity and subsequent
accelerated erosion of average selling prices, and in some cases, have lasted
for more than a year. The Company may experience substantial period-to-period
fluctuations in future operating results due to general industry conditions
or events occurring in the general economy and the Company's operating
results and financial condition could be materially and adversely impacted by
a significant industry-wide downturn. Even if customers' aggregate demand
were not to decline, the availability of additional capacity can adversely
impact pricing levels, which can also depress revenue levels. Also, during
such periods, customers benefiting from shorter lead times may delay some
purchase into future periods. There can be no assurance the Company will not
experience such downturns in the future, which could have a material impact
on the Company's operating results and financial condition.
In addition, the Company currently places noncancelable orders to
purchase its products from independent foundries on an approximately three
month rolling basis and is currently committed with two of its foundries for
certain minimum amounts of capacity (see Footnote 3, "Foundry Deposits"),
while its customers generally place purchase orders with the Company less
than four weeks prior to delivery that may be rescheduled or under certain
circumstances may be canceled without significant penalty. Due to the
Company's relatively narrow customer base for certain devices and the short
product life cycles of such products, such cancellations can leave the
Company
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with significant inventory exposure, which could have a material adverse
effect on the Company's operating results. Such inventory exposure has occurred
in the past. Consequently, if anticipated sales and shipments in any quarter are
rescheduled, canceled, or do not occur as quickly as expected, expense and
inventory levels could be disproportionately high and the Company's business,
financial condition and results of operations for that quarter or for the year
would be materially adversely affected.
The markets in which the Company competes are intensely competitive and
are characterized by rapid technological change, declining unit ASP's and
rapid product obsolescence. The Company expects competition to increase in
the future from existing competitors and from other companies that may enter
the Company's existing or future markets with solutions that may be less
costly or provide higher performance or additional features. The Company's
existing and potential competitors include many large domestic and
international companies that have substantially greater financial,
manufacturing, technical, marketing, distribution and other resources,
broader product lines and longer standing relationships with customers than
the Company. The Company's competitors also include a number of emerging
companies as well as some of the Company's own customers and suppliers. The
Company anticipates increased competition from the captive suppliers to the
optical storage market as this market transitions to DVD. 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. Certain of the Company's
principal competitors maintain their own semiconductor foundries and may
therefore benefit from certain capacity, cost and technological advantages.
The Company believes that its ability to compete successfully depends on a
number of factors, both within and outside of its control, including the
price, quality and performance of the Company's and its customers' products,
the timing and success of new product introductions by the Company, its
customers and its competitors, the rate of infrastructure development in the
digital broadcast market, the development of technical innovations, the
ability to obtain adequate foundry capacity and sources of raw materials, the
efficiency of production, the rate at which the Company's customers design
the Company's products into their products, the market acceptance of the
Company's customers products, the number and nature of the Company's
competitors in a given market, the assertion of intellectual property rights
and general market and economic conditions. The Company's future operating
results are likely to be affected by these factors as well as others.
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 performance is highly dependent upon the
successful development and timely introduction of its next generation CD-RW
controller, MPEG-2 decoder for the DVD player market, and an imaging processing
chip for the digital office equipment market as well as new products for the
digital broadcast market and its first generation PC DVD product at competitive
price and performance levels. The Company's financial performance is dependent
upon timely and successful execution of these next generation and new products,
as the majority of the Company's revenue for the first nine months of fiscal
year 1999 has come from mature CD-ROM and CD-RW products, the sales of which are
anticipated to further decline. In an effort to diversify and grow its product
and market base, the Company has invested substantial resources in optical
storage as well as in its other core technologies, consumer electronics and
digital imaging. There can be no assurance that products currently under
development in these core technologies or any other new products will be
successfully developed or will achieve market acceptance, thereby affecting the
Company's ability to achieve diversification and expansion of its products
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and markets, and thereby revenue diversification and growth. The failure of the
Company to introduce these new products successfully or the failure of new
products to achieve market acceptance would have a material adverse effect on
the Company's business, financial condition and results of operations. The
success of new product introductions is dependent on several factors, including
recognition of market requirements, product cost, timely completion and
introduction of new product designs, quality of new products, differentiation
of new products from those of the Company's competitors, improvement of existing
technologies and development and implementation of new process technologies in
order to continue to reduce semiconductor die size, improve device performance
and manufacturing yields, adapt products and processes to technological changes
and adopt emerging industry standards. In both the optical storage and consumer
electronics market, 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 Company's
success is also dependent upon securing sufficient foundry capacity for volume
manufacturing of wafers and achievement of acceptable manufacturing yields from
the Company's contract manufacturers. Semiconductor design and process
methodologies are subject to rapid technological change. Decreases in geometries
call for sophisticated design efforts, advanced manufacturing equipment and
cleaner fabrication environments. Due to the design complexity of its products,
especially with the increased levels of integration that are required, the
Company has experienced delays in completing development and introduction of new
products, and there can be no assurance that the Company will not encounter
such delays in the development and introduction of future products. In
particular, the Company has in the past experienced delays in its products
for the optical storage market and the digital office equipment market. There
can be no assurance that the Company will successfully identify new product
opportunities and develop and bring new products to market in a timely
manner, that the Company's products will be selected for design into the
products of its targeted customers or that products or technologies developed
by others will not render the Company's products or technologies obsolete or
noncompetitive. Furthermore, there can be no assurance that the products of
the Company's customers will be successfully introduced into the market. The
failure of the Company's new product development efforts, the failure of the
Company to achieve market acceptance of its new products and the failure of
the products of the Company's customers to achieve market acceptance would
have a material adverse effect on the Company's business, financial condition
and operating results.
NEED FOR ADDITIONAL CAPITAL. In order to remain competitive, the Company
must continue to make investments in new facilities and capital equipment.
The Company spent $4.8 million on capital additions in the first three
quarters of fiscal 1999 and although it expects to spend lesser amounts in
the remaining quarters of calendar year 1999, 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 (such as those described in Foundry Deposits later in this
document) that commit the Company to purchase specified quantities of wafers
over extended periods. Manufacturing arrangements such as these may require
substantial capital investment, which may require the Company to seek
additional financing.
The Company believes that existing liquid resources and funds generated
from operations, if any, combined with its ability to borrow funds will be
adequate to meet its operating and capital requirements and obligations into
the foreseeable future. The Company believes that a company's level of
financial resources is an important factor in its industry. Accordingly, the
Company may from time to time seek additional equity or debt financing. There
can be no assurance that such funds will be available on terms acceptable to
the Company when needed. Any future equity financing will also lead to
dilution to the existing shareholders.
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. 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.
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In the fourth quarter of fiscal year 1998, the Company acquired ODEUM
Microsystems, Inc. (ODEUM) and allocated approximately $1.3 million of the
purchase price to in-process research and development (which was expensed)
and approximately $2.2 million to purchased technology, 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 prepared by an independent third-party appraiser. For the ODEUM
acquisition, the acquired in-process research and development valuation was
based on Oak management's best estimate based on 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.
INTELLECTUAL PROPERTY MATTERS. The Company's ability to compete is
affected by its ability to protect its proprietary information. The Company
considers its technology to be proprietary and relies on a combination of
patents, trademarks, copyrights, trade secret laws, confidentiality
procedures and licensing arrangements to protect its intellectual property
rights. The Company currently has 11 patents granted, 32 patents in
preparation in the United States, 83 patents pending in the United States and
and 19 international patents pending. The Company intends to seek additional
international patents and additional United States patents on its technology.
There can be no assurance that additional patents will issue from any of the
Company's pending applications or applications in preparation, or be issued
in all countries where the Company's products can be sold, or that any claims
allowed from pending applications or applications in preparation will be of
sufficient scope or strength to provide meaningful protection or any
commercial advantage to the Company. Additionally, competitors of the Company
may be able to design around the Company's patents. 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, some of the Company's products are based in part on
standards, including MPEG-1, MPEG-2, JPEG and JBIG and the Company does not
hold patents or other intellectual property rights for such standards. The
laws of certain foreign countries in which the Company's products are or may
be manufactured or sold, including various countries in Asia, may not protect
the Company's products or intellectual property rights to the same extent as
do the laws of the United States and thus make the possibility of piracy of
the Company's technology and products more likely. There can be no assurance
that the steps taken by the Company to protect its proprietary information
will be adequate to prevent misappropriation of its technology or that the
Company's competitors will not independently develop technologies that are
substantially equivalent or superior to the Company's technology.
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights, which has resulted in significant,
often protracted and expensive litigation. Although there is currently no
pending intellectual property litigation against the Company, the Company or
its foundries may, from time to time, be notified of claims that the Company
may be infringing patents or other intellectual property rights owned by
third parties. If it is necessary or desirable, the Company may seek licenses
under such patents or other intellectual property rights. However, there can
be no assurance that licenses will be offered or that the terms of any
offered licenses will be acceptable to the Company. The failure to obtain a
license from a third party for technology used by the Company could cause the
Company to incur substantial liabilities and to suspend the manufacture of
products or the use by the Company's foundries of processes requiring the
technology. Furthermore, the Company
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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"). The Company has
incurred significant legal expenses in connection with both ITC actions. 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 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, the
Company may not be able to settle an alleged patent infringement claim
through a cross-licensing arrangement. If a successful claim is made against
the Company or its customers and a license is not made available to the
Company on commercially reasonable terms or the Company is required to pay
substantial damages or awards, the Company's business, financial condition
and results of operations would be materially adversely affected.
In addition, certain technology used in the Company's products is
licensed from third parties, and pursuant thereto the Company is required to
fulfill confidentiality obligations and in certain cases pay royalties. Some
of the Company's products, particularly those targeted for the DVD (both PC
and consumer) market, require certain types of copy protection software that
the Company must license from third parties. Should the Company lose its
rights to or be unable to obtain the necessary copy protection software, the
Company would be unable to sell and market certain of its products. The
Company licenses technology from Sun Microsystems, Inc. for use in its
consumer products under an agreement requiring royalty payments, and on
occasion buys products off the shelf for use with its own products. In an
effort to provide a complete solution to its customers, and to develop
products with specifications meeting customer requirements, Oak has entered
into development relationships with certain companies. In certain cases, as
consideration for such development assistance and in some cases proprietary
information, the Company has agreed to pay royalties to such companies and
generally retains ownership of such 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 certain 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 such licenses or purchases will be available on terms acceptable to the
Company, if at all. The inability of the Company to enter into such license
arrangements on acceptable terms or to maintain its current licenses on
acceptable terms could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company also generally enters into confidentiality agreements with
its employees and 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.
MANUFACTURING ISSUES. The Company contracts with independent foundries
to manufacture all of its products, enabling the Company to focus on its
design strengths, minimize fixed costs and capital expenditures and gain
access to advanced manufacturing facilities. The Company's foundry agreements
with TSMC and Chartered require up-front, nonrefundable prepayments or
deposits and these fixed costs could affect the Company's operating margins
if the Company is unable to utilize the minimum number of wafers required
under the agreements (see footnote 3, "Foundry Deposits"). The Company is
currently attempting to amend its agreements with TSMC and Chartered to
enable it to fully utilize the deposits on account with each of these
companies. While the Company expects to finalize amended agreements with
both TSMC and Chartered during the fourth quarter of fiscal 1999, no
assurance can be given that the Company will ultimately be successful in
negotiating amended agreements with both TSMC and Chartered. 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
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acceptable manufacturing yields and to deliver products to the Company in a
timely manner. These foundries fabricate products for other companies and
some manufacture products of their own design. While the Company believes
there is adequate foundry capacity available to meet its current
requirements, there can be no assurance that the Company will continue to
have access to sufficient capacity to meet its needs in the future. If there
is a decrease in available foundry capacity, it is likely that the lead time
required to manufacture the Company's products will increase.
Product supply and demand fluctuations common to the semiconductor
industry are historically characterized by periods of manufacturing capacity
shortages immediately followed by periods of overcapacity, which are caused
by the additions of manufacturing capacity in large increments. The industry
has moved from a period of capacity shortages in 1995 to what has been a
period of excess capacity for approximately the last twelve months, although
capacity currently appears to be tightening. 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. There can be no assurance that the Company can
achieve timely, cost-effective access to such capacity when needed.
The Company generally does not have long-term volume production
contracts with its customers. Accordingly, customers generally buy the
Company's products on a purchase order basis, often with short lead times. In
periods of manufacturing capacity shortages, the Company may not be able to
meet the customers required delivery times. Customer orders are also subject
to rescheduling and cancellation which could result in the Company having
excess inventory given that the Company does not enjoy such cancellation or
rescheduling privileges with its foundries. In addition, whether any specific
product design will result in volume production orders and, if so, the
quantities included in any such orders, are factors beyond the control of the
Company. Insufficient orders will result in underutilization of the Company's
manufacturing facilities and the Company's prepayments and deposits with TSMC
and Chartered which would adversely impact the Company's business, financial
condition and operating results.
The Company's results of operations could also be adversely affected if
particular suppliers are unable to provide a sufficient and timely supply of
product, whether because of raw material shortages, capacity constraints,
unexpected disruptions at the plants, delays in qualifying new suppliers or
other reasons, or if the Company is forced to purchase materials from higher
cost suppliers or to pay expediting charges to obtain additional supply, or
if the Company's test facilities are disrupted for an extended period of
time. Production could also be constrained by delays if there is a need to
move production from one facility to another. Such problems with supply could
adversely affect the Company's business, financial condition and operating
results. As the Company generally does not use multiple sources of supply for
its products, the consequences of these factors occurring is magnified.
The loss of any of the Company's foundries as a supplier, the inability
of the Company in a period of increased demand for its products to expand the
foundry capacity of its current suppliers or qualify other wafer
manufacturers for additional foundry capacity, industry overcapacity, any
inability to obtain timely and adequate deliveries from the Company's current
or future suppliers or any other circumstances that would require the Company
to seek alternative sources of supply could delay shipments of the Company's
products, which could damage relationships with its current and prospective
customers, provide an advantage to the Company's competitors and have a
material adverse effect on the Company's business, financial condition and
operating results.
Disruption of operations at any of the manufacturing facilities utilized
by the Company or any of its subcontractors for any reason, including work
stoppages, fire, earthquake, flooding or other natural disasters, would cause
delays in shipments of the Company's products. There can be no assurance that
alternative capacity would be available on a timely basis on terms acceptable
to the Company, if at all, thereby resulting in a loss of customers. This
could have a material adverse effect on the Company's business, financial
condition and operating results.
The manufacture of semiconductors is a highly complex and precise
process, with current trends in the Company's markets leading to increasingly
complex products. Minute levels of contaminants in the manufacturing
environment, defects in the masks used to print circuits on a wafer,
difficulties in the fabrication process or other factors can cause a
substantial percentage of wafers to be rejected or a significant number of
die on each wafer to be nonfunctional. Many of these problems are difficult
to diagnose and time consuming or expensive to remedy. The Company's products
are particularly complex and difficult to manufacture. The greater
integration of functions and complexity of operations of the Company's
products increase the risk that latent defects or subtle faults could be
discovered by customers or end users after volumes of product have been
shipped. If such defects were significant, the Company could incur material
recall and replacement costs for product warranty. The relationships with
customers could also be adversely impacted. There can be no assurance that
the Company's foundries will not
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experience irregularities or adverse yield fluctuations in their
manufacturing processes. Any yield or other production problems or shortages
of supply experienced by the Company or its foundries could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company's reliance on independent manufacturers and third party
assembly and testing vendors involves a number of additional risks, including
the unavailability of, or interruption in access to, certain process
technologies and reduced control over delivery schedules, quality assurance
and costs. In addition, as a result of the Company's dependence on foreign
subcontractors, the Company is subject to the risks of conducting business
internationally, including foreign government regulation and general
political risks, such as political and economic instability, potential
hostilities, changes in diplomatic and trade relationships, currency
fluctuations, unexpected changes in, or imposition of, regulatory
requirements, tariffs, import and export restrictions, and other barriers and
restrictions, potentially adverse tax consequences, the burdens of complying
with a variety of foreign laws and other factors beyond the Company's control.
DEPENDENCE ON CD-ROM AND CD-RW CONTROLLER PRODUCTS. Sales of the
Company's CD-ROM and CD-RW controller products comprised 57% and 77% of the
Company's net revenues in the quarters ended March 31, 1999 and 1998,
respectively. Sales of CD-ROM and CD-RW controller products are expected to
continue to account for a substantial portion of the Company's total revenues
for the forseeable future. The market for CD-ROM controller products
continues to mature and therefore, it is expected that sales of such products
will continue to decline and will continue to be influenced by the
traditional seasonality and volatility associated with the PC market. The
Company is no longer developing any CD-ROM controllers, but is instead
focusing its development efforts on CD-RW controllers and DVD drives. It is
anticipated that the proliferation of CD-RW and eventually DVD drives will
further impact the demand for CD-ROM controller products. Furthermore,
although the Company is currently a leading supplier of CD-RW controllers,
due to product delays in its second generation CD-RW product the Company
expects to experience lower unit sales from its maturing current CD-RW
product until it is in production with its next generation CD-RW product. As
the CD-ROM market has begun to mature and transition toward the emerging
CD-RW and DVD-ROM markets, there have been a number of new competitors
entering the market. This increased competition combined with the pressure
from the sub-$1000 PC segment for lower cost components have caused
tremendous price erosion on CD-ROM controller prices. Furthermore, there is
currently a trend toward integrating increased functionality on the CD-ROM
and CD-RW controller, potentially making the controller more costly through
increased development costs and manufacturing costs. In addition, the
Company's revenues and its gross margins from its CD-ROM and CD-RW controller
products will be dependent on the Company's ability to introduce such
integrated products in a commercially competitive manner. To provide
integrated CD-ROM, CD-RW and DVD controller products, the Company has been
and will continue to be required to expand the scope of its research and
development efforts to provide these new functions, which will require the
hiring of engineers skilled in the respective areas and additional management
coordination among the Company's engineering and marketing groups.
Alternatively, the Company may find it necessary or desirable to license or
acquire technology to enable the Company to provide these functions, and
there can be no assurance that any such technology will be available for
license or purchase on acceptable terms to the Company. In addition, with
additional functionality being added to the CD-ROM and CD-RW controller
product, companies that historically provided chips with this functionality
are now entering the CD-ROM and CD-RW controller market with integrated
products containing this functionality as well as the controller function.
Accordingly, given the above-stated factors, there can be no assurance that
the Company will be able to sustain the current level of such product sales
or current operating margins. In addition, there can be no assurance that the
market for optical storage controller products in general, or the Company's
optical storage controller products in particular, will support the Company's
planned operations in the future. The Company's future revenue generation is
much dependent on the successful introduction of its next generation CD-RW
product and first generation PC DVD product, and there can be no assurance
that the products will achieve customer acceptance. Given certain royalty
issues related to DVD, it is currently unclear whether there will be a
merchant market for DVD, and if there will be, how big the merchant market
will be. In addition, the Company has recently experienced, and continues to
experience, a decrease in the overall level of sales of, and prices for, the
Company's CD-ROM and older generation CD-RW controller product due to
introductions of products by competitors, a decline in demand for CD-ROM
controller products, product obsolescence and delays in its integrated CD-ROM
controller product and its next generation CD-RW controller product which
have had a material adverse effect on the Company's business, financial
condition and results of operations.
RISKS PERTAINING TO INTERNATIONAL BUSINESS. During the quarters ended
March 31, 1999 and 1998, 89% and 87%, respectively, of the Company's net
revenues were derived from international sales. A substantial portion of the
Company's international revenues are derived from manufacturers of CD-ROM
drives in Japan, Taiwan, Korean, Belgium and Singapore. Most of the Company's
foreign sales are negotiated in US dollars; however,
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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. The Company uses financial instruments, including
local currency debt arrangements, to offset the gains or losses of the
financial instruments against gains or losses on the underlying operations
cash flows or investments. The Company expects that there could be hedges of
anticipated transactions or investments in foreign subsidiaries in the
future. The Company is also subject to the additional risks of conducting
business outside of the United States. These risks include unexpected changes
in, or impositions of, legislative or regulatory requirements, delays
resulting from difficulty in obtaining export licenses for certain
technology, tariffs, quotas and other trade barriers and restrictions, longer
payment cycles, greater difficulty in accounts receivable collection,
potentially adverse taxes, the burdens of complying with a variety of foreign
laws and other factors beyond the Company's control. 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, but not
limited to, the potential for conflict between Taiwan and the People's
Republic of China. In addition, China is the primary market for the Company's
DVD and cable and satellite products and therefore, any political or economic
instability in China could significantly reduce the demand for these
products. The Company is also subject to general geopolitical risks in
connection with its international operations, such as political, social and
economic instability, potential hostilities and changes in diplomatic and
trade relationships. There can be no assurance that such factors will not
adversely affect the Company's operations in the future or require the
Company to modify its current business practices. There can be no assurance
that one or more of the foregoing factors will not have a material adverse
effect on the Company's business, financial condition or operating results or
require the Company to modify its current business practices.
LIMITED CUSTOMER BASE. A limited number of customers historically has
accounted for a substantial portion of the Company's net revenues. In the
quarters ended March 31, 1999 and 1998, sales to the Company's top ten
customers accounted for approximately 71% and 76%, respectively, of the
Company's net revenues. These customers were all purchasers of the Company's
CD-ROM and CD-RW products. At March 31, 1999, one customer accounted for
approximately 40% of the Company's accounts receivable. Although the Company
is currently attempting to diversify its products, markets, and customer
base, the Company expects that sales to a limited number of customers will
continue to account for a substantial portion of its net revenues for the
foreseeable future. The Company has experienced significant changes from year
to year in the composition of its major customer base and believes this
pattern will continue. The Company does not have long term purchase
agreements with any of its customers. Customers generally purchase the
Company's products pursuant to short-term purchase orders. The loss of, or
significant reduction in purchases by, current major customers would have a
material adverse effect on the Company's business, financial condition and
operating results. Philips, which accounted for approximately 10% of the
Company's sales in the first nine months of fiscal year 1999, recently
announced that it will cease ordering the Company's CD-RW product, as Philips
now has its own solution. There can be no assurances that the Company's
current customers will continue to place orders or that existing orders will
not be canceled. If sales to current customers cease or are reduced, there
can be no assurance that the Company will be able to continue to obtain the
orders from new customers necessary to offset any such losses or reductions.
The loss of business or cancellation of orders from any key customers,
significant changes in scheduled deliveries to any of these customers or
decreases in the prices of products sold to any of these customers could have
a material adverse effect on the Company's business, financial condition and
results of operations.
COMPETITION. The markets in which the Company competes are intensely
competitive and are characterized by rapid technological change, declining
unit ASPs and rapid product obsolescence. The Company expects competition to
increase in the future from existing competitors and from other companies
that may enter the Company's existing or future markets with solutions that
may be less costly or provide higher performance or additional features. The
Company's existing and potential competitors include many large domestic and
international companies that have substantially greater financial,
manufacturing, technical, marketing, distribution and other resources,
broader product lines and longer standing relationships with customers than
the Company. The Company's competitors also include a number of emerging
companies as well as some of the Company's own customers and suppliers. The
Company is currently attempting to enter several new markets in which the
Company has not previously operated. These markets are intensely competitive
and the Company will have to compete with large domestic and international
companies that have long standing relationships with the Company's target
customers. Specifically, the Company's ability to compete successfully in the
PC DVD and digital broadcast markets will depend on its ability to develop
partnerships with other companies established in the industries and to
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gain recognition in such markets. There can be no assurance that
participation in these new markets will produce positive results for the
Company. Certain of the Company's principal competitors maintain their own
semiconductor foundries and may therefore benefit from certain capacity, cost
and technological advantages. In addition, in the digital office equipment
market, the Company's most intense competition comes from captive suppliers
and the Company also anticipates increased competition from the captive
suppliers to the optical storage market as this market transitions to DVD.
The Company believes that its ability to compete successfully depends on a
number of factors, both within and outside of its control, including the
price, quality and performance of the Company's and its customers' products,
the timing and success of new product introductions by the Company, its
customers and its competitors, the development of technical innovations, the
ability to obtain adequate foundry capacity and sources of raw materials, the
efficiency of production, the rate at which the Company's customers design
the Company's products into their products, the market acceptance of the
products of the Company's customers, the number and nature of the Company's
competitors in a given market, the assertion of intellectual property rights
and general market and economic conditions. There can be no assurance that
the Company will be able to compete successfully in the future.
DEPENDENCE ON KEY PERSONNEL. The Company's future performance depends,
to a significant degree, on the retention and contribution of members of the
Company's senior management as well as other key personnel. In February 1999,
the Company appointed a new President and Chief Executive Officer, Young K.
Sohn. The Company also appointed a new President to head its Optical Storage
Group. The Company is in the process of recruiting replacements for
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 qualified replacements or
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. 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.
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 phase of the project was completed
as of March 31, 1999, and the Company has begun the Conversion/Vendor
Readiness phase. The entire Year 2000 project is expected to be completed by
September 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 to repair all PC BIOS and convert all Excel and
Access data files. The Company will replace all non-compliant PCs and upgrade
all servers and workstations by the end of the year. All network components
examined have been found to be compliant with the exception of one piece of
equipment which will be replaced before the end of the year. Based on the
Inventory/Assessment review, the Company does not anticipate any major Year
2000-related renovation work for internal systems. However, the failure of
any internal system to achieve Year 2000 readiness could result in material
disruption to the Company's operations.
The Conversion/Vendor Compliance phase is targeted for completion by the
end of May 1999. The Company has begun requesting, receiving and reviewing
Year 2000 readiness and warranty statements from external product and service
vendors. The Company has identified critical vendors for close follow-up
including face-to-face meetings to obtain their compliance. The Company has
also identified key customers and will work with them to ensure that their
internal systems will not affect their businesses. Even where assurances are
received from third parties there remains a risk that failure of systems and
products of other companies on which the Company relies could have a material
adverse effect on the Company.
The Company's Contingency Plan 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.) Upon completion of the Contingency Planning
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phase, the Company will begin the Testing phase and perform company-wide
integrated testing to ensure the Company's ability to continue business
smoothly during the transition into the Year 2000.
All product related assessments and testing are expected to be completed
by May 1999. Updates or status on products will be 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.
However, since the assessment process is ongoing, Year 2000 implications are
not fully known, and potential liability issues are not clear. Therefore, the
full potential impact of the Year 2000 on the Company is not known at this
time.
At this point, the Company believes that total cost of achieving Year
2000 readiness will be less than $1.5 million. The foregoing statements are
based upon management's best estimates at the present time, which were
derived utilizing numerous assumptions of future events, including the
continued availability of certain resources, third party modification plans
and other factors. There can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are
not limited to, the availability and cost of personnel trained in this area,
the ability to locate and correct all relevant computer codes, the nature and
amount of programming required to upgrade or replace each of the affected
programs, the rate and magnitude of related labor and consulting costs and
the success of the Company's external customers and suppliers in addressing
the Year 2000 issue.
The Company 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 Oak products, are Year 2000
compliant.
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 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 plans to test 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'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.
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LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its cash requirements from
cash generated from operations, the sale of equity securities, bank lines of
credit and long-term and short-term debt. The Company's principal sources of
liquidity as of March 31, 1999 consisted of approximately $87.4 million in
cash, cash equivalents and short-term investments. The Company also has
approximately $13.1 million in lines of letters of credit with Taiwanese
financial institutions, all of which was available at March 31, 1999.
Additionally, approximately $15 million in lines of credit exist with
Japanese financial institutions, of which approximately $12 million was
available at March 31, 1999.
In the nine months ended March 31, 1999, operating activities used net
cash of approximately $7.7 million. The Company's net loss of approximately
$34.9 million was offset by receipt of income tax refunds totaling $8.0
million, and the non-cash effect of depreciation and amortization ($8.7
million) and in-process research and development write-offs ($7.2 million).
Decreases in accounts receivable and inventories totaling $9.0 million also
helped offset the cash effect of the net loss for the period. Investing
activities utilized cash of approximately $24.7 million primarily due to the
ViewPoint and XLI acquisitions ($15.2 million, net of cash acquired) and
additions to property, plant and equipment of $4.8 million. Borrowings under
the Company's line of credit in Japan decreased by $0.4 million.
Additionally, the Company repurchased 858,000 shares of its common stock
during the nine months ended March 31, 1999, for a total of approximately
$2.7 million.
The Company believes that its existing cash, cash equivalents,
short-term investments and credit facilities will be sufficient to provide
adequate working capital and to fund necessary purchases of property and
equipment through at least the next twelve months. The Company will record
the cash proceeds ($51.2 million) from the sale of its investment in the UICC
joint venture in the fourth quarter of fiscal 1999, which will substantially
increase the Company's cash and investments. 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.
FOUNDRY DEPOSITS
The Company contracts with independent foundries to manufacture all of
its semiconductor products, enabling the Company to focus on its design
strengths, minimize fixed costs and capital expenditures and gain access to
advanced manufacturing facilities. The Company's primary suppliers under such
arrangements during the first nine months of fiscal year 1999 were TSMC,
Sony, and LG Semicon Co. Ltd. in Korea. The Company also uses wafer
fabrication facilities at Chartered, Rohm, and NEC. 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 3 to the condensed consolidated
financial statements, that commit the Company to purchase specified
quantities of wafers over extended periods. Manufacturing arrangements such
as these may require substantial capital investment, which may require the
Company to seek additional financing. There can be no assurance that such
additional financing, if required, will be available when needed or if
available, will be on satisfactory terms. The Company is currently attempting
to amend its agreements with TSMC and Chartered to enable it to fully utilize
the deposits on account with each of these companies. While the Company
expects to finalize amended agreements with both TSMC and Chartered during
the fourth quarter of fiscal 1999, no assurance can be given that the Company
will ultimately be successful in negotiating amended agreements with either
TSMC or Chartered.
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ITEM 3. 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. The Company uses financial instruments, including
local currency debt arrangements, to offset the gains or losses of the
financial instruments against gains or losses on the underlying operations
cash flows or investments.
The Company'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 within 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.
The Company has performed an analysis to assess the potential effect of
reasonably possible near-term changes in interest and foreign currency
exchange rates. The effect of such rate changes is not expected to be
material to the Company's results of operations, cash flows or financial
condition. Net foreign currency gains and losses were not material for the
three or nine months ended March 31, 1999.
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PART II - OTHER INFORMATION
ITEM 1. 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. 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 allege violations of California
securities laws and statutory deceit provisions as well as breaches of
fiduciary duty and abuse of control. On December 6, 1996, the state court
judge sustained the Oak defendants' demurrer to all causes of action alleged
in 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. 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 various of its current and former officers and Directors
are also parties to four putative class action lawsuits pending in the U.S.
District Court for the Northern District of California. These actions have
been consolidated as IN RE OAK TECHNOLOGY, INC. SECURITIES LITIGATION, Case
No. C-96-20552-SW(PVT). This action alleges certain violations of federal
securities laws and is brought on behalf of purchasers of the Company's
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.
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.
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The Company and its current Directors are 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 allege that the offer is 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. Based on its
investigation to date, the Company believes the suits to be without merit and
will defend its position vigorously. No provision for any liability that may
result upon adjudication has been made in the Company's Consolidated
Financial Statements.
The Company and its current Directors are 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 are 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 alleges violations of the Delaware
General Corporation Law and breaches of fiduciary duty and is 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 allege 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 are seeking 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). A settlement has been reached with the plaintiffs. The
settlement should not have a material effect on the Company's Consolidated
Financial Statements. To date, no provision for any loss has been made in 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
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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 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.
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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. On May 17, 1999, the Company filed a petition with the
Commission for review of 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 will file a petition requesting the Commission to review the
Initial Determination. The Company believes that both Initial Determinations
are incorrect and the Company intends to pursue its right to seek protection
from importation of UMC's and Mediatek's CD-R controllers under the trade
laws of the United States. In connection with this legal proceeding, the
Company has incurred and will continue to incur substantial legal and other
expenses. The ITC's final decision in this case is due no later than August
13, 1999.
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.
ITEM 2. CHANGES IN SECURITIES
RECENT SALES OF UNREGISTERED SECURITIES
On February 22, 1999, the Board of Directors granted an option to
purchase 2,000,000 shares of the Company's common stock at an exercise price
of $3.00 per share to Young K. Sohn, the Company's new President and Chief
Executive Officer. The option was granted pursuant to the Executive Stock
Option Plan adopted by the Company on January 27, 1999. The option has a term
of ten years from the date of grant and is immediately exercisable, subject
to a right of repurchase by the Company of any unvested shares. Vesting
occurs monthly over a four year term commencing on the date of Mr. Sohn's
employment. However, in the event that the Company's common stock has an
average closing price of at least $20 per share for a period of thirty
consecutive calendar days, then one-half of the shares subject to the options
which are not vested shares as of such date shall become vested shares.
Subject to Mr. Sohn's continued employment with the Company, the remaining
unvested shares shall vest in equal monthly increments over the period
commencing on the date of such acceleration and ending on the date four years
from February 29, 1999. In addition, in the event there is a change in
control as defined in Mr. Sohn's employment agreement, then all shares
subject to the option shall vest. Furthermore, in the event Mr. Sohn is
involuntarily terminated, then pursuant to the terms of Mr. Sohn's employment
agreement, a certain amount of additional shares subject to the option which
are not vested shares on the date of such termination shall become vested
shares. On February 26, 1999, Mr. Sohn exercised a portion of his option
related to unvested shares, and received 200,000 shares of common stock.
The option grant was made by the Board of Directors in reliance upon the
exemption from registration provided by Section 4(2) of the Securities Act of
1933, as amended. The shares of common stock underlying the option will be
registered with the Securities and Exchange Commission on a Registration
Statement on S-8.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
31
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith or incorporated by
reference herein.
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<S> <C>
3.01 The Company's Restated Certificate of Incorporation, as
amended (1)
3.02 The Company's Restated Bylaws (2)
3.03 Certificate of Correction to the Restated Certificate of
Incorporation of the Company (16)
4.01 Form of Specimen Certificate for the Company's Common
Stock (3)
4.02 Amended and Restated Registration Rights Agreement dated
as of October 15, 1993 among the Company and various
investors (3)
4.03 The Company's Restated Certificate of Incorporation, as
amended (See Exhibit 3.01)
4.04 The Company's Restated Bylaws (See Exhibit 3.02)
4.05 Form of Certificate of Designation of Series A Junior
Participating Preferred Stock of the Company dated August 18,
1997 (16)
4.06 Rights Agreement between the Company and BankBoston, N.A.
dated August 19, 1997 (16)
4.07 Amendment to the Rights Agreement between the Company and
BankBoston, N.A. dated November 18, 1998. (21)
10.01 1988 Stock Option Plan, as amended and related documents (3)*
10.02 1994 Stock Option Plan and related documents (3) and amendment
thereto dated February 1, 1996 (4)*
10.03 1994 Outside Directors' Stock Option Plan and related
documents (3)*
10.04 1994 Employee Stock Purchase Plan (3)*
10.05 401(k) Plan and related documents (3) and Amendment
Number One and Supplemental Participation Agreement
thereto (5)*
10.06 Lease Agreement dated August 3, 1988 between John
Arrillaga, Trustee, or his Successor Trustee, UTA dated
7/20/77 (John Arrillaga Separate Property Trust) as amended
and Richard T. Peery, Trustee, or his Successor Trustee, UTA
dated 7/20/77 (Richard T. Peery Separate Property Trust) as
amended, and Justin Jacobs, Jr., dba Siri-Kifer Investments,
a joint venture, and the Company, as amended June 1, 1990,
and Consent to Alterations dated March 26, 1991 (lease
agreement for 139 Kifer Court, Sunnyvale, California) (3),
and amendments thereto dated June 15, 1995 and July 19,
1995 (5)
10.07 Lease Agreement dated August 22, 1994 between John Arrillaga,
Trustee, or his Successor Trustee, UTA dated 7/20/77 (John
Arrillaga Separate Property Trust) as amended and Richard T.
Peery, Trustee, or his Successor Trustee, UTA dated 7/20/77
(Richard T. Peery Separate Property Trust) as amended, and
Justin Jacobs, Jr., dba Siri-Kifer Investments, a joint
venture, and the
</TABLE>
32
<PAGE>
<TABLE>
<S> <C>
Company (lease agreement for 140 Kifer Court, Sunnyvale,
California) (3), and amendment thereto dated June 15, 1995 (5)
10.08 Form of Indemnification Agreement, between the Company and
each of its Directors and executive officers (14)
10.09 VCEP Agreement dated July 30, 1990 between the Company and
Advanced Micro Devices, Inc.(3)
10.10 Product License Agreement dated April 13, 1993 between the
Company and Media Chips, Inc., as amended September 16, 1993
(3)
10.11 Resolutions of the Board of Directors of the Company dated
July 27, 1994 setting forth the provisions of the Executive
Bonus Plan (3) (12)*
10.12 Employee Incentive Plan effective January 1, 1995 (3)*
10.13 Option Agreement between Oak Technology, Inc., and Taiwan
Semiconductor Manufacturing Co., Ltd. dated as of August 8,
1996 (14)**
10.14 Foundry Venture Agreement between the Company and United
Microelectronics Corporation dated as of October 2, 1995 (6)
(12)
10.15 Fab Ven Foundry Capacity Agreement among the Company, Fab Ven
and United Microelectronics Corporation dated as of October 2,
1995 (7) (12)
10.16 Written Assurances Re: Foundry Venture Agreement among the
Company, United Microelectronics Corporation and Fab Ven dated
as of October 2, 1995 (8) (12)
10.17 Lease Agreement dated June 15, 1995 between John Arrillaga,
Trustee, or his Successor Trustee, UTA dated 7/20/77 (John
Arrillaga Separate Property Trust) as amended and Richard T.
Peery, Trustee, or his Successor Trustee, UTA dated 7/20/77
(Richard T.Peery Separate Property Trust) as amended, and the
Company (lease agreement for 130 Kifer Court, Sunnyvale,
California) (9), and amendments thereto dated June 15, 1995
and August 18, 1995 (10)
10.18 Deposit Agreement dated November 8, 1995 between Chartered
Semiconductor Manufacturing Ltd. and the Company (11), and
Amendment Agreement (No. 1) thereto dated September 25, 1996
(13)**
10.19 Amendment Agreement (No. 2) dated April 7, 1997 to Deposit
Agreement dated November 8, 1995 between Chartered
Semiconductor Manufacturing Ltd. and the Company(15) and
addendum thereto dated September 26, 1997 (17)**
10.20 First Amendment to Plan of Reorganization and Agreement of
Merger dated October 27, 1995 among the Company, Oak
Acquisition Corporation, Pixel Magic, Inc. and the then
shareholders of Pixel dated June 25, 1996 and Second Amendment
thereto dated June 13, 1997 (16)
10.21 First Amendment to Non-Compete and Technology Transfer
Agreement by and among the Company, Pixel Magic, Inc. and
Peter D. Besen dated June 13, 1997 (16)**
10.22 Agreement of Termination of Employment Agreement between Pixel
Magic, Inc. and Peter D. Besen dated June 13, 1997 (16)
10.23 Agreement of Termination of Employment Agreement between Pixel
Magic, Inc. and Don Schulsinger dated June 13, 1997 (16)
</TABLE>
33
<PAGE>
<TABLE>
<S> <C>
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
10.30 Loan agreement between Oak Technology Inc. and Young K. Sohn
dated February 27, 1999
10.31 Oak Technology Inc. Executive Stock Option Plan
10.32 Letter Agreement dated January , 1999 between the Special
Committee of the Board of Directors of Oak Technology, Inc.
and David T. Tsang and Ta-Lin Hsu
27.1 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.
34
<PAGE>
(15) Incorporated herein by reference to the exhibit with the same number
filed with the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1997.
(16) Incorporated herein by reference to the exhibit with the same number
filed with the Company's Annual Report on Form 10-K for the year ended
June 30, 1997.
(17) Incorporated herein by reference to the exhibit with the same number
filed with the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997.
(18) Incorporated herein by reference to the exhibit with the same number
filed with the Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1997.
(19) Incorporated herein by reference to the exhibit with the same number
filed with the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998.
(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 Exhibit 1 filed with the Company's
Registration Statement on Form 8-A/A on November 25, 1998.
- ---------------------------
* 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 March 3, 1999, making an item 5
disclosure that it had appointed Young K. Sohn as the Company's Chief
Executive Officer and President. The Company also announced that David D.
Tsang, founder of the Company, will continue to hold the office of
Chairman of the Board of Directors and that Richard B. Black will serve
as Vice-Chairman of the Board of Directors. The Company further announced
that William L. Housley has been appointed President of the Company's
Optical Storage Group.
35
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OAK TECHNOLOGY, INC.
(Registrant)
Date: May 17, 1999
ROBERT O. HERSH
---------------
Robert O. Hersh, Vice-President Finance
Chief Financial Officer
(Principal Financial and Accounting Officer)
36
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
10.29 Employment Agreement between Oak Technology Inc. and Young K.
Sohn dated February 27, 1999
10.30 Promissory Note of Young K. Sohn dated February 27, 1999
10.31 Oak Technology Inc. Executive Stock Option Plan
10.32 Letter Agreement dated January 27, 1999 between the Special
Committee of the Board of Directors of Oak Technology, Inc. and
David T. Tsang and Ta-Lin Hsu
27.01 Financial Data Schedule
</TABLE>
37
<PAGE>
Exhibit 10.29
EMPLOYMENT AGREEMENT
This Employment Agreement is made and entered into by and between Oak
Technology Inc. (the "Company") and Young Sohn ("Sohn") as of February 22,
1999 (the "Effective Date").
1. POSITION AND DUTIES. Sohn shall be employed by the Company as its
President and Chief Executive Officer ("CEO") reporting to the Company's
Board of Directors (the "Board"). Sohn's employment shall commence February
26, 1999 (the "Employment Date"). As its President and CEO, Sohn agrees to
devote his full business time, energy and skill to his duties at the Company.
These duties shall include all those duties customarily performed by the
President and CEO.
2. TERM OF EMPLOYMENT. Sohn's employment with the Company will be for
no specified term, and may be terminated by Sohn or the Company at any time,
with or without cause.
3. COMPENSATION. Sohn shall be compensated by the Company for his
services as follows:
(a) BASE SALARY. As President and CEO, Sohn shall be paid a
monthly Base Salary of $37,500 per month ($450,000 on an annualized basis),
subject to applicable withholding, in accordance with the Company's normal
payroll procedures.
(b) BENEFITS. Sohn shall have the right, on the same basis as
other members of senior management of the Company, to participate in and to
receive benefits under any of the Company's employee benefit plans, as such
plans may be modified from time to time. In addition, Sohn shall be entitled
to the benefits afforded to other members of senior management under the
Company's vacation, holiday and business expense reimbursement policies.
(c) PERFORMANCE BONUS. Sohn shall have the opportunity to earn a
Performance Bonus beginning with the Fiscal Year commencing July 1, 1999.
This Performance Bonus shall be based upon the achievement of certain fiscal
and performance-based objectives as agreed to by Sohn and the Board. The
target amount for the Performance Bonus shall be 60% of base salary with a
maximum bonus of 120% of base salary (less applicable withholding).
(d) SPECIAL BONUS. Subject to the provisions of this Agreement,
Sohn shall receive a Special Bonus in the amount of Two Million Dollars
($2,000,000) plus an inflation adjustment. The Special Bonus shall be paid in
three installments of Six Hundred Sixty-Six Thousand Six Hundred Sixty-Six
Dollars and Sixty-Seven Cents ($666,666.67) plus the inflation adjustment,
less applicable withholding, on the first three anniversaries ("Anniversary
Date") of Sohn's Employment Date, provided Sohn is continuously employed from
the Employment Date until such Anniversary Date. For purposes of this
Paragraph 3(d), the inflation adjustment for each Special Bonus payment shall
be an amount equal to $2,000,000 less the amount of the
1
<PAGE>
Special Bonus which has been paid prior to the Anniversary Date for which the
inflation adjustment is being calculated multiplied by 4.62%.
(e) LOAN. As of the Effective Date, the Company will loan Sohn
Two Million Dollars ($2,000,000) (the "Loan") which shall bear interest at
the minimum federal rate, and shall be payable in three annual installments
of principal and interest on the anniversaries of Sohn's Employment Date. The
Loan shall be subject to Sohn's execution of a Promissory Note in the form
attached hereto as EXHIBIT A. Except as otherwise provided in this Agreement,
the balance outstanding on the Loan shall be due and payable upon Sohn's
termination of employment. In the event Sohn's employment is terminated by
the Company for any reason within one year of his Employment Date, at Sohn's
election, the Loan may be paid, in whole or in part, with shares of the
Company's stock acquired upon exercise of the Option. Any stock used to repay
the Loan shall be valued at the price paid by Sohn for such stock upon
exercise of the Option.
4. STOCK OPTION As of the Effective Date, Sohn shall be granted an
option to purchase 2,000,000 shares of the Common Stock of the Company (the
"Option"), with an exercise price equal to the fair market value of the
Company's stock on the date of grant. Except as provided herein, the Option
shall be subject to the terms of the Company's Executive Stock Option Plan
and the option agreement provided pursuant to the plan. Subject to compliance
with applicable securities law, the Option shall be exercisable in full on
the date of grant, provided that any shares acquired upon exercise which have
not vested (as described below) are subject to a right of repurchase (at
original cost) in favor of the Company. The shares subject to the Option
shall vest and become "Vested Shares" as follows:
(a) Except as otherwise provided herein, for each full month of
Sohn's continuous employment with the Company (or any parent or subsidiary of
the Company) after his Employment Date, 1/48 of the shares subject to the
Option shall become Vested Shares. In no event shall the number of Vested
Shares exceed the total number of shares subject to the Option.
(b) In the event that the Company's Common Stock has an average
closing price of at least $20 per share (the "Trading Value") for a period of
thirty (30) consecutive calendar days, 1/2 of the shares subject to the
Option which are not Vested Shares as of such date (as determined without
regard to this paragraph (b)) shall become Vested Shares. Subject to the
Sohn's continued employment with the Company (or any parent or subsidiary of
the Company), the remaining unvested shares shall become Vested Shares in
equal monthly increments over the period commencing on the date of such
acceleration and ending on the date four (4) years after the Employment Date.
(c) In the event of a Change of Control (as defined below), all
shares subject to the Option shall become Vested Shares as of the effective
date of the Change of Control, subject to paragraph 8, below.
2
<PAGE>
(d) In the event that Sohn's employment with the Company (or any
parent or subsidiary of the Company) is involuntarily terminated by the
Company (or any parent or subsidiary of the Company) during Sohn's first year
of employment, the number of Vested Shares shall be increased to the greater
of (i) a total of 1/4 of the shares subject to the Option, or (ii) the number
of Vested Shares calculated pursuant to the other provisions of this
paragraph 4 plus 1/8 of the total number of shares subject to the Option.
Such acceleration of vesting is effective as of the date of Sohn's
termination of employment.
(e) In the event that Sohn's employment with the Company (or any
parent or subsidiary of the Company) is involuntarily terminated by the
Company (or any parent or subsidiary of the Company) after Sohn's first year
of employment other than For Cause, the number of Vested Shares shall be
increased to such number of Vested Shares calculated pursuant to the other
provisions of this paragraph 4 plus 1/8 of the total number of shares subject
to the Option.
5. BENEFITS UPON INVOLUNTARY TERMINATION OR RESIGNATION FOR GOOD
REASON AFTER CHANGE OF CONTROL.
(a) INVOLUNTARY TERMINATION OR RESIGNATION FOR GOOD REASON AFTER
A CHANGE OF CONTROL. Within twelve (12) months after the occurrence of any
Change of Control, if Sohn's employment is involuntarily terminated, or if
Sohn resigns for Good Reason, Sohn shall be entitled to the following
separation benefits:
(i) continued payment of Sohn's salary at his Base Salary
rate, less applicable withholding, for twelve (12) months following his
termination; and
(ii) 100% of Sohn's target Performance Bonus, less
applicable withholding, payable in a lump sum within thirty (30) days
following his termination;
(iii) if Sohn elects continued medical insurance coverage in
accordance with the applicable provisions of federal law (commonly referred
to as "COBRA"), the Company shall pay Sohn's COBRA premium contributions for
twelve (12) months. Notwithstanding the above, in the event Sohn becomes
covered under another employer's group health plan during the period provided
for herein, the Company shall cease payment of the COBRA premiums.
(b) DEFINITIONS.
(i) CHANGE OF CONTROL: For purposes of this Agreement, a
"Change of Control" shall be deemed to have occurred in the event any of the
following occurs with respect to the Company:
(A) the direct or indirect sale or exchange by the
stockholders of the Company of all or substantially all of the stock of the
Company where the stockholders of the Company before such sale or exchange do
not retain, directly or indirectly, at least a majority of the beneficial
interest in the voting stock of the Company after such sale or exchange.
3
<PAGE>
(B) a merger or consolidation in which the Company is
a party where the stockholders of the Company before such merger or
consolidation do not retain, directly or indirectly, at least a majority of
the beneficial interest in the voting stock of the Company after such merger
or consolidation.
(C) the sale, exchange, or transfer of all or
substantially all of the assets of the Company other than a sale, exchange,
or transfer to one (1) or more subsidiaries of the Company.
(D) a liquidation or dissolution of the Company.
(ii) "GOOD REASON". For purposes of this Agreement, "Good
Reason" means any of the following conditions, which condition(s) remain(s)
in effect 30 days after written notice to the Board from Sohn of such
condition(s).
(A) a decrease in Sohn's Base Salary and/or a
material decrease in Sohn's Performance Bonus Plan or employee benefits; or
(B) any change in Sohn's title, authority,
responsibilities or duties, so that any of them are not substantially
equivalent to Sohn's title, authority, responsibilities or duties as
determined immediately prior to the Change of Control.
(c) In the event of Sohn's involuntary termination or Resignation
for Good Reason within twelve (12) months after a Change Of Control, Sohn
shall be entitled to the separation benefits provided in this Paragraph 5,
and shall not be entitled to benefits under Paragraph 7, below.
6. BENEFITS UPON VOLUNTARY TERMINATION. In the event of Sohn's
voluntary termination from employment with the Company other than his
resignation for Good Reason within twelve (12) months after a Change of
Control as provided in paragraph 5, above, Sohn shall be entitled to no
compensation or benefits from the Company other than those earned under
paragraph 3 above through the date of his termination or in the case of any
stock options, vested through the date of his termination.
7. BENEFITS UPON OTHER TERMINATION. Sohn agrees that his employment
may be terminated by the Company at any time, with or without cause. In the
event of the termination of Sohn's employment by the Company for the reasons
set forth below, he shall be entitled to the following:
(a) TERMINATION FOR ANY REASON DURING THE FIRST YEAR OF
EMPLOYMENT. If Sohn's employment is terminated by the Company for any reason
prior to the first anniversary of the Employment Date, Sohn shall be entitled
to the following separation benefits:
(i) continued payment of Sohn's salary at his Base Salary
rate, less applicable withholding, for twelve (12) months following his
termination;
4
<PAGE>
(ii) 50% of Sohn's target Performance Bonus, less applicable
withholding payable in a lump sum within thirty (30) days following his
termination;
(iii) payment of the first installment of the Special Bonus,
plus an inflation adjustment, less applicable withholding. The inflation
adjustment shall be prorated for the number of days from the Employment Date
until the termination date (or, if later, until the date such Special Bonus
is paid) over 365 days; provided, however, that no payment of the first
installment of the Special Bonus shall be made in the event that Sohn's
termination results from death or Disability as that term is defined in
paragraph 7(e), below.
(iv) if Sohn elects continued medical insurance coverage in
accordance with the applicable provisions of federal law (commonly referred
to as "COBRA"), the Company shall pay Sohn's COBRA premium contributions for
twelve (12) months. Notwithstanding the above, in the event Sohn becomes
covered under another employer's group health plan during the period provided
for herein, the Company shall cease payment of the COBRA premiums; and
(v) Additional vesting of the Option as provided in
Paragraph 4.
(b) TERMINATION WITHOUT CAUSE AFTER THE FIRST YEAR OF EMPLOYMENT.
If Sohn's employment is terminated by the Company for any reason other than
For Cause after the first anniversary of the Employment Date, Sohn shall be
entitled to the following separation benefits:
(i) continued payment of Sohn's salary at his Base Salary
rate, less applicable withholding, for six (6) months following his
termination;
(ii) 50% of Sohn's target Performance Bonus, less applicable
withholding payable in a lump sum within thirty (30) days following his
termination;
(iii) if Sohn elects continued medical insurance coverage in
accordance with the applicable provisions of federal law (commonly referred
to as "COBRA"), the Company shall pay Sohn's COBRA premium contributions for
twelve (12) months. Notwithstanding the above, in the event Sohn becomes
covered under another employer's group health plan during the period provided
for herein, the Company shall cease payment of the COBRA premiums; and
(iv) additional vesting of the Option as provided in
Paragraph 4.
(c) TERMINATION FOR CAUSE AFTER FIRST YEAR OF EMPLOYMENT. If
Sohn's employment is terminated after the first anniversary of the Employment
Date For Cause as defined below, Sohn shall be entitled to no compensation or
benefits from the Company other than those earned under paragraph 3, or in
the case of any stock options, vested through the date of his termination.
5
<PAGE>
(d) DEFINITION OF FOR CAUSE.
(i) For purposes of this Agreement, a termination "For
Cause" occurs if Sohn is terminated for any of the following reasons:
(A) commission of any crime involving moral turpitude;
(B) repeated insobriety or substance abuse at the
workplace;
(C) theft of material Company assets;
(D) Sohn's causing the Company to be convicted of a
crime or to incur criminal penalties; or
(E) Sohn's refusal to perform duties reasonably given
to him by the Board of Directors which duties are within the scope of the
normal duties of a CEO, which refusal continues after receiving notice
thereof and a reasonable opportunity to cure.
(e) TERMINATION DUE TO DEATH OR DISABILITY. For purposes of this
Agreement, Sohn's termination due to death or Disability shall be considered
his involuntary termination other than for Cause on the date of his death or
Disability and benefits shall be paid to Sohn or his estate accordingly. In
addition, notwithstanding anything to the contrary in the Promissory Note,
the full amount of the principal and interest outstanding on the Promissory
Note at the time of death or Disability shall be forgiven and the Promissory
Note shall be canceled. For purposes of this Agreement, Disability means the
permanent incapacity of Sohn by reason of physical or mental illness, injury
or condition, to perform his usual duties for the Company
8. 280G LIMITATIONS. To the extent that any of the payments and
benefits provided for in this Agreement, including, without limitation,
acceleration of option vesting under Paragraph 4, or otherwise payable to
Sohn constitute "parachute payments" within the meaning of Section 280G of
the Internal Revenue Code of 1986, as amended (the "Code"), and, but for this
Paragraph 8, would be subject to the excise tax imposed by Section 4999 of
the Code or any similar or successor provision, the aggregate amount of such
payments and benefits shall be reduced, but only to the extent necessary so
that none of such payments are subject to excise tax pursuant to Section 4999
of the Code (the "Excise Tax"). In the event that any such reduction shall be
required, Sohn shall determine, in his sole discretion, which benefits
(option acceleration or cash payments) shall be reduced to avoid the Excise
Tax.
9. TAX WITHHOLDING. All payments under this Agreement shall be subject
to withholding for all applicable state and federal income and employment
taxes. At the time the Promissory Note is canceled or any payment thereunder
is forgiven, in whole or in part, or at any time thereafter as requested by
the Company, Sohn hereby authorizes withholding from payroll and any other
amounts payable to him, and otherwise agrees to make adequate provision for
any sums required to satisfy the federal, state, local and foreign tax
withholding obligations of the Company, which may arise in connection with
such forgiveness or cancellation. Sohn
6
<PAGE>
acknowledges that, notwithstanding any other provision of this Agreement, no
obligations under the Promissory Note shall be forgiven or canceled unless
the tax withholding obligations of the Company are satisfied.
10. BONUS OFFSET. Notwithstanding any other provision herein to the
contrary, the Company may offset any payments of the Special Bonus which may
be due under this Agreement, net of applicable withholding, against any
payments owed by Sohn pursuant to the Promissory Note and Sohn, by his
execution of this Agreement, expressly consents to such offset.
11. CONFIDENTIALITY AGREEMENT. Sohn agrees to abide by the terms and
conditions of the Company's standard Confidentiality Agreement as executed by
Sohn and attached hereto as EXHIBIT B.
12. DISPUTE RESOLUTION. In the event of any dispute or claim relating
to or arising out of this Agreement (including, but not limited to, any
claims of breach of contract, wrongful termination or age, sex, race or other
discrimination), Sohn and the Company agree that all such disputes shall be
fully and finally resolved by binding arbitration conducted by the American
Arbitration Association in San Jose, California in accordance with its
National Employment Dispute Resolution rules, as those rules are currently in
effect (and not as they may be modified in the future). Sohn acknowledges
that by accepting this arbitration provision he is waiving any right to a
jury trial in the event of such dispute. Provided, however, that this
arbitration provision shall not apply to any disputes or claims relating to
or arising out of the misuse or misappropriation of trade secrets or
proprietary information.
13. NON-SOLICITATION. Sohn agrees that for a period of one year after
the date of the termination of his employment for any reason, he shall not,
either directly or indirectly, solicit the services, or attempt to solicit
the services, of any employee of the Company to any other person or entity.
14. INTERPRETATION. Sohn and the Company agree that this Agreement
shall be interpreted in accordance with and governed by the laws of the State
of California.
15. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit
of and be binding upon the Company and its successors and assigns. In view of
the personal nature of the services to be performed under this Agreement by
Sohn, he shall not have the right to assign or transfer any of his rights,
obligations or benefits under this Agreement, except as otherwise noted
herein.
16. ENTIRE AGREEMENT. This Agreement constitutes the entire employment
agreement between Sohn and the Company regarding the terms and conditions of
his employment, with the exception of (i) the Promissory Note described in
Paragraph 3(d) and attached hereto as Exhibit A; (ii) the agreement described
in Paragraph 11 and attached hereto as Exhibit B; and (iii) any stock option
agreements between Sohn and the Company. This Agreement (including the
documents described in (i), (ii) and (iii) herein) supersedes all prior
negotiations, representations
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or agreements between Sohn and the Company, whether written or oral,
concerning Sohn's employment by the Company.
17. VALIDITY. If any one or more of the provisions (or any part
thereof) of this Agreement shall be held invalid, illegal or unenforceable in
any respect, the validity, legality and enforceability of the remaining
provisions (or any part thereof) shall not in any way be affected or impaired
thereby.
18. MODIFICATION. This Agreement may only be modified or amended by a
supplemental written agreement signed by Sohn and the Company.
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the date set forth above.
OAK TECHNOLOGY, INC.
Date: By:
----------------------- ---------------------------------------
Its:
--------------------------------------
Date:
----------------------- ------------------------------------------
Young Sohn
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Exhibit 10.30
PROMISSORY NOTE
$2,000,000 Palo Alto, California
Due February 25, 2002 February 22, 1999
FOR VALUE RECEIVED, Young Sohn ("Borrower") promises to pay to Oak
Technology, a Delaware corporation or order (the "Company"), at Sunnyvale,
California or at such place or places as the holder of this promissory note
(the "Note") may from time to time designate in writing, the principal sum of
Two Million Dollars ($2,000,000) (the "Principal"). The unpaid balance of
Principal shall bear interest from the date hereof at a rate of Four and
Sixty-Two One Hundredths Percent (4.62%) per annum, compounded annually.
This Note shall be payable in equal annual installments of Six Hundred
Sixty-Six Thousand Six Hundred Sixty-Six Dollars and Sixty-Six Cents
($666,666.66) of the Principal balance, plus any accrued but unpaid interest
commencing on February 25, 2000. Each payment shall be credited first to
interest then accrued and the remainder to principal. Notwithstanding the
foregoing, the outstanding Principal balance and any accrued but unpaid
interest shall be due and payable upon the earlier of (i) February 25, 2002,
or (ii) the termination for any reason of Borrower's employment the with
Company.
Borrower waives demand, presentment, notice of protest, notice of demand and
dishonor in collection. Borrower hereby waives to the full extent permitted
by law all rights to plead any statute of limitations as a defense to any
action hereunder. The failure of the Company to exercise any of the rights
created hereby, or to promptly enforce any of the provisions of this Note,
shall not constitute a waiver of the right to exercise such rights or to
enforce any such provisions.
If any amount due under the terms of this Note is not paid in full, Borrower
agrees to pay all reasonable costs and expenses of collection, including
attorneys' fees. Borrower also waives presentment, demand, protest, notice of
protest, notice of dishonor, notice of nonpayment, any and all other notices
and demands in connection with the delivery, acceptance, performance, default
or enforcement of this Note.
As used herein, "Borrower" includes the heirs, executors, successors, assigns
and distributees of Borrower and the "Company" includes the successors,
assigns and distributees of the Company, as well as a holder in due course of
this Note.
This Note shall be governed by and construed in accordance with the laws of
the State of California.
---------------------------
Young Sohn
<PAGE>
Exhibit 10.31
OAK TECHNOLOGY, INC.
EXECUTIVE STOCK OPTION PLAN
1. PURPOSE. This Plan is intended to provide incentives to attract,
retain and motivate eligible persons whose present and potential
contributions are important to the success of the Company and any Parent or
Subsidiary of the Company by offering them an opportunity to participate in
the Company's future performance through awards of Options, and to provide
such eligible persons with a proprietary interest (or increase their existing
proprietary interest) in the Company. Capitalized terms not defined in the
text of the Plan are defined in Section 15.
2. STOCK SUBJECT TO THE PLAN. The capital stock subject to the Plan
shall be shares of the Company's authorized but unissued Common Stock or
treasury shares of Common Stock. The maximum aggregate number of shares of
Common Stock which may be issued under the Plan is Two Million (2,000,000)
subject to adjustments pursuant to Section 8 hereof. In the event that any
outstanding Option under the Plan shall expire by its terms or is otherwise
terminated for any reason (or if shares of Common Stock of the Company that
are issued upon exercise of an Option are subsequently reacquired by the
Company pursuant to contractual rights of the Company under the particular
Option Agreement), the shares of Common Stock allocated to the unexercised
portion of such Option (or the shares so reacquired by the Company pursuant
to the terms of the Option Agreement) shall again become available to be made
subject to Options granted under the Plan.
3. ADMINISTRATION.
3.1 POWER AND AUTHORITY. The Plan shall be administered by the
Board and/or the Committee. Subsequent references herein to the Board shall
also mean the Committee if such Committee has been appointed, and, unless the
powers of the Committee have been specifically limited, the Committee shall
have all of the powers of the Board granted herein. Subject to the general
purposes, terms and conditions of the Plan, the Board shall have full power
and authority to implement and carry out the Plan. More specifically, the
Board shall have the following powers and authority (which listing is
provided by way of example and is not intended to be comprehensive or
limiting to the extent of powers not included):
3.1.1 SELECTION OF PARTICIPANTS. To determine the persons
providing services to the Company to whom, and the time or times at which,
Options to purchase Common Stock of the Company shall be granted.
3.1.2 NUMBER OF OPTION SHARES. To determine the number of
shares of Common Stock to be subject to Options granted to each Participant,
provided that no person shall be eligible to receive Options to purchase more
than Two Million (2,000,000) shares of Common Stock pursuant to the Plan
during any fiscal year of the Company (the "Section 162(m) Grant Limit").
3.1.3 EXERCISE PRICE. To determine the price to be paid for
the shares of Common Stock upon the exercise of each Option.
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3.1.4 TERM, VESTING AND EXERCISE SCHEDULE. To determine the
term, vesting and exercise schedule of each Option, including the effect of a
Participant's termination of employment or service.
3.1.5 OTHER TERMS OF OPTIONS. To determine the terms and
conditions of each Option Agreement (which need not be identical) entered
into between the Company and any Participant.
3.1.6 INTERPRETATION OF PLAN. To construe and interpret the
Plan, any Option Agreement and any other agreement or document executed
pursuant to the Plan and to prescribe, amend and rescind rules and
regulations relating to the Plan.
3.1.7 WAIVERS; CORRECTION OF DEFECTS. To grant waivers of
Plan or Option Agreement conditions and to correct any defect, supply any
omission or reconcile any inconsistency in the Plan or any Option Agreement.
3.1.8 MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS. To
modify, extend, renew or grant a new Option in substitution for, any Option
granted under the Plan; provided, however, that no such modification or
cancellation and regrant of an Option shall, without the written consent of
the Participant, alter or impair any rights of the Participant under any
Option previously granted under the Plan.
3.1.9 DELEGATION. To delegate to one or more officers or
employees of the Company the authority to execute and deliver such
instruments and documents, to do all such acts and things, and to take all
such other steps deemed necessary, advisable or convenient for the effective
administration of the Plan in accordance with its terms and purpose;
provided, however, that the Committee shall exercise, and may not delegate
any discretionary authority with respect to, all substantive decisions and
functions regarding the Plan and Options granted under the Plan as those
relate to Insiders of the Company.
3.1.10 GENERAL AUTHORITY. To take such actions and make such
determinations as the Board deems necessary or advisable for the
administration of the Plan, subject to complying with the Plan and with
applicable legal requirements.
3.2 BOARD DISCRETION. The interpretation and construction by the
Board of any provision of this Plan, or any Option granted pursuant hereto
(including the applicable Option Agreement), shall be final, binding and
conclusive upon all parties in interest. In the event of any conflict between
any Option Agreement and the Plan, the terms of the Plan shall govern. No
member of the Board shall be liable to the Company, any Parent or Subsidiary
of the Company, or the holder of any Option granted under the Plan for any
action, inaction, determination or interpretation made in good faith with
respect to the Plan or any transaction under the Plan.
3.3 INTENT TO COMPLY WITH SEC RULE 16b-3. With respect to
Insiders, transactions under this Plan are intended to comply with all
applicable conditions of SEC Rule 16b-3 or its successors under the Exchange
Act. To the extent any provision of the Plan or any action by the Board fails
to so comply, it shall be deemed null and void, to the extent permitted
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by law and deemed advisable by the Board. Moreover, in the event the Plan
does not include a provision required by Rule 16b-3 to be stated therein,
such provision (other than one relating to eligibility requirements, or the
price and amounts of awards) shall be deemed automatically to be incorporated
by reference into the Plan insofar as Insider Participants are concerned.
4. ELIGIBILITY AND AWARD OF OPTIONS.
4.1 AUTHORITY TO GRANT AND ELIGIBILITY. The Board shall have full
and final authority, in its discretion and at any time and from time to time
during the term of this Plan, to grant or authorize the granting of Options
to such employees (including officers and directors), non-employee directors
and consultants of the Company or any Parent or Subsidiary of the Company as
it may select. For purposes of the foregoing sentence, "employees,"
"directors " and "consultants" shall include prospective employees,
prospective directors and prospective consultants to whom Options are granted
in connection with written offers of an employment or other service
relationships with the Company or any Parent or Subsidiary. Any individual
who is eligible to receive an Option under this Plan shall be eligible to
hold more than one Option at any given time, in the discretion of the Board.
The Board shall have full and final authority in its discretion to determine,
in the case of employee Participants (including employees who are officers or
directors), whether such Options shall be incentive stock options within the
meaning of Section 422 of the Code ("Incentive Stock Options") or options
that do not qualify as Incentive Stock Options ("Non-Qualified Stock
Options"); however, no Incentive Stock Option may be granted to any person
who is not a bona fide employee of the Company or any Parent or Subsidiary of
the Company. Persons selected by the Board who are prospective employees of,
non-employee directors of or consultants to be retained by, the Company or
any Parent or Subsidiary of the Company shall be eligible to receive
Non-Qualified Stock Options; provided, however, that in the case of such
prospective employment or other engagement, the exercisability of such
Options shall be subject in each case to such person in fact becoming an
employee, non-employee director or consultant, as applicable, of the Company
or any Parent or Subsidiary of the Company.
4.2 CERTAIN RESTRICTIONS APPLICABLE TO OPTIONS. No Incentive
Stock Option shall be granted to any Participant who, at the time such
Incentive Stock Option is granted, owns stock possessing more than ten
percent (10%) of the total combined voting power of all classes of
outstanding capital stock of the Company, or any Parent or Subsidiary of the
Company, unless the exercise price (as provided in Section 5.1 hereof) is not
less than one hundred ten percent (110%) of the Fair Market Value of the
Common Stock on the date the Incentive Stock Option is granted and the period
within which such Incentive Stock Option may be exercised (as provided in
Section 5.2 hereof) does not exceed five (5) years from the date the
Incentive Stock Option is granted. For purposes of this Section 4.2, in
determining stock ownership, a Participant shall be considered as owning the
voting capital stock owned, directly or indirectly, by or for his or her
brothers and sisters, spouse, ancestors and lineal descendants. Voting
capital stock owned, directly or indirectly, by or for a corporation,
partnership, estate or trust shall be considered as being owned
proportionately by or for its stockholders, partners or beneficiaries, as
applicable. Additionally, for purposes of this Section 4.2, outstanding
capital stock shall include all capital stock actually issued and outstanding
immediately after the grant of the Option to the Participant.
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Outstanding capital stock shall not include capital stock authorized for
issue under outstanding Options held by the Participant or by any other
person. Additionally, the aggregate Fair Market Value (determined as of the
date an Option is granted) of the Common Stock with respect to which
Incentive Stock Options granted are exercisable for the first time by an
employee Participant during any one calendar year (under this Plan and under
all other incentive stock option plans of the Company and of any Parent or
Subsidiary of the Company) shall not exceed One Hundred Thousand Dollars
($100,000). If the aggregate Fair Market Value (determined as of the date an
Option is granted) of the Common Stock with respect to which Incentive Stock
Options granted are exercisable for the first time by a Participant during
any calendar year exceeds One Hundred Thousand Dollars ($100,000), the
Options for the first One Hundred Thousand Dollars ($100,000) worth of shares
of Common Stock to become exercisable in such calendar year shall be
Incentive Stock Options and the Options for the amount in excess of One
Hundred Thousand Dollars ($100,000) that become exercisable in that calendar
year shall be Non-Qualified Stock Options. In the event that the Code or the
regulations promulgated thereunder are amended after the effective date of
the Plan to provide for a different limit on the Fair Market Value of shares
of Common Stock permitted to be subject to Incentive Stock Options, such
different limit shall be automatically incorporated herein and shall apply to
Options granted after the effective date of such amendment.
5. TERMS AND PROVISIONS OF OPTION AGREEMENTS. Each Option granted
under the Plan shall be evidenced by an Option Agreement between the
Participant and the Company. Each such Option Agreement shall set forth the
number of shares of Common Stock subject to the Option and shall be subject
to the following terms and conditions, and to such other terms and conditions
not inconsistent herewith as the Board may deem appropriate in each case:
5.1 EXERCISE PRICE. The price to be paid for each share of Common
Stock upon the exercise of an Option shall be determined by the Board at the
time the Option is granted; provided, however, that (1) no Non-Qualified
Stock Option shall have an exercise price less than eighty-five percent (85%)
of the Fair Market Value of the Common Stock on the date the Option is
granted; (2) no Incentive Stock Option shall have an exercise price less than
one hundred percent (100%) of the Fair Market Value of the Common Stock on
the date the Option is granted and (3) all Incentive Stock Options granted to
ten percent (10%) stockholders of the Company shall have an exercise price of
not less than one hundred ten percent (110%) of Fair Market Value at the date
of the grant, as provided in Section 4.2 hereof. Notwithstanding the
foregoing, an Option (whether an Incentive Stock Option or a Non-Qualified
Stock Option) may be granted with an exercise price lower than the minimum
exercise price set forth above if such Option is granted pursuant to an
assumption or substitution for another option in a manner complying with the
provisions of Section 424(a) of the Code.
5.2 TERM OF OPTIONS. The period or periods within which an Option
may be exercised shall be determined by the Board at the time the Option is
granted, but no exercise period shall exceed ten (10) years from the date the
Option is granted (or five (5) years in the case of any Incentive Stock
Option granted to a ten percent (10%) stockholder as described in Section 4.2
hereof).
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5.3 EXERCISABILITY. Options granted under this Plan shall be
exercisable at such future time or times (or may be fully exercisable upon
grant), whether or not in installments, as shall be determined by the Board
and provided in the form of Option Agreement. Notwithstanding any other
provisions of this Plan, no Option may be exercised after the expiration of
ten (10) years from the date of grant.
5.4 METHOD OF PAYMENT FOR COMMON STOCK UPON EXERCISE. Except as
otherwise provided in the applicable Option Agreement (subject to the
limitations of this Plan), the exercise price for each share of Common Stock
purchased under an Option shall be paid in full in cash at the time of
purchase (or by check acceptable to the Board). At the discretion of the
Board, the Option Agreement may provide for (or the Board may permit) the
exercise price to be paid by one or more of the following additional
alternative methods: (1) the surrender of shares of the Company's Common
Stock, in proper form for transfer, owned by the Participant exercising the
Option and having a Fair Market Value on the date of exercise equal to the
exercise price, provided that such shares (a) have been owned by the
Participant for more than six (6) months and have been paid for within the
meaning of Rule 144 under the Securities Act (and, if such shares were
purchased from the Company by use of a promissory note, such note has been
fully paid with respect to such shares) or (b) were obtained by the
Participant in the public market, (2) to the extent permitted under the
applicable provisions of the Delaware General Corporation Law, the delivery
by the Participant exercising the Option of a full recourse promissory note
in a form approved by the Company and executed by such Participant, bearing
interest at a per annum rate which is not less than the "test rate," as set
by the regulations promulgated under Sections 483 or 1274, as applicable, of
the Code and as in effect on the date of exercise, (3) consummation of an
immediate sale proceeds transaction ("Immediate Sale Proceeds"), which
transaction may be executed (a) through a "same day sale" commitment from the
Participant and a broker-dealer that is a member of the National Association
of Securities Dealers (a "NASD Dealer") whereby the Participant irrevocably
elects to exercise the Option and to sell a portion of the shares of Common
Stock so purchased under the Option to pay for the aggregate exercise price,
and whereby the NASD Dealer irrevocably commits upon receipt of such shares
to forward the aggregate exercise price directly to the Company or (b)
through a "margin" commitment from the Participant and a NASD Dealer whereby
the Participant irrevocably elects to exercise the Option and to pledge the
shares of Common Stock so purchased to the NASD Dealer in a margin account as
security for a loan from the NASD Dealer in the amount of the aggregate
exercise price, and whereby the NASD Dealer irrevocably commits upon receipt
of such shares to forward the aggregate exercise price directly to the
Company, or (4) any combination of the foregoing, so long as the sum of the
cash so paid, plus the Fair Market Value of the shares of Common Stock so
surrendered, the principal amounts of the promissory notes so delivered, and
the Immediate Sale Proceeds so executed, is equal to the aggregate exercise
price. No share of Common Stock shall be issued under any Option until full
payment therefor has been made in accordance with the terms of the Option
Agreement (and in compliance with the Plan). Any promissory note accepted
upon the exercise of an Option from a Participant who is a consultant
retained by the Company or any Parent or Subsidiary of the Company shall be
adequately secured by collateral other than the shares of Common Stock
acquired upon such exercise. Notwithstanding the foregoing, an Option may not
be exercised by surrender to the Company of shares of the Company's Common
Stock to the extent such
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surrender of stock would constitute a violation of the provisions of any law,
regulation and/or agreement restricting the redemption of the Company's
Common Stock. Unless otherwise provided by the Board, in the event the
Company at any time is subject to the regulations promulgated by the Board of
Governors of the Federal Reserve System or any other governmental entity
affecting the extension of credit in connection with the Company's
securities, any promissory note shall comply with such applicable
regulations, and the Optionee shall pay the unpaid principal and accrued
interest, if any, to the extent necessary to comply with such applicable
regulations. The Company reserves, at any and all times, the right, in the
Company's sole and absolute discretion, to establish, decline to approve
and/or terminate any program and/or procedure for the exercise of Options by
means of an execution of Immediate Sale Proceeds.
5.5 NON-ASSIGNABILITY. No Option granted under the Plan shall be
assignable or transferable by a Participant except by will or the laws of
descent and distribution and each Option granted under the Plan shall be
exercisable only by the Participant (or his or her guardian or legal
representative) during his or her lifetime.
5.6 ALL OPTIONS SUBJECT TO TERMS OF THIS PLAN. In addition to the
provisions contained in any Option Agreement granted under this Plan, each
Option Agreement shall provide that it is subject to the terms and conditions
of this Plan and each Participant shall be given a copy of this Plan.
Further, any terms or conditions contained in any Option Agreement which are
inconsistent in any respect with the provisions of this Plan shall be
disregarded and void, or shall be deemed amended to the extent necessary to
comply with the provisions of this Plan and the intent of the Board.
5.7 OTHER PROVISIONS. Option Agreements under the Plan shall
contain such other provisions, including, without limitation: (1)
restrictions and conditions upon the exercise of the Option, (2) lock-up
agreements (applicable in the event of the public offering of the Common
Stock of the Company) restricting a Participant from any sales or other
transfers of Common Stock received upon exercise of the Option for a
designated period of time following the effective date of a registration
statement under the Securities Act, (3) other restrictions on the
transferability or right to retain shares of the Common Stock received upon
the exercise of the Option, including repurchase rights at original cost
based on a vesting schedule, (4) commitments to pay cash bonuses, make loans
or transfer other property to a Participant upon exercise of any Option, and
(5) restrictions required by applicable federal, state and foreign securities
laws, as the Board shall deem necessary or advisable; provided that no such
additional provision shall be inconsistent with any other term or condition
of this Plan and no such additional provision shall cause any Incentive Stock
Option granted hereunder to fail to qualify as an incentive stock option
under Section 422 of the Code. Without limiting the generality of the
foregoing, the Board may provide in the form of Option Agreement that, in
lieu of an exercise schedule, the Option may immediately be exercisable in
full and provide a "vesting schedule" with respect to the Common Stock so
purchased, giving the Company (or its assignees) the right to repurchase the
shares of Common Stock at cost (or some other specified amount) to the extent
such shares have not become vested upon any termination of the Participant's
employment or other engagement with the Company, which vesting may depend
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upon or be related to the attainment of performance goals or other conditions
(such as the passage of stated time periods) pursuant to which the obligation
to resell such shares to the Company shall lapse.
6. SECURITIES LAW REQUIREMENTS. No shares of Common Stock shall be
issued upon the exercise of any Option unless and until: (1) the Company and
the Participant have satisfied all applicable requirements under the
Securities Act and the Exchange Act, (2) any applicable listing requirement
of any stock exchange on which the Company's Common Stock is listed has been
satisfied, and (3) all other applicable provisions of state, federal and
foreign law have been satisfied. The Board shall cause such legends to be
placed on certificates evidencing shares of Common Stock issued upon exercise
of an Option as, in the opinion of the Company's counsel, may be required by
applicable federal, state and foreign securities laws.
7. WITHHOLDING TAXES. The exercise of any Option granted under this
Plan shall be conditioned upon the Participant's payment to the Company of
all amounts (in addition to the exercise price) required to meet federal,
state, local or foreign taxes of any kind required by law to be withheld with
respect to shares of Common Stock to be issued upon the exercise of such
Option. The Company shall have the right (but not the obligation) to deduct
from payments of any kind otherwise due to a Participant (whether regular
salary, commissions, or otherwise) any federal, state, local or foreign taxes
of any kind required by law to be withheld with respect to any shares of
Common Stock issued upon exercise of Options granted under the Plan. The
Board, in its discretion, may permit or require satisfaction of any such
withholding obligations by withholding from the shares of Common Stock to be
issued on exercise of an Option that number of shares of Common Stock having
a Fair Market Value equal to the minimum amount required to be withheld,
determined on the date that the amount of tax to be withheld is to be
determined. In addition, the Board, in its discretion, may declare cash
bonuses to a Participant to satisfy any such withholding requirements or may
incorporate provisions in the applicable Option Agreement allowing (or after
grant of the Option may permit, in its discretion) a Participant to satisfy
any such withholding obligations, in whole or in part, by delivery of shares
of the Company's Common Stock already owned by such Participant and which are
not subject to repurchase, forfeiture, vesting or other similar requirements
or restrictions. The Fair Market Value of any such shares used to satisfy
such withholding obligations shall be determined as of the date the amount of
tax to be withheld is to be determined.
8. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR CHANGE OF CONTROL.
8.1 STOCK SPLITS AND SIMILAR EVENTS. Appropriate adjustments
shall be made in the number and class of shares of capital stock subject to
the Plan as described in Section 2 of the Section 162(m) Grant Limit
described in Section 3.1.2 and to any outstanding Options and in the exercise
price of any outstanding Options in the event of a stock dividend, stock
split, reverse stock split, recapitalization, combination, reclassification,
or like change in the capital structure of the Company. In the event a
majority of the shares which are of the same class as the shares that are
subject to outstanding Options are exchanged for, converted into, or
otherwise become shares of another corporation (the "New Shares"), the
Company may unilaterally amend such Options to provide that each Option is
exercisable for New Shares. In the event of any such
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amendment, the number of shares subject to and the exercise price of each
Option shall be adjusted in a fair and equitable manner.
8.2 CHANGE OF CONTROL. In the event of a Change of Control (as
defined below), the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as the case may be (the "Acquiring
Corporation"), shall either assume the Company's rights and obligations under
outstanding Options or substitute options for the Acquiring Corporation's
stock for such outstanding Options. Any Options which are neither assumed or
substituted for by the Acquiring Corporation in connection with the Change of
Control nor exercised as of the date of the Change of Control shall terminate
and cease to be outstanding effective as of the date of the Change of
Control. A "Change of Control" shall be deemed to have occurred in the event
any of the following occurs with respect to the Company:
8.2.1 the direct or indirect sale or exchange by the
stockholders of the Company of all or substantially all of the stock of the
Company where the stockholders of the Company before such sale or exchange do
not retain, directly or indirectly, at least a majority of the beneficial
interest in the voting stock of the Company after such sale or exchange.
8.2.2 a merger or consolidation in which the Company is a
party where the stockholders of the Company before such merger or
consolidation do not retain, directly or indirectly, at least a majority of
the beneficial interest in the voting stock of the Company after such merger
or consolidation.
8.2.3 the sale, exchange, or transfer of all or
substantially all of the assets of the Company other than a sale, exchange,
or transfer to one (1) or more subsidiaries of the Company.
8.2.4 a liquidation or dissolution of the Company.
8.3 BOARD'S DETERMINATION FINAL AND BINDING UPON PARTICIPANTS.
The foregoing determinations and adjustments in this Section 8 relating to
stock or securities of the Company shall be made by the Board, whose
determination in that respect shall be final, binding and conclusive. The
Company shall give notice of any such adjustment or action to each Optionee;
provided, however, that any such adjustment or action shall be effective and
binding for all purposes, whether or not such notice is given or received.
8.4 NO FRACTIONS OF SHARES. Fractions of shares shall not be
issued by the Company. Instead, such fractions of shares shall be rounded up
or down to the nearest share, as determined by the Board.
8.5 NO RIGHTS EXCEPT AS EXPRESSLY STATED. Except as expressly
provided in this Section 8, no additional rights shall accrue to any
Participant by reason of any subdivision or combination of shares of the
capital stock of any class or the payment of any stock dividend or any other
increase or decrease in the number of shares of any class or by reason of any
dissolution, liquidation, merger, consolidation or spin-off of assets or
stock of another corporation, and any issuance by the Company of shares of
stock of any class or of securities
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convertible into shares of stock of any class shall not affect, and no
adjustment by reason thereof shall be made with respect to, the number or
exercise price of shares of Common Stock subject to Options granted hereunder.
8.6 NO LIMITATIONS ON COMPANY'S DISCRETION. The grant of Options
under this Plan shall not affect in any way the right or power of the Company
to make adjustments, reclassifications, reorganizations or changes of its
capital or business structure or to merge or consolidate or to dissolve,
liquidate, sell or transfer all or any part of its business or assets.
9. NO ADDITIONAL EMPLOYMENT RELATED RIGHTS OR BENEFITS.
9.1 NO SPECIAL EMPLOYMENT RIGHTS. Nothing contained in this Plan
or in any Option Agreement shall confer upon any Participant any right with
respect to the continuation of his or her employment or other engagement by
the Company or any Parent or Subsidiary of the Company or interfere in any
way with the right of the Company, subject to the terms of any separate
employment or consulting agreement to the contrary, at any time to terminate
such employment or consulting or other relationship or to increase or
decrease the compensation of any Participant. Whether an authorized leave of
absence, or absence in military or government service, shall constitute
termination of a Participant's employment or other engagement shall be
determined by the Board.
9.2 OTHER EMPLOYEE BENEFITS. The amount of any compensation
deemed to be received by any Participant as a result of the exercise of an
Option or the sale of shares received upon such exercise will not constitute
compensation with respect to which any other employment (or other engagement)
related benefits of such Participant are determined, including, without
limitation, benefits under any bonus, pension, profit-sharing, life insurance
or salary continuation plan, except as otherwise specifically determined by
the Board or as expressly provided for in the Option Agreement. The granting
of an Option shall impose no obligation upon the Participant to exercise such
Option.
10. RIGHTS AS A STOCKHOLDER AND ACCESS TO INFORMATION. No Participant
and no person claiming under or through any such Participant shall be, or
have any of the rights or privileges of, a stockholder of the Company in
respect of any of the shares of capital stock issuable upon the exercise of
any Option granted under this Plan, unless and until the Option is properly
and lawfully exercised and a certificate representing the shares so purchased
is duly issued to the Participant or to his or her estate. No adjustment
shall be made for dividends or any other rights if the record date relating
to such dividend or other right predates the date the Participant became a
stockholder. Participants shall be provided annual financial statements of
the Company. and such other information generally made available to the
Company's stockholders.
11. USE OF PROCEEDS. The proceeds received from the sale of shares of
the Common Stock upon exercise of Options granted under the Plan shall be
used for general corporate purposes.
9
<PAGE>
12. RESERVATION OF SHARES. The Company, during the term of this Plan,
shall at all times reserve and keep available such number of shares of its
Common Stock as shall be sufficient to satisfy the requirements of the Plan
and all Options issued hereunder.
13. TERM OF PLAN.
13.1 EFFECTIVE DATE AND STOCKHOLDER APPROVAL. The Plan became
effective when adopted by the Board on February 22, 1999, but to the extent
required under any applicable law, rule or regulation, no Option granted
under the Plan shall become exercisable unless and until the Plan shall have
been approved by the Company's stockholders. If such stockholder approval is
not obtained within twelve (12) months after the date of the Board's adoption
of the Plan, no Incentive Stock Options may be granted hereunder. Subject to
the foregoing limitation, Incentive Stock Options may be granted under the
Plan at any time after the effective date and before the date fixed for
termination of the Plan.
13.2 TERMINATION. Unless sooner terminated in accordance with
Section 14, the Plan shall terminate upon the earlier of: (1) the close of
business on the last business day preceding the tenth (10th) anniversary of
the date the Plan is adopted by the Board, or (2) the date on which all
shares available for issuance under the Plan shall have been issued pursuant
to Options granted under the Plan and none of such shares shall remain
subject to contractual repurchase rights of the Company pursuant to "vesting"
or other similar provisions. If the date of termination is determined under
clause (1) above, then any Options outstanding on such date shall continue to
have force and effect in accordance with the provisions of the Option
Agreements evidencing such Options.
14. EARLY TERMINATION AND AMENDMENT OF THE PLAN. The Board may from
time to time suspend or terminate the Plan or revise or amend it; provided,
however, that, no amendment shall be effective without the approval of the
Company's stockholders at a duly held meeting by the vote of a majority of
the shares present and entitled to vote (or by written consent of the holders
entitled to vote) in compliance with the requirements of the Company's Bylaws
and the Delaware General Corporation Law, if (1) such amendment increases the
aggregate number of shares of Common Stock that may be issued upon exercise
of Options granted under the Plan (except for adjustments made pursuant to
Section 8 hereof), (2) modifies the requirements as to eligibility to receive
Incentive Stock Options under the Plan or (3) stockholder approval is
required under an applicable law, regulation or rule.
15. DEFINITIONS. As used in the Plan, the following terms shall have
the following meanings:
15.1 "Board" means the Board of Directors of the Company as it may
be comprised from time to time.
15.2 "Code" means the Internal Revenue Code of 1986, as amended,
and applicable regulations.
10
<PAGE>
15.3 "Committee" means the Compensation Committee of the Board
comprised of at least two (2) directors.
15.4 "Company" means Oak Technology, Inc., a corporation organized
under the laws of the State of Delaware, or any successor corporation.
15.5 "Disability" means a disability, whether temporary or
permanent, partial or total, as determined by the Board.
15.6 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
15.7 "Fair Market Value" means, as of any date, the value of a
share of the Company's Common Stock determined as follows:
15.7.1 if such Common Stock is then quoted on the Nasdaq
National Market System, its last reported sale price on the Nasdaq National
Market System on that date or, if no such reported sale takes place on such
date, the average of its closing bid and asked prices on the Nasdaq National
Market System on the trading day next preceding such date;
15.7.2 if such Common Stock is publicly traded and is then
listed on a national securities exchange, its last reported sale price on the
national securities exchange on which the Common Stock is then listed on that
date or, if no such reported sale takes place on the such date, the average
of its closing bid and asked prices on the national securities exchange on
which the Common Stock is then listed on the trading day next preceding such
date;
15.7.3 if such Common Stock is publicly traded but is not
quoted on the Nasdaq National Market System nor listed or admitted to trading
on a national securities exchange, the average of its closing bid and asked
prices on such date, as reported by The Wall Street Journal, for the
over-the-counter market; or
15.7.4 if none of the foregoing is applicable, by the Board
in good faith, with such determination being based upon past arms'-length
sales by the Company of its equity securities and other factors considered
relevant in determining the Company's fair value.
Notwithstanding anything to the contrary in this Section 15.7, any
Option Agreement may provide for alternative means of valuation for the
purpose of repurchase at fair market value of shares acquired.
15.8 "Insider" means an officer or director of the Company or any
other person whose transactions in the Company's Common Stock are subject to
Section 16 of the Exchange Act.
15.9 "Option" means an option to purchase shares of Common Stock
pursuant to the Plan.
11
<PAGE>
15.10 "Option Agreement" means an agreement described in Section 5
entered into by the Company and a Participant, setting forth the terms,
conditions and limitations applicable to the Option granted to the
Participant.
15.11 "Parent" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company if, at the time of
granting of an Option, each of such corporations other than the Company owns
stock possessing fifty percent (50%) or more of the total combined voting
power of all classes of stock in one of the other corporations in such chain.
15.12 "Participant" means a person who is granted one or more
Options under the Plan.
15.13 "Plan" means this Oak Technology, Inc. Executive Stock Option
Plan, as amended from time to time.
15.14 "SEC" means the Securities and Exchange Commission.
15.15 "Securities Act" means the Securities Act of 1933, as amended.
15.16 "Subsidiary" means any corporation (other than the Company)
in an unbroken chain of corporations beginning with the Company if, at the
time of granting of an Option, each of the corporations other than the last
corporation in the unbroken chain owns stock possessing fifty percent (50%)
or more of the total combined voting power of all classes of stock in one of
the other corporations in such chain.
12
<PAGE>
Exhibit 10.32
SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS
OF OAK TECHNOLOGY, INC.
January __, 1999
Mr. David Tsang
Mr. Ta-lin Hsu
c/o Steve Tonsfeldt, Esq.
Venture Law Group
2800 Sand Hill Road
Menlo Park, CA 94025
Dear Sirs:
As you know, your recent offer to acquire Oak Technology, Inc. (the
"Company") has made it difficult for you to participate fully in the
management of the Company as directors (and, in David's case, as an officer
of the Company). In addition, the Special Committee has determined that it
would be inappropriate to provide you with copies of certain information and
reports prepared by Boston Consulting Group in connection with the Special
Committee's evaluation of your offer, as long as there continues to exist a
substantial possibility that you would pursue an acquisition of the Company.
This Letter Agreement is being made to clarify your intentions with respect
to the Company and to facilitate your return to full participation in the
management of the affairs of the Company.
For a period one year from the date of this Letter Agreement, you shall
not, without the prior written consent of a majority of Board of Directors of
the Company, either directly or indirectly as part of any group or through
any affiliate or any employees, agents or advisors (including, without
limitation, attorneys, accountants, investment bankers, and other consultants
and advisors) (collectively, "Representatives") or otherwise: (i) acquire,
offer to acquire, or agree to acquire, by purchase, tender offer, merger,
consolidation, share exchange or otherwise, ownership or control of any
voting securities, or any direct or indirect right to acquire any voting
securities, of the Company, any subsidiary thereof, or any successor
corporation thereto; (ii) make, or in any way participate in any
"solicitation" of "proxies" (as such terms are used in the rules and
regulations of the Securities and Exchange Commission) to vote, or seek to
advise or influence any person or entity with respect to the voting of, any
voting securities of the Company (other than as a member of the Board of
Directors of the Company); (iii) make any public announcement with respect
to, or submit a proposal for, or offer of any merger, acquisition or other
business combination or extraordinary transaction involving the Company or
any of its subsidiaries or any securities or assets of the Company or any of
its subsidiaries; (iv) form, join or in any way participate in a "group" (as
defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended) in connection with any of the foregoing; or (v) request the Company
or any of the Company's Representatives to amend or waive any provision of
this paragraph 4(b) in any manner which may reasonably be expected to compel
public disclosure.
<PAGE>
Each party agrees that money damages would not be a sufficient remedy
for any breach of any provision of this Letter Agreement by you or any of
your Representatives, and that in addition to all other remedies which the
Company hereto may have, the Company shall be entitled to specific
performance and injunctive or other equitable relief as a remedy for any such
breach. Such remedies shall not be deemed to be the exclusive remedies for a
breach of this Letter Agreement but shall be in addition to all other
remedies available at law or in equity. No failure or delay by any party
hereto in exercising any right, power or privilege hereunder shall operate as
a waiver thereof, nor shall any single or partial exercise thereof preclude
any other or further exercise thereof or the exercise of any right, power or
privilege hereunder.
This Letter Agreement contains the sole and entire agreement between the
parties with respect to the subject matter hereof. This Letter Agreement may
be amended, modified or waived only by a separate written instrument duly
signed and delivered by or on behalf of both parties. The invalidity or
unenforceability of any provision of this Letter Agreement shall not impair
or affect the validity or enforceability of any other provision of this
Letter Agreement unless the enforcement of such provision in such
circumstances would be inequitable.
This Letter Agreement shall be governed by and construed in accordance
with the internal laws of the State of California without giving effect to
the conflicts of laws principles thereof. Each party hereto consents and
submits to the exclusive jurisdiction of the courts of the State of
California in and for the County of Santa Clara and the courts of the United
States located in the Northern District of California for the adjudication of
any action, suit, or proceeding arising out of or otherwise relating to this
Letter Agreement.
If the foregoing correctly sets forth our agreement with respect to the
matters set forth herein, please so indicate by signing two copies of this
Letter Agreement and returning one signed copy to me, whereupon this Letter
Agreement shall constitute our binding agreement with respect to the matters
set forth herein. This Letter Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of
which shall be one and the same document.
Very truly yours,
OAK TECHNOLOGY, INC.
By:
------------------------------------
Name: Timothy Tomlinson
Title: Chairman, Special Committee
2
<PAGE>
Accepted and agreed to as of
the day of January , 1999
---- --
MR. DAVID TSANG
- --------------------------------
MR. TA-LIN HSU
- --------------------------------
3
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<PAGE>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS AS FOUND
ON PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE YEAR TO DATE AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<NAME> OAK TECHNOLOGY, INC.
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<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 25,577
<SECURITIES> 61,858
<RECEIVABLES> 14,429
<ALLOWANCES> 824
<INVENTORY> 1,700
<CURRENT-ASSETS> 177,567
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<COMMON> 41
<OTHER-SE> 204,667
<TOTAL-LIABILITY-AND-EQUITY> 226,254
<SALES> 57,793
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<CGS> 30,615
<TOTAL-COSTS> 30,615
<OTHER-EXPENSES> 71,825
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 48
<INCOME-PRETAX> (40,321)
<INCOME-TAX> (5,404)
<INCOME-CONTINUING> (34,917)
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<NET-INCOME> (34,917)
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