<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 SEPTEMBER 30, 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 October 29, 1999, there were outstanding 40,859,908 shares of the
Registrant's Common Stock, par value $0.001 per share.
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
- ------------------------------- ----
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1999 and June 30,1999................ 3
Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 1999
and 1998 ................................................................................. 4
Condensed Consolidated Statements of Cash Flows for the Three Months Ended
September 30, 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.......................................................................... 33
Item 4. Submission of Matters to a Vote of Security Holders............................................ 33
Item 6. Exhibits and Reports on Form 8-K............................................................... 33
SIGNATURES ........................................................................................ 34
Exhibit Index ........................................................................................ 35
</TABLE>
<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)
ASSETS
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
------------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 13,563 $ 19,500
Short-term investments 113,320 113,703
Accounts receivable, net of allowance for doubtful accounts of
$570 and $555, respectively 5,421 8,251
Inventories 1,558 1,819
Current portion of foundry deposits 5,192 9,061
Prepaid expenses and other current assets 12,463 11,121
--------- ---------
Total current assets 151,517 163,455
Property and equipment, net 21,718 22,039
Foundry deposits 7,760 7,760
Other assets 9,074 10,587
--------- ---------
Total assets $ 190,069 $ 203,841
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 26 $ 25
Accounts payable 4,248 3,648
Accrued expenses 7,092 8,467
Deferred revenue 234 379
--------- ---------
Total current liabilities 11,600 12,519
Long-term debt -- 5
Deferred income taxes 1,438 1,438
Other long-term liabilities 342 457
--------- ---------
Total liabilities 13,380 14,419
--------- ---------
Stockholders' equity:
Preferred stock, $0.001 par value; 2,000,000 shares authorized;
None issued and outstanding as of September 30, 1999 and
June 30, 1999 -- --
Common stock, $0.001 par value; 60,000,000 shares authorized;
43,195,557 shares issued and 40,979,577 shares outstanding as
of September 30, 1999 and 42,916,721 shares issued and
40,915,241 outstanding as of June 30, 1999 43 42
Additional paid-in capital 165,660 164,784
Treasury stock (10,471) (9,437)
Retained earnings 21,847 34,033
Accumulated other comprehensive income (loss) (390) --
--------- ---------
Total stockholders' equity 176,689 189,422
--------- ---------
Total liabilities and stockholders' equity $ 190,069 $ 203,841
========= =========
</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
September 30,
-------------------------
1999 1998
-------- --------
<S> <C> <C>
Net revenues $ 10,142 $ 19,967
Cost of revenues 5,071 10,466
-------- --------
Gross profit 5,071 9,501
Research and development expenses 12,139 13,134
Selling, general and administrative expenses 7,463 8,394
Acquired in-process technology -- 7,161
-------- --------
Operating loss (14,531) (19,188)
Nonoperating income, net 2,345 1,952
-------- --------
Loss before income taxes (12,186) (17,236)
Income taxes (benefit) -- (3,057)
-------- --------
Net loss $(12,186) $(14,179)
Other comprehensive loss:
Unrealized net loss on short-term investments (390) --
Comprehensive net loss $(12,576) $(14,179)
======== ========
Net loss per basic and diluted share: $ (0.30) $ (0.35)
======== ========
Shares used in computing basic and diluted net loss
per share: 41,086 40,928
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(12,186) $(14,179)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 2,942 2,827
Acquired in-process technology -- 7,161
Loss on disposal of property and equipment 378 --
Deferred income taxes -- (114)
Changes in operating assets and liabilities:
Accounts receivable 2,830 3,989
Inventories 261 3,844
Foundry deposits 4,480 533
Prepaid expenses and other current assets (1,343) 5,374
Accounts payable, accrued expenses and deferred revenue (1,645) (1,892)
Other assets 552 (90)
-------- --------
Net cash provided by (used in) operating activities (3,731) 7,453
-------- --------
Cash flows from investing activities:
Purchases of short-term investments (17,629) (11,102)
Proceeds from matured short-term investments 17,622 14,181
Additions to property and equipment, net (2,038) (3,056)
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)
-------- --------
Net cash used in investing activities (2,045) (15,213)
-------- --------
Cash flows from financing activities:
Issuance of debt -- 735
Repayment of debt (4) (70)
Issuance of common stock, net 877 388
Treasury stock acquisitions (1,034) (2,098)
-------- --------
Net cash provided by (used in) financing activities (161) (1,045)
-------- --------
Net decrease in cash and cash equivalents (5,937) (8,805)
Cash and cash equivalents, beginning of period 19,500 59,803
-------- --------
Cash and cash equivalents, end of period $ 13,563 $ 50,998
======== ========
Supplemental information:
Cash paid (refunded) during the period:
Interest $ 1 $ 14
======== ========
Income taxes $ (213) $ (8,033)
======== ========
</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 of Oak
Technology, Inc. and Subsidiaries ("Oak" or "The Company") have been prepared
in conformity with generally accepted accounting principles. However, certain
information or footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have
been condensed or omitted 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, 1999, included in the Oak Technology,
Inc. (the "Company") 1999 Annual Report on Form 10-K filed with the
Commission.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133 "Accounting for Derivative Instruments and Hedging Activities", which
will be effective for the Company's fiscal year 2001. SFAS No. 133
establishes accounting and reporting standards requiring that every
derivative instrument, including certain derivative instruments imbedded in
other contracts, be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement also requires that
changes in the derivative's fair value be recognized in earnings unless
specific hedge accounting criteria are met. The Company is currently
assessing the impact of this new statement on its consolidated financial
position, liquidity, and results of operations.
2. INVENTORIES
Inventories are stated at the lower of cost (first in, first out) or
market and consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, June 30,
-------------------------------------
1999 1999
----------------- ------------------
<S> <C> <C>
Purchased parts and work in process............ $ 1,252 $ 1,269
Finished goods................................. 3,558 4,385
Reserve for obsolescence....................... (3,252) (3,835)
----------------- ------------------
$ 1,558 $ 1,819
----------------- ------------------
----------------- ------------------
</TABLE>
3. FOUNDRY DEPOSITS
In June and November 1995, the Company entered into
agreements with Taiwan Semiconductor Manufacturing Company, Ltd. (TSMC) and
Chartered Semiconductor Manufacturing Ltd. (Chartered) to obtain certain
additional wafer capacity through the year 2001. The original agreements
called for the Company to commit to certain future wafer purchases and to
deposit funds with the suppliers as either a portion of the price of the
additional wafers in advance of their delivery or as a non-interest bearing
deposit to secure the availability of additional wafers. The price of such
wafers 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.
The Company has subsequently twice amended its previous agreement
with TSMC. The most recent amendment, dated June 1999, covered the remaining
$16.1 million of wafer deposits held be TSMC as of that date.
6
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Prior to this latest amendment to the agreement, the Company was to have
utilized the entire remaining amount of the prepayment by December 31, 1999.
Under the new amendment, the period of time over which the Company can
utilize the deposit was extended to December 31, 2000. A maximum of $9.1
million can be utilized in calendar 1999, and the remaining $7.0 million can
be utilized in calendar 2000. Including excess wafer purchases applied from
calendar 1998, the Company has already made the maximum amount of wafer
purchases required for calendar 1999 and has earned the maximum credit of
$9.0 million. As of September 30, 1999 the Company had received $4.5 million
of this credit. The remainder of the credit will be used to offset future
payments to TSMC. The Company currently believes the terms and conditions of
the agreement, as amended, will be met although no assurance can be given in
this regard.
As of June 30, 1999, the Company had $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 with Chartered, should the Company
fail to utilize the maximum amount of the deposit for a given calendar year,
the remainder of the deposit available to be utilized for that calendar year
may be forfeited to Chartered. Additionally, should the Company fail to make
certain minimum amounts of wafer purchases in any given calendar year,
pursuant to the terms of the agreement, as amended, Chartered may elect to
terminate the agreement and retain any unused portion of the total deposit.
During the fourth quarter of fiscal 1999, the Company completed its
reassessment of wafer purchasing forecasts. The Company determined that its
wafer purchases for calendar 1999 and beyond would be significantly below the
minimum amounts required, and that Chartered will have the right to terminate
the agreement and retain the unused deposit. As a result, the Company
recorded a $2.8 million reserve in the fourth fiscal quarter of 1999 to
reduce the deposit asset to its estimated realizable value of approximately
$0.7 million.
4. NET INCOME (LOSS) PER SHARE
Basic and diluted net 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 loss per share computations:
<TABLE>
<CAPTION>
Three Months Ended
September 30
----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Net loss .................................................... $(12,186) $(14,179)
============= =============
Weighted average number of common
shares outstanding ....................................... 41,086 40,928
------------- -------------
Shares used in computing basic and diluted net loss per share 41,086 40,928
------------- -------------
Net loss per basic and diluted share: ....................... $ (0.30) $ (0.35)
</TABLE>
For the three month periods ended September 30, 1999 and 1998, respectively,
approximately 775,000 and 119,000 of potentially dilutive common shares were
not included in the calculation of diluted net loss per share as they are
antidilutive.
7
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. STOCKHOLDERS' EQUITY
On July 28, 1999, the Company announced that its Board of Directors approved
a stock repurchase plan authorizing the purchase of up to four million shares
of the Company's common stock. Repurchases will be made from time to time in
open market or privately negotiated transactions over a one year period,
unless further extended by the Board. From July 28, 1999 to September 30,
1999, the Company repurchased 214,500 shares of the 4 million shares
authorized at a cost of approximately $1.0 million.
6. ACQUISITIONS
On July 29, 1999, the Company announced it had entered into a definitive
agreement to acquire Xionics Document Technologies, Inc. Under the terms of
the agreement, which is subject to approval by the shareholders of both
companies, Oak would issue approximately 11.7 million shares of its common
stock and approximately $34.4 million in cash to acquire all of the common
stock of Xionics. The transaction will be accounted for under the purchase
method of accounting, and is expected to be completed in the second quarter
of fiscal 2000.
7. CONTINGENCIES
The Company and various of its current and former officers and
Directors are parties to several class action lawsuits filed on behalf of all
persons who purchased or acquired the Company's common stock (excluding the
defendants and parties related to them) for the period July 27, 1995 through
May 22, 1996. The first, a state court proceeding designated IN RE OAK
TECHNOLOGY SECURITIES LITIGATION, Master File No. CV758510 pending in Santa
Clara County Superior Court in Santa Clara, California, consolidates five
class actions. This lawsuit also names as defendants several of the Company's
venture capital fund investors, two of its investment bankers and two
securities analysts. The plaintiffs alleged violations of California
securities laws and statutory deceit provisions as well as breaches of
fiduciary duty and abuse of control. On December 6, 1996, the state court
judge sustained the Oak defendants' demurrer to all causes of action alleged
in the plaintiffs' First Amended Consolidated Complaint, but allowed the
plaintiffs the opportunity to amend. The plaintiffs' Second Amended
Consolidated Complaint was filed on August 1, 1997. On December 3, 1997, the
state court judge sustained the Oak defendants' demurrer to the plaintiffs'
Second Amended Consolidated Complaint without leave to amend to the causes of
action for breach of fiduciary duty and abuse of control, and to the
California Corporations Code Sections 25400/25500 claims with respect to the
Company, a number of the individual officers and directors, and the venture
capital investors. The judge also sustained the demurrer with leave to amend
to the California Civil code Sections 1709/1710 claims; however, the
plaintiffs elected not to amend this claim. Accordingly, the only remaining
claim in state court action, IN RE OAK TECHNOLOGY SECURITIES LITIGATION, is
the California Corporations Code Sections 25400/25500 cause of action against
four officers of the Company and the Company's investment bankers and
securities analysts. Plaintiffs recently filed a motion to reinstate the
California Corporation Code Sections 25400/25500 claims against the Company
and the remaining Oak defendants filed a cross-motion to dismiss this
remaining claim against them. These motions were heard on October 1, 1999,
and the state court judge ruled that pursuant to the California Supreme
Court's recent decision in STOR MEDIA, INC. V. SUPERIOR COURT, the Company
was a seller who could be held liable under the state securities laws because
the Company had an employee stock purchase plan. Therefore, the judge ruled
that the Company should be reinstated as a defendant in the lawsuit. The
state court judge denied the defendants cross-motion for reconsideration on
the remaining California Corporations Code Section 25400/25500 claim. 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 number of depositions are currently
being taken, including the depositions of those officers of the Company who
were officers during the class period.
The Company and several of its current and former officers and
Directors are also parties to four putative class action lawsuits pending in
the U.S. District Court for the Northern District of California. These
actions have
8
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
been consolidated as IN RE OAK TECHNOLOGY, INC. SECURITIES LITIGATION, Case
No. C-96-20552-SW(PVT). This action alleges certain violations of federal
securities laws and is brought on behalf of purchasers of the Company's
common stock for the period July 27, 1995 through May 22, 1996. This action
also names as a defendant one of the Company's investment bankers. On July
29, 1997, the federal court judge granted the Oak defendants Motion to
Dismiss the plaintiffs' First Amended Consolidated Complaint, but granted the
plaintiffs leave to amend most claims. The plaintiffs' Second Amended
Consolidated Complaint was filed on September 4, 1997. The defendants' Motion
to Dismiss was heard on December 17, 1997. The federal court Judge took the
matter under submission and has not yet issued a ruling. Plaintiffs have
recently filed a motion seeking the Court's permission to voluntarily dismiss
this action without prejudice. Defendants have requested that the dismissal
be with prejudice. This motion was heard on September 29, 1999 and the
parties are waiting for the federal court judge's ruling on the matter.
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 above
described 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.
9
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company is party to various other legal proceedings, including a
number of patent-related matters. In the opinion of management 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, legal and other expenses.
If any of the above pending actions are decided adversely to the
Company, it would likely have a material adverse affect on the Company's
financial condition and results of operations.
8. SEGMENT INFORMATION
SFAS No. 131 establishes standards for the reporting by public
business enterprises of information about operating segments, products and
services, geographic areas, and major customers. The method for determining
what information to report is based on the way that management organizes the
operating segments within the Company for making operational decisions and
assessments of financial performance. The Company's chief operating
decision-maker is considered to be the chief executive officer (CEO).
For fiscal year 2000, Oak Technology has three reportable segments
which offer different product lines to each of its target markets: Optical
Storage Group, Consumer Group and Digital imaging Equipment Group. The
Company evaluates operating segment performance based on net revenues and
direct operating expenses of the segment. The accounting policies of the
operating segments are the same as those described in the summary of
accounting policies. No segments have been aggregated. The Company does not
allocate assets to its individual operating segments.
10
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Information about reported segment income or loss is as follows for
the three months ended September 30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
----------------- ------------------
<S> <C> <C>
Net Revenues
Optical Storage ........................ $ 1,624 $ 14,056
Digital imaging Equipment .............. 6,855 4,714
Consumer ............................... 1,664 1,196
----------------- ------------------
$ 10,144 $ 19,966
================= ==================
Cost of Goods Sold and Direct Operating Expenses:
Optical Storage ........................ $ 5,831 $ 12,165
Digital imaging Equipment .............. 5,155 4,536
Consumer ............................... 4,722 5,477
----------------- ------------------
$ 15,708 $ 22,178
================= ==================
Contribution Margin:
Optical Storage ........................ $ (4,207) $ 1,891
Digital imaging Equipment .............. 1,699 178
Consumer ............................... (3,058) (4,280)
----------------- ------------------
$ (5,566) $ (2,211)
================= ==================
</TABLE>
A reconciliation of the totals reported for the operating segments
to the applicable line items in the consolidated condensed financial
statements for the three months ended September 30, 1999, 1998 is as follows
(in thousands):
<TABLE>
<CAPTION>
1999 1998
-------------------------------------
<S> <C> <C>
Contribution margin from operating segments $ (5,566) $ (2,211)
Indirect costs of goods sold and operating expenses 8,965 16,977
---------------------------------
Total operating loss (14,531) (19,188)
Other income 2,345 1,952
---------------------------------
Loss before taxes $ (12,186) $ (17,236)
=================================
</TABLE>
Indirect costs of goods sold and operating expenses includes all
costs and expenses not specifically charged to the operating segments in the
financial information reviewed by the Company's chief decision making
officer. These include inventory reserve provisions and adjustments;
operating overhead included in consolidated cost of goods sold; corporate
research and development expenses; and most of the Company's selling, general
and administrative expenses.
The Company maintains significant operations in the United States, United
Kingdom, Taiwan and Japan. Activities in the United States consist of
corporate administration, product development, logistics and worldwide sales
management. Foreign operations consist of regional sales and limited
board-level manufacturing.
11
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The distribution of net revenues for the three months ended
September 30, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
----------------- ------------------
<S> <C> <C>
Revenue from unaffiliated customers Originating from:
United States $ 2,875 $ 2,638
Japan 4,284 10,082
Korea 1,357 1,871
Taiwan 318 966
Other Asia 774 1,560
Europe 534 2,850
----------------- ------------------
$ 10,142 $ 19,967
================= ==================
</TABLE>
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
EXCEPT FOR THE HISTORICAL FINANCIAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS QUARTERLY REPORT ON FORM 10-Q MAY BE CONSIDERED
"FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
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, 1999, 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 imaging markets. The Company's products consist primarily of
integrated circuits and supporting software and firmware to provide a
complete solution for customers, thereby enabling them to deliver cost
effective, powerful systems to end users for home and business use. The
Company's mission is to be a leading solutions provider for the storage and
distribution of digital content.
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 Imaging 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), announced a fourth (Xionics Document Technologies,
Inc.), and made a joint venture investment (Omni Peripherals Pte, Ltd.), all
aimed at expanding the potential product offerings for these three target
markets. The ViewPoint and XLI acquisitions were completed during the first
quarter of fiscal year 1999 ended September 30, 1998. The Xionics acquisition
was announced in July 1999, and is expected to be complete in December 1999.
On February 2, 1999, the Company announced the appointment of Young
K. Sohn to the office of President and Chief Executive Officer. Mr. Sohn has
initiated a comprehensive review of all aspects of the Company and has put in
place a new management team whose charter is to architect and execute a
turnaround plan for the Company. Although the Company is expected to formally
announce its turnaround plan in the second half of fiscal year 2000, portions
of the plan have been announced to date. First, in July 1999, the Company
announced that it intends to focus on the digital imaging and optical storage
markets, as these are both markets in which the Company has successful legacy
and unique core competencies. Furthermore, with the emergence of the
Internet, both markets are experiencing fundamental change and new growth
which the Company believes it is uniquely positioned to capture. On October
20, 1999, the Company announced that it was in discussions with larger
semiconductor companies regarding a sale of its digital broadcast business. A
sale of this business will allow the Company to focus on its optical storage
and imaging businesses. Second, in July 1999, the Company also announced that
it intends to be a solutions provider rather than only a semiconductor
provider. As a consequence, the Company announced that it was redefining its
product roadmaps so that it would be able to provide completely integrated
hardware and software solutions to its customers in the digital imaging and
optical storage markets. The announcement of the merger with Xionics, a
software company in the imaging market, on July 29,1999, represented a
quantifiable step towards the Company providing its customers in the imaging
market with a compete solution. To date, the Company has stated that part of
its turnaround strategy is to become the leading supplier of embedded
solutions for the digital imaging market
13
<PAGE>
and the leading supplier of CD-RW solutions to personal computer and consumer
applications. It is anticipated that additional parts of Oak's turnaround
strategy will continue to be announced periodically until the final, formal
announcement in the second half of fiscal year 2000.
The Company reported a net loss of $12.2 million for the first
quarter of fiscal year 2000, its seventh consecutive quarterly loss. The
decrease in first quarter revenue and continued loss is primarily due to a
product transition in the Company's optical storage business, which
historically has accounted for approximately 80% of its business, as the
Company moves to its next generation CD-RW controller. Unit shipments of its
next generation CD-RW controller is not expected to reach volume production
until the third quarter of fiscal 2000. Although the Company is continuing to
ship its single function CD-ROM controllers and integrated CD-ROM
controllers, unit volumes and ASPs of these products have declined
significantly and will continue to decline as these products mature. Oak is
currently sampling its next generation CD-RW product with five of the top ten
CD-RW manufacturers. However, the Company cannot predict the level of
customer acceptance of the product and the product's impact on operating
results. The Company anticipates that net revenues for the next quarter of
fiscal year 2000 will be significantly less than the comparable periods of
the previous fiscal year as the Company transitions to its next generation
CD-RW product.
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. Recently, Taiwan experienced a
severe earthquake. The Company did not incur any significant damage to its
own facilities located in Taipei; however, its primary wafer manufacturer
(TSMC) experienced a disruption in operations for several weeks. To date, Oak
has not experienced any material delays in its wafer deliveries from its
primary manufacturers. However, there can be no assurance that delays will
not occur in the future.
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. 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 and inkjet
multi-function peripherals. The Company's DVD, CD-RW, and digital imaging
products are subject to the new product risks described in the preceding
paragraph, including in particular the Company's ability to timely introduce
these products and the market's acceptance of them, which could have a
materially adverse effect on its operating results.
RESULTS OF OPERATIONS
NET REVENUES. Net revenues decreased 49% to $10.1 million for the
three months ended September 30, 1999 from $20.0 million in the comparable
period of fiscal 1999. Net revenues in the Optical Storage business segment
were $1.6 million for the first quarter of fiscal 2000, representing an 89%
decrease from the segment's net revenues of $14.1 million reported in the
first quarter of fiscal 1999. This decrease is primarily the result of a loss
of market share in Taiwan, the maturation of the CD-ROM market, and
development delays in the Company's next-generation CD-RW controller. Oak is
currently sampling its next generation CD-RW product with five of the top ten
CD-RW manufacturers. However, the Company cannot predict the level of
customer acceptance of the product and the product's impact on operating
results.
Net revenues for the Digital Imaging business segment were $6.9
million for the three months ended September 30, 1999, representing a 45%
increase over the $4.7 million reported in the first quarter of fiscal 1999.
This increase was primarily due to increase revenues from the segment's
compression codec and resolution enhancement products and engineering
revenues. Net revenues for the Consumer business segment were $1.5 million
for the first quarter of fiscal 2000, representing an 81% increase from the
$0.8 million reported in the same quarter of the prior year. This increase
was primarily due to increased revenues from the segment's VCD decoder
products.
14
<PAGE>
The Company anticipates that net revenues for at least the first two
quarters of fiscal year 2000 will be significantly less than the comparable
periods of the previous fiscal year as the Company transitions to its next
generation CD-RW product. 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 increased to 50% in the three month period ended September 30, 1999,
as compared to 48% during the comparable period in the prior year. This
slight increase from the comparable period a year ago is primarily due to
higher gross margins on engineering revenues recognized in the Company's
Optical Storage business segment. Gross margin for the Optical Storage
business segment was 53% for the first quarter of fiscal 2000 compared to 46%
for the comparable quarter of the prior year.
Gross margin for the Digital Imaging business segment was 67% for
the first quarter of fiscal year 2000, representing a 5% decrease from the
72% reported in the first quarter of fiscal 1999. This decrease was primarily
due to reduced margin from the segment's power controller products. Gross
margin for the Consumer business segment was 34% for the first quarter of
fiscal year 2000 and did not change from the same quarter of the prior year.
The Company's overall gross margin is subject to change due to
various factors, including, among others, competitive product pricing,
yields, wafer costs, assembly and test costs and product mix. The Company
expects that ASPs for its existing products will continue to decline over
time and that ASPs for each new product will decline significantly over the
life of the product. The Company continues to experience severe price
pressure on its CD-ROM controller products and expects such price erosion to
continue. The Company does not believe it can achieve cost reductions or
sales of new products with higher gross margins which fully offset the
expected price declines of its CD-ROM products and therefore, it expects
gross margin percentages to decline. In addition, given the extremely
competitive nature of the optical storage and consumer market, the Company
believes that gross margins for new products in its optical storage market
and consumer market will be lower than historical levels and that, as a
result, gross margins in general will decline in the future.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
of $12.1 million for the three months ended September 30, 1999 decreased $1.0
million, or 8%, from $13.1 million in the comparable period of the previous
fiscal year. This decrease was primarily due to lower engineering salaries
and employee benefits resulting from lower headcount. 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 1999. The
Company will continue to invest substantial resources in research and
development of 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 by 11% to $7.5 million for the
three months ended September 30, 1999 from $8.4 million in the comparable
period of the prior year. This decrease is primarily due to lower legal fees
during the first quarter of fiscal 2000. 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.
ACQUIRED IN-PROCESS TECHNOLOGY. During the first quarter of fiscal
1999, the Company acquired ViewPoint and XLI. 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 first quarter of fiscal 2000,
nonoperating income increased to $2.3 million from $2.0 million during first
quarter of fiscal 1999. This increase is primarily due to increased interest
15
<PAGE>
income from higher average short-term investments and higher interest rates
combined with foreign currency translation gains (related primarily to the
strengthening of the Japanese Yen) recognized during the quarter.
INCOME TAXES. Management does not believe it is more likely than not
that sufficient future taxable income will be generated to realize all of the
Company's deferred tax assets. Accordingly, during fiscal 1999 a full
valuation allowance against deferred tax assets was established. Given this,
no income tax benefit was recognized with respect to net operating loss carry-
forwards generated in the first quarter of fiscal 2000.
FACTORS THAT MAY AFFECT FUTURE RESULTS
THE COMPANY HAS EXPERIENCED AND EXPECTS TO CONTINUE TO EXPERIENCE SIGNIFICANT
PERIOD-TO-PERIOD FLUCTUATIONS IN ITS REVENUES AND OPERATING RESULTS, WHICH
MAY RESULT IN VOLATILITY IN THE PRICE OF THE COMPANY'S STOCK
The Company's quarterly revenues and operating results have varied
significantly in the past and are likely to vary substantially from quarter
to quarter in the future. Accordingly, you should not rely on
period-to-period comparisons as an indication of future performance. In
addition, these variations may cause the Company's stock price to fluctuate.
If quarterly results fail to meet public expectations, the price of the
Company's stock may decline.
The Company's revenues and operating results are affected by a wide
variety of factors, including factors that generally affect everyone in its
industry and factors that are more specific to its business and product
lines. The principal risk the Company faces in its business and one which has
had, and is expected to continue to have, a significant effect on its
revenues and operating results, is its dependence on the optical storage
market. Other factors specific to its business and product lines include the
following:
- - The Company's ability to diversify its product offerings and the markets
for its products;
- - The current market for its products;
- - The loss or gain of important customers;
- - The timing of significant orders and order cancellations or reschedulings;
- - Pricing policy changes by the Company and its competitors and suppliers;
- - The potential for significant inventory exposure;
- - The timing of the development and introduction of new products or enhanced
versions of existing products;
- - Market acceptance of new products;
- - Increased competition in product lines;
- - Barriers to entry into new product lines; and
- - The competitiveness of the Company's customers.
The semiconductor industry historically has been characterized by
rapid technological change and product obsolescence, cyclical market patterns
and seasonal customer demand, significant price erosion, periods of
over-capacity and under-capacity, periods of production shortages, variations
in manufacturing costs, including raw materials, and yields, and significant
expenditures for capital equipment and product development. In addition, the
industry has experienced significant economic downturns at various times,
characterized by diminished product demand and accelerated erosion of product
prices. Any downturns in the industry may cause the Company's business,
financial condition and results of operations to suffer.
The Company has experienced in the past and may in the future
experience substantial period-to-period fluctuations in operating results due
to these general semiconductor industry conditions. The downturns in the
industry often occur in connection with, or in anticipation of, maturing
product cycles (of both the semiconductor companies and their customers) and
declines in general economic conditions. These downturns have been
characterized by abrupt fluctuations in product demand, production
over-capacity and subsequent accelerated erosion of average selling prices,
and in some cases have lasted for more than a year. Even if customers'
aggregate demand were not to decline, the availability of additional capacity
can adversely impact pricing levels, which can also depress revenue levels.
In addition, the Company's quarterly operating results could be
materially adversely affected by legal expenses incurred in connection with,
or any judgment or settlement in, the Company's ongoing stockholder legal
proceedings. See "The Company is a Defendant in Several Lawsuits."
THE COMPANY HAS A RECENT HISTORY OF OPERATING LOSSES AND MAY NOT BECOME OR
REMAIN PROFITABLE
16
<PAGE>
Although the Company experienced periods of profitability following
its reincorporation in Delaware in October 1994 in connection with its
initial public offering (the Company was first incorporated in California in
1987), the Company has at times sustained significant losses since the
initial public offering and may not become profitable in the future. While
the Company had operating income of $32.8 million in fiscal 1997, its current
loss trend began in calendar year 1998, resulting in an operating loss of
$9.1 million for fiscal 1998 and an operating loss of $61.9 million for
fiscal 1999 (in each case before adjustments for non-operating income or
loss, or income tax expense or benefit). The Company's operating losses
generally have been due to the Company's dependence on its optical storage
business, which historically has accounted for approximately 80% of its
business. In fiscal 1998, the Company failed to timely and/or adequately
develop its integrated CD-ROM controller product and second generation CD-RW
product. Consequently, for fiscal 1999, the Company was dependent on mature
CD-ROM products and its first generation CD-RW product for its revenue. These
mature products have continued to decline in both unit sales volume and
average sales price in each successive quarter. The Company expects its next
generation CD-RW product to be in initial production in the second quarter of
fiscal 2000 and to reach volume production in the third quarter of fiscal
2000. Although the Company is currently sampling the product with five of the
top ten CD-RW drive manufacturers, at this time, the Company cannot
accurately predict the level of customer acceptance of the product and the
product's impact on operating results.
The Company anticipates that net revenues for at least the first two
quarters of the fiscal year 2000 will continue to be significantly less than
the comparable periods of the previous fiscal year as the Company completes
its transition to its next generation CD-RW controllers. The Company expects
that the average selling prices (ASPs) for its existing products will
continue to decline over time and that ASPs for each new product will decline
significantly over the life of the product. The Company continues to
experience severe price pressure on its CD-ROM controller products and
expects such price erosion to continue. The Company does not believe it can
achieve cost reductions or sales of new products with higher margins which
fully offset the expected price declines of its CD-ROM products and
therefore, it expects gross margin percentages to decline. In addition, given
the extremely competitive nature of the optical storage and consumer market,
the Company believes that gross margins for new products in its optical
storage market and consumer market will be lower than historical levels and
that, as a result, gross margins in general will decline in the future.
If the Company incurs additional losses or fails to achieve
profitability in the future, this will significantly harm the Company's
business and may affect the trading price of the Company common stock.
ACQUISITIONS AND DIVESTITURES
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. As announced during fiscal 1999, Company management is
currently in the process of developing a turn-around strategy. This strategy
may include acquiring businesses and technology or divesting certain existing
businesses and technology assets. During the first quarter of fiscal 2000,
the Company announced its decision to divest its broadband business.
Additionally, on July 29, 1999, the Company announced its intention to
acquire Xionics Document Technology, Inc., a leading supplier of embedded
software for the digital imaging market. Acquisitions involve numerous risks,
including difficulties in integration of the operations, technologies, and
products of the acquired companies; the risk of diverting management's
attention from normal daily operations of the business; risks of entering
markets in which the Company has no or limited direct prior experience and
where competitors in such markets have stronger market positions; the
coordination of sales, marketing and research and development; and the
potential loss of key employees of the acquired company. In addition,
investments in emerging technology present risks of loss of value of one or
more of the investments due to failure of the technology to gain the
predicted market acceptance.
Failure to manage growth effectively and successfully integrate
acquisitions made by the Company could adversely affect the Company's
business and operating results. In addition, with such acquisitions, there is
the risk that future operating performance may be unfavorably impacted due to
acquisition related costs such as, but not limited to, in-process research
and development charges, additional development expenses, lower gross margins
generated by the sales of acquired products and restructuring costs
associated with duplicate facilities.
In 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
17
<PAGE>
development. Although the Company believes that recognized in-process
research and development expenses are reasonable when applying these factors,
there can be no assurance that the SEC will not review the Company's and
require adjustments to previously recognized amounts. These adjustments could
result in an increase in the amount of purchased technology and other
intangibles recorded with respect to the Company's acquisitions and may
adversely affect the Company's future operating results.
THE COMPANY'S FINANCIAL PERFORMANCE IS HIGHLY DEPENDENT ON THE TIMELY AND
SUCCESSFUL INTRODUCTION OF NEW PRODUCTS
The markets for the Company's products are characterized by evolving
industry standards, rapid technological change and product obsolescence. The
Company's financial performance is highly dependent upon timely and
successful execution of next generation and new products, particularly in
light of the continued decline in sales from the Company's mature CD-ROM and
CD-RW products and the Company's failure to timely develop new products for
the optical storage market in fiscal 1998 and 1999. The failure to timely and
successfully introduce next generation and new products that achieve market
acceptance in the future could seriously damage the Company's business,
financial condition and results of operations. Specifically, the Company's
performance is highly dependent upon the successful development, timely
introduction and customer acceptance of its next generation CD-RW controller,
MPEG-2 decoder for the DVD player market, and imaging processing chip for the
digital office equipment market.
The success of new product introductions is dependent on several factors,
including:
- - Recognition of market requirements;
- - Product cost;
- - Timely completion and introduction of new product designs;
- - Quality of new products;
- - Differentiation of the Company's products from those of its competitors;
- - Improvements in existing technologies; and
- - Development and implementation of new process technologies to: Reduce
semiconductor die size; Improve device performance in manufacturing yield;
Adapt product and processes to technological changes; and Adopt emerging
industry standards.
In both the optical storage and consumer electronics markets,
particularly DVD, a variety of standards and formats are being proposed,
making it difficult to develop product to market requirements, and making it
even more difficult for the market to develop.
Due to the design complexity of the Company's products, especially
with the increased levels of integration that are required, the Company has
experienced delays in completing development and introduction of new
products, particularly in its products for the optical storage and the
digital office markets.
No assurance can be given that the Company will successfully
identify new product opportunities and develop and bring new products to
market in a timely manner or that its products will be selected for design
into the products of its targeted customers. Also, there can be no assurance
that the products of the Company's customers will be successfully introduced
into the market. If the Company fails in its new product development efforts
or its products fail to achieve market acceptance, the Company's revenues
will decline and its business, financial condition and results of operations
will be severely damaged.
THE COMPANY'S FUTURE REVENUES ARE HIGHLY DEPENDENT ON SALES OF ITS CD-RW
CONTROLLER PRODUCT
The Company's future revenue generation is highly dependent on the
successful introduction of its next generation CD-RW product, although the
Company can provide no assurance that this product will achieve customer
acceptance. Although sales of CD-ROM controller products are expected to
continue to account for a portion of the Company's total revenues for the
foreseeable future, the Company expects that sales of its CD-ROM controller
products will continue to decline. The Company is no longer developing any
CD-ROM controllers, but is instead focusing its development efforts on
controllers for CD-RW and DVD drives. If the Company experiences delays in
its product development efforts or fails to achieve market acceptance, the
Company will need other sources of revenue to offset the continued decline in
sales of its CD-ROM controllers. In fiscal 1999, revenue generated from the
Company's optical storage CD-ROM and CD-R/RW businesses declined 73% and 36%,
respectively, compared to the previous year, primarily due to delays in the
development of the next-generation integrated CD-ROM device and CD-RW product.
18
<PAGE>
Similarly, in fiscal 1998, revenue generated from the Company's optical
storage CD-ROM business declined 25% from the prior year primarily due to
delays in the next-generation single chip and integrated CD-ROM device.
Although the Company was a leading supplier of CD-RW controllers,
due to product delays in its second generation CD-RW product, the Company
lost its leadership in this market. While the Company is currently sampling
its next generation CD-RW product, no assurance can be given this product
will be competitive in the marketplace or accepted by the Company's targeted
customers. In addition, even if this product proves to be competitive and is
accepted by targeted customers, there is no assurance that the Company's
customers will be successful.
The Company also faces increased competition in the emerging CD-RW
and DVD markets. Moreover, the current trend toward integrating increased
functionality of the CD-ROM, CD-RW or DVD controller potentially adds to the
development and manufacturing costs of producing the controller. The
Company's revenues and gross margins from its optical storage controller
products will be dependent on the Company's ability to introduce these
integrated products in a commercially competitive manner.
The decrease in the overall level of sales of, and prices for, the
Company's CD-ROM and older generation CD-RW controller product due to
introductions of newer products by competitors, the decline in demand for
CD-ROM controller products generally, product obsolescence and delays in the
Company's integrated CD-ROM controller product and its next generation CD-RW
product, have had a material adverse effect on the Company's business,
financial condition and results of operations, and will continue to have that
effect if the Company fails to successfully introduce new products to the
market.
THE COMPANY'S MARKETS ARE INTENSELY COMPETITIVE AND EXPERIENCE RAPID
TECHNOLOGICAL CHANGE AND THE COMPANY'S FAILURE TO RESPOND TO TECHNOLOGICAL
ADVANCES OF OTHERS COULD HARM ITS BUSINESS
The markets in which the Company competes are intensely competitive
and are characterized by rapid technological change, declining unit average
sales prices and rapid product obsolescence. If the Company cannot
successfully respond to the technological advances of others or if its new
products or product enhancements do not achieve market acceptance, the
Company's business, operating results and financial condition could be
seriously harmed. 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. After its combination with
Xionics, the Company must also continue to enhance its current product line
and develop and introduce new products that keep pace with the technological
developments of its competitors. The combined company must also satisfy
increasingly sophisticated customer requirements. The Company's principal
competitors in the optical storage market are MediaTek, Toshiba and Ricoh.
The Company's principal competitors in the terrestrial segment of the digital
broadcast market are Philips, ST Microelectronics, Siemens and LSI Logic. The
Company's principal competitors in the digital office market are primarily
in-house, captive suppliers; however, the Company expects increased
competition from the merchant market in the future.
The willingness of prospective customers to design the Company
products into their products depends, to a significant extent, upon the
Company's ability to have product available at the appropriate market window
and to price these products at a level that is cost effective for these
customers. The markets for most of the applications for the Company's
products, especially in the consumer electronics market and the optical
storage market, are characterized by intense price competition. As the
markets for these products mature and competition increases, as has been the
trend for the optical storage and DVD segment of the consumer electronics
market, the Company anticipates that average sales prices on products will
decline. If the Company is unable to reduce costs sufficiently to offset
declines in average sales prices or is unable to successfully introduce new
higher performance products with higher average sales prices, operating
results will be materially adversely affected. In addition, if the Company
experiences yield or other production problems or shortages of supply that
increase manufacturing costs, fail to reduce manufacturing costs or fail
19
<PAGE>
to utilize prepaid deposits with foundries, the Company's business, financial
condition and operating results will be seriously harmed.
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 market, the
most intense competition comes from captive suppliers, and increased
competition is anticipated from captive suppliers to the optical storage
market as this market transitions to DVD. Also, the ability to compete
successfully in the PC and consumer DVD market depends on the ability to
develop partnerships with other companies established in the industry and to
gain recognition in such markets. There can be no assurance that
participation in these new markets will produce positive results.
The Company believes that its ability to compete successfully
depends on a number of factors, both within and outside of its control,
including the following:
- - Price, quality and performance of the Company's and its customers'
products;
- - The timing and success of new product introductions by the Company, its
customers and competitors;
- - The development of technical innovations;
- - The ability to obtain adequate foundry capacity and sources of raw
materials;
- - The efficiency of production;
- - The rate at which its customers design its products into their products;
- - The market acceptance of the products of its customers;
- - The number and nature of its competitors in a given market;
- - The ability to protect its proprietary information and to obtain or
preserve its rights to the intellectual property of other parties
necessary in its business; and
- - General market and economic conditions.
There can be no assurance that the Company will be able to compete
successfully against respective current or future competitors, or that
competitive pressures faced by it and its customers will not result in
reduced revenues and profit margins and otherwise seriously harm its
business, financial condition and results of operations.
THE COMPANY MAY BE UNABLE TO PROTECT ITS INTELLECTUAL PROPERTY AND
PROPRIETARY RIGHTS, WHICH MAY AFFECT ITS ABILITY TO COMPETE
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. However, these
measures afford only limited protection. Competitors of the Company may be
able to effectively design around the Company's patents. There can be no
assurance that any patents held by the Company will not be challenged,
invalidated or circumvented, or that the rights granted under those patents
will provide competitive advantages to the Company. Moreover, while the
Company holds or has applied for patents relating to the design of its
products, some of the Company's products are based in part on standards, for
which the Company does not hold patents or other intellectual property
rights. In addition, the laws of certain foreign countries in which the
Company's products are or may be manufactured or sold, including various
countries in Asia, may not protect the Company's products or intellectual
property rights to the same extent as do the laws of the United States and
thus make the possibility of piracy of the Company's technology and products
more likely. There can be no assurance that the steps taken by the Company to
protect its proprietary information will be adequate to prevent
misappropriation of its technology or that the Company's competitors will not
independently develop technologies that are substantially equivalent or
superior to the Company's technology. Moreover, the Company intends to seek
additional international and United States patents on its technology. There
can be no assurance that additional patents will issue from any of the
Company's pending applications or applications in preparation, or be issued
in all countries where the Company's products can be sold, or that any claims
allowed from pending applications or applications in preparation will be of
sufficient scope or strength to provide meaningful protection or any
commercial advantage to the Company.
Furthermore, the Company may initiate claims or litigation against
third parties for infringement of the Company's proprietary rights or to
establish the validity of the Company's proprietary rights and in the past
has incurred significant legal expenses in connection with claims of this
type initiated by it. Any litigation by or against the Company could result
in significant expense to the Company and divert the efforts of the Company's
technical and management personnel, whether or not that litigation results in
a favorable determination for the Company. In the event
20
<PAGE>
of an adverse result in any litigation, the Company could be required to pay
substantial damages, cease the manufacture, use and sale of infringing
products, expend significant resources to develop 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
developing new technology or that those licenses would be available on
reasonable terms, or at all, and any development or license could require
expenditures by the Company of substantial time and other resources.
The Company also generally enters into confidentiality agreements
with its employees and consultants and confidentiality and license agreements
with its customers and potential customers, and limits access to and
distribution of the source and object code of its software and other
proprietary information. Under some circumstances, the Company grants
licenses that give its customers limited access to the source code of the
Company's software which increases the likelihood of misappropriation or
misuse of the Company's technology. Accordingly, despite precautions taken by
the Company, it may be possible for unauthorized third parties to copy
certain portions of the Company's technology or to obtain and use information
that the Company regards as proprietary. There can be no assurance that the
steps taken by the Company will be adequate to prevent misappropriation of
its technology or to provide an adequate remedy in the event of a breach or
misappropriation by others.
THE COMPANY MAY BE UNABLE TO OBTAIN THIRD PARTY INTELLECTUAL PROPERTY RIGHTS
AND/OR MAY BE LIABLE FOR SIGNIFICANT DAMAGES
Certain technology used in the Company's products is licensed from
third parties, and in connection with these licenses, the Company is required
to fulfill confidentiality obligations and, in some cases, pay royalties.
Some of the Company's products, require various types of copy protection
software that the Company must license from third parties. Should the Company
lose its rights to, or be unable to obtain the necessary copy protection
software, the Company would be unable to sell and market certain of its
products. The Company's agreements with third parties often have no specified
term and may be terminated by either party in the event of breach by the
other. The Company's business could be adversely affected by the loss for any
reason of these third-party agreements. Given the trend to include increasing
levels of functionality on a chip, in the future it may be necessary or
desirable for the Company to seek additional licenses to intellectual
property rights held by third parties or purchase products manufactured
and/or sold by third parties with respect to some or all of its product
offerings. There can be no assurance that those licenses or purchases will be
available on terms acceptable to the Company, if at all. The inability of the
Company to enter into those license arrangements on acceptable terms or to
maintain its current licenses on acceptable terms could have a material
adverse effect on the Company's business, financial condition and results of
operations.
In addition, the semiconductor industry is characterized by vigorous
protection and pursuit of intellectual property rights, which has resulted in
significant, often protracted and expensive litigation. The Company or its
foundries may, from time to time, be notified of claims that the Company may
be infringing patents or other intellectual property rights owned by third
parties. If it is necessary or desirable, the Company may seek licenses under
those patents or other intellectual property rights. However, there can be no
assurance that licenses will be offered or that the terms of any offered
licenses will be acceptable to the Company. The failure to obtain a license
from a third party for technology used by the Company could cause the Company
to incur substantial liabilities and suspend the manufacture of products or
the use by the Company's foundries of processes requiring the technology.
Although patent disputes in the semiconductor industry have often
been settled through cross-licensing arrangements, the Company may not be
able in any or every instance, to settle an alleged patent infringement claim
through a cross-licensing arrangement. The Company has a limited patent
portfolio in comparison to traditional semiconductor companies, thereby
making cross-licensing difficult. If a successful claim is made against the
Company or its customers and a license is not made available to the Company
on commercially reasonable terms or the Company is required to pay
substantial damages or awards, the Company's business, financial condition
and results of operations would be materially adversely affected.
THE COMPANY'S FAILURE TO ACCURATELY FORECAST DEMAND FOR ITS PRODUCTS OR
MANAGE ITS RELATIONSHIPS WITH THE MANUFACTURERS AND VENDORS OF ITS PRODUCTS
COULD NEGATIVELY IMPACT ITS ABILITY TO MANUFACTURE AND SELL ITS PRODUCTS AND
ITS RESULTS OF OPERATIONS
The Company contracts with independent foundries to manufacture all
of its products, and with independent vendors to assemble and test its
products. The Company's failure to adequately manage its relationships with
these foundries and vendors could negatively impact its ability to
manufacture and sells its products and its results of operations.
21
<PAGE>
Under its foundry agreements, the Company is required to place
non-cancelable orders and purchase its products on an approximately
three-month rolling basis. The Company is currently committed under an
agreement with one of its foundries to purchase certain minimum amounts of
capacity. Until recently, the Company also had an agreement with one of its
other foundries to purchase certain minimum amounts of capacity. The
Company's customers, on the other hand, generally place purchase orders with
the Company less than four weeks prior to delivery that may be rescheduled or
under certain circumstances may be cancelled, without significant penalty.
Due to the Company's relatively narrow customer base for certain devices and
the short product life cycles of the Company's products, these cancellations
can leave the Company with significant inventory exposure. Consequently, if
anticipated sales and shipments in any quarter are rescheduled, canceled or
do not occur as quickly as expected, the Company's expense in inventory
levels could be disproportionately high, which would seriously harm its
results of operations for that quarter or for the year.
In addition, the Company is dependent on its foundries to allocate
to the Company a portion of their foundry capacity sufficient to meet its
needs to produce products of acceptable quality and with acceptable
manufacturing yield and to deliver products to the Company in a timely
manner. These foundries fabricate products for other companies and some
manufacture products of their own design. If there is a decrease in available
foundry capacity, it is likely that the lead time required to manufacture the
Company's products will increase, which may result in lost sales and
revenues. In periods of manufacturing capacity shortages, the Company may not
be able to meet its customers' required delivery time. Also, if the Company
is unable to timely respond to its customers' needs, the Company may lose
customer orders. Insufficient orders will result in under-utilization of the
Company's manufacturing facilities and prepayments with one of Oak's
foundries for certain minimum amounts of capacity, which also will increase
its costs and adversely affect its results of operations.
Product supply and demand fluctuations common to the semiconductor
industry are historically characterized by periods of manufacturing capacity
shortages immediately followed by periods of overcapacity, which are caused
by the addition of manufacturing capacity in large increments. The industry
has moved from a period of capacity shortages in 1995 to what has been a
period of excess capacity for approximately the last twelve months, although
capacity has recently tightened. During a period of industry overcapacity,
profitability can drop sharply as factory utilization declines and high fixed
costs of operating a wafer fabrication facility are spread over a lower net
revenue base. No assurance can be given that the Company can or will achieve
timely, cost-effective access to that capacity when needed.
Factors which could damage relationships with the Company's current
and prospective customers or provide an advantage to its competitors include:
- - The loss of any foundry as a supplier;
- - Inability in a period of increased demand for the Company's products to
expand foundry capacity;
- - Inability to obtain timely and adequate deliveries from current or
future suppliers;
- - Delays in shipments of the Company's products;
- - Disruption of operations at any of the Company's manufacturing
facilities; and
- - Product defects and the difficulty of detecting and remedying product
defects.
The Company's reliance on independent manufacturers and third party
assembly and testing vendors involve a number of additional risks, including:
- - The unavailability of, or interruption in access to, certain process
technologies; and
- - Reduced control over delivery schedules, quality assurance and costs.
Any problems with supply could result in lost sales and decreased
revenues, increased costs and declining operating results. As the Company
generally does not use multiple services of supply for its products, the
consequences of these factors occurring is magnified.
In addition, as a result of the Company's dependence on foreign
subcontractors, the Company is subject to the risks of conducting business
internationally, including foreign government regulation and general
political risks, which include the risks described under the heading "Risks
Pertaining to International Business" below.
THE COMPANY DERIVES A LARGE PORTION OF ITS REVENUES FROM INTERNATIONAL SALES,
DEPENDS ON FOREIGN SUBCONTRACTORS AND IS SUBJECT TO THE RISKS OF DOING
BUSINESS IN FOREIGN COUNTRIES
22
<PAGE>
A large portion of the Company's revenues are derived from
international sales. International sales, principally to Japan, Korea,
Singapore and Europe, accounted for approximately 86% and 92% of the
Company's net revenues in fiscal 1999 and 1998, respectively. Of this amount,
Japan accounted for 52% and 38% of the Company's net revenues in fiscal 1999
and 1998, respectively; Korea accounted for 10% and 20% for fiscal 1999 and
1998, respectively; Singapore accounted for 10% and 11% for fiscal 1999 and
1998, respectively; and Europe accounted for 11% and 9% for fiscal 1999 and
1998, respectively. The Company also depends on foreign subcontractors for
the manufacture of its products. Most of the Company's foreign sales and
purchases are negotiated in US dollars, although invoicing is often done in
local currency. As a result, the Company may be subject to the risks of
currency fluctuations in the foreign countries in which it does business.
The Company also is subject to other risks of conducting business
outside of the United States. These risks include:
- - Unexpected changes in, or impositions of, foreign legislative or
regulatory requirements;
- - Delays resulting from difficulty in obtaining export licenses for
certain technology;
- - Tariffs, quotas and other trade barriers and restrictions;
- - Longer payment cycles;
- - Greater difficulty in collecting accounts receivable;
- - Potentially adverse taxes and adverse tax consequences;
- - The burdens of complying with a variety of foreign laws;
- - Political, social and economic instability;
- - Potential hostilities;
- - Changes in diplomatic and trade relationships; and
- - Fluctuations in foreign currencies
The Company's significant investment in foundry capacity in Taiwan
is a prime example of its exposure to these types of risks. Due to this
investment, the Company is subject to the risk of political instability in
Taiwan, including the potential for conflict between Taiwan and the People's
Republic of China. In addition, the fact that China is the primary market for
the Company's consumer DVD and cable and satellite products is another
example. Any political or economic instability in China could significantly
reduce the demand for these products.
Recently Taiwan experienced a severe earthquake. The Company did not
incur any significant damage to its own facilities located in Taipei;
however, its primary wafer manufacturer, Taiwan Semiconductor Manufacturing
Company, experienced a disruption in operations for several weeks. To date,
the Company has not experienced any material delays of its wafer deliveries
from its primary manufacturer.
While these factors or the impact of these factors are difficult to
forecast, any one or more of these factors could adversely affect the
Company's operations in the future or require the Company to modify its
current business practices.
THE COMPANY DEPENDS ON A LIMITED NUMBER OF CUSTOMERS FOR A SUBSTANTIAL
PORTION OF ITS REVENUES, AND A LOSS OF, OR A SIGNIFICANT REDUCTION IN
PURCHASES BY, CURRENT MAJOR CUSTOMERS WOULD SIGNIFICANTLY REDUCE ITS REVENUES
The Company has derived a substantial portion of its net revenues
from a limited number of customers and expects this concentration to
continue. For fiscal years 1999 and 1998, sales to the Company's top ten
customers accounted for approximately 70% and 81%, respectively, of the
Company's net revenues. Two customers accounted for over 10% of revenues in
fiscal 1999, compared to three customers in fiscal 1998. At June 30, 1999,
one international customer accounted for approximately 40% of accounts
receivable. In addition, the Company has experienced significant changes from
year to year in the composition of its major customer base, including the
loss in the past year of a customer responsible for approximately 16% of the
Company's sales in fiscal year 1999, and the Company believes this pattern
will continue. Customers generally purchase the Company's products pursuant
to short-term purchase orders, and the Company has no long term purchase
agreements with any of its customers. The loss of, or significant reduction
in purchases by, current major customers of the Company would significantly
reduce its revenues.
THE COMPANY'S MARKETS ARE SUBJECT TO INTENSE PRICE COMPETITION
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
24
<PAGE>
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.
THE COMPANY IS A DEFENDANT IN SEVERAL LAWSUITS
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 common stock for the period
from July 27, 1995 to May 22, 1996, alleging state and federal securities law
and other violations. Additionally, various of the Company's current and
former officers and directors are defendants in three consolidated derivative
actions which allege a breach of fiduciary duty and a claim under California
securities laws. Based on its current information, the Company believes the
class actions and derivative suits to be without merit and will defend its
position vigorously. Although it is reasonably possible the Company may incur
losses upon resolution of these claims, an estimate of 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 financial statements. The Company
is also a party to various other legal proceedings, including a number of
patent-related matters. In the opinion of management, these legal proceedings
will not result in any material liability to the Company. In connection with
these matters, however, management time has been, and will continue to be,
expended and the Company has incurred, and expects to continue to incur,
substantial legal and other expenses.
THE COMPANY MUST CONTINUE TO MAKE SIGNIFICANT CAPITAL INVESTMENTS, AND THE
INABILITY TO RAISE THE ADDITIONAL CAPITAL NECESSARY TO FUND THESE INVESTMENTS
ON ACCEPTABLE TERMS COULD SERIOUSLY HARM THE COMPANY'S BUSINESS
In order to remain competitive, the Company must continue to make
investments in new facilities and capital equipment, and significant amounts
of capital additions could be required in subsequent years. Additionally, in
order to obtain an adequate supply of wafers, especially wafers manufactured
using advanced process techniques, the Company has entered into and will
continue to consider various possible transactions, including various "take
or pay" contracts that commit the Company to purchase specified quantities of
wafers over extended periods. Manufacturing arrangements such as these may
require substantial capital investment, which may require the Company to seek
additional financing. The Company believes that existing liquid resources and
funds generated from operations, if any, combined with its ability to borrow
funds will be adequate to meet its operating and capital requirements and
obligations into the foreseeable future. The Company believes that the level
of a company's financial resources is an important factor in its industry.
Accordingly, the Company may from time to time seek additional equity or debt
financing. There can be no assurance that those funds will be available on
terms acceptable to the Company when needed. Any future equity financing will
also lead to dilution to existing shareholders.
DEPENDENCE ON KEY PERSONNEL
The Company's future performance depends, to a significant degree,
on the retention and contribution of members of the Company's senior
management as well as other key personnel. In February 1999, the Company
appointed a new President and Chief Executive Officer, Young K. Sohn. It is
important for the Company to retain the services of Mr. Sohn. In fiscal 1999,
the Company also appointed a new Vice President and General Manager to head
its Optical Storage Group, a new Chief Financial Officer, a new Vice
President of Sales, and a new Vice President of Human Resources. The Company
is in the process of recruiting additional senior management positions as
well as technical personnel. Competition for these persons is intense and
there can be no assurance that the Company will be able to attract and retain
additional senior managers and technical personnel.
24
<PAGE>
IMPACT OF YEAR 2000
The "Year 2000 Issue" is the result of computer programs being
written using two digits rather than four to define the applicable year. The
Company is dependent, to a significant extent, on computer technology with
date-sensitive functions. If the Company's computer programs with
date-sensitive functions are not Year 2000 compliant, they may recognize a
date using "00" as the year 1900 rather than the Year 2000. This could result
in a system failure or miscalculations causing incorrect reporting and
disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities. The issue spans both information technology and
non-information technology systems that use date data. In addition to the
Company's own systems, the Company relies, directly and indirectly, on
external systems of its customers, suppliers, creditors, financial
organizations, utilities providers and government entities, both domestic and
international.
The Company's committee for the Year 2000 issue has a year 2000
project plan consisting of the following five phases: Inventory/Assessment,
Conversion, Vendor Readiness, Contingency Planning, Testing and
Implementation. The Inventory/Assessment, Conversion, Testing and
Implementation phases of the project were complete as of August 31, 1999, and
the Company is in the process of concluding the Vendor Readiness and
developing the Contingency Planning phases. The entire Year 2000 project is
expected to be complete by December 15, 1999.
In its Inventory/Assessment phase, the Company examined well over
two thousand items for Year 2000 compliance. For internal systems, the
Company examined all network components, PCs, Unix workstations, business
applications, CAD systems, desktop applications, operating systems, testers,
telephone system, FAX, copiers, security and environmental systems. The
Company purchased a Y2K tool and repaired all PC BIOS and converted all Excel
and Access data files. The Company has also upgraded all servers,
workstations and network components. Major business application systems
including the Oracle Enterprise Resource Planning system and FactoryWorks
Manufacturing Execution System have been fully upgraded and tested to Y2K
compliance status. The Company's Wide Area Network was successfully tested to
be Y2K ready. The security system was upgraded to be Y2K compliant. The
Company also obtained Y2K compliance statements from CAD systems, telephone,
energy and environmental system vendors. Further upgrades are to be applied
to some desktop applications before the end of year.
The Company is actively responding to all customer requests for
compliance, surveys and other general information related to its Year 2000
programs. The Company has requested assurance from its key customers that
they, and their products which incorporate the Company products, are Year
2000 compliant.
The Company plans to develop a Contingency Plan by December 15,
1999, that will address the non-compliance of vendors/suppliers and any
"worst case" Year 2000 issues that the Company may be confronted with. In the
worst case, the Company or the key customers and/or suppliers on which it
depends may be unable to produce reliable information or process routine
transactions. Furthermore, in the worst case, the Company or parties on which
it depends may, for an extended period of time be incapable of conducting
critical business activities, which include but are not limited to,
manufacturing and shipping products, invoicing customers and paying vendors.
All product related assessments and testing were completed as of
June 30, 1999. Updates or status on products are available on the Company's
web site (www.oaktech.com). The Company considers a product or system to be
Year 2000 compliant if the date/time data is accurately processed (including,
but not limited to, calculating, comparing, and sequencing) from, into and
between the twentieth and twenty-first centuries, and the years 1999 and 2000
along with leap year calculations. To date, the Company has not identified
any non-compliant products and therefore, no material costs have been
incurred with respect to remediation. The Company believes that it is
unlikely to experience a material adverse impact on its financial condition
or results of operations due to product related Year 2000 compliance issues.
The foregoing statements are based upon management's best estimates
at the present time, which were derived utilizing numerous assumptions of
future events, including the continued availability of certain resources,
third party modification plans and other factors. There can be no guarantee
that these estimates will be achieved and actual results could differ
materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to, the availability and
cost of personnel trained in this area, the ability to locate and correct all
relevant computer codes, the nature and amount of programming required to
upgrade or
25
<PAGE>
replace each of the affected programs, the rate and magnitude of related
labor and consulting costs and the success of the Company's external
customers and suppliers in addressing the Year 2000 issue.
As the Year 2000 project continues, the Company may discover
additional Year 2000 problems, may not be able to develop, implement, or test
remediation or contingency plans in a timely manner, or may find that the
costs of these activities exceed current expectations and become material. In
many cases, the Company is relying on assurances from suppliers and customers
that new and upgraded information systems and other products will be Year
2000 compliant. The Company is testing certain third-party products, but
cannot be sure that its tests will be adequate or that, if problems are
identified, they will be addressed by the supplier in a timely and
satisfactory way.
Because the Company uses a variety of information systems and has
additional systems embedded in its operations and infrastructure, the Company
cannot be sure that all of its systems will work together in a Year
2000-compliant fashion. Furthermore, the Company cannot be sure that it will
not suffer business interruptions, either because of its own Year 2000
problems or those of its customers or suppliers whose Year 2000 problems may
make it difficult or impossible for them to fulfill their commitments to the
Company. If the Company fails to satisfactorily resolve Year 2000 issues
related to its products in a timely manner, it could be exposed to liability
to third parties.
If the Company or the third parties with which it has relationships
were to cease or not successfully complete its or their Year 2000 remediation
efforts, the Company would encounter disruptions to its business that could
have a material adverse effect on its business, financial position and
results of operations. The Company could be materially and adversely impacted
by widespread economic or financial market disruption or by Year 2000
computer system failures at third parties with which it has relationships.
The Company has not yet developed a contingency plan that addresses
how it plans to handle any of the "worst-case" Year 2000 issues that may
confront it, but instead has focused its resources on identifying material,
remediable problems and reducing uncertainties generally, through the Year
2000 project described above. A contingency plan is expected to be developed
by December 15, 1999. The Company to date has spent less than $1.0 million on
Year 2000 readiness and does not currently anticipate that any further
expenditures will be material to its business, financial condition or results
of operations.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its cash requirements
from cash generated from operations, the sale of equity securities, bank
lines of credit and long-term and short-term debt. The Company's principal
sources of liquidity as of September 30, 1999 consisted of approximately
$127.3 million in cash, cash equivalents and short-term investments. The
Company also has approximately $8.3 million in lines of letters of credit
with Taiwanese financial institutions, all of which was available at
September 30, 1999. Additionally, approximately $12.0 million in lines of
credit exist with Japanese financial institutions, all of which was available
at September 30, 1999. The Company had outstanding commitments to purchase
capital equipment of approximately $0.3 million at September 30, 1999.
In the three months ended September 30, 1999, operating activities
used net cash of approximately $3.7 million. The Company's net loss of
approximately $12.2 million was offset by receipt of foundry deposit refunds
totaling $4.5 million, and decreases in accounts receivable and inventories
during the quarter totaling $3.1 million. The non-cash effect of depreciation
and amortization totaling $2.9 million also helped offset the cash effect of
the net loss for the period. Investing activities utilized cash of
approximately $2.0 million primarily due to additions to property, plant and
equipment. Additionally, the Company repurchased 214,500 shares of its common
stock during the three months ended September 30, 1999, for a total of
approximately $1.0 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, the Xionics acquisition, and any other investments it may make
through at least the next twelve months. If, however, during the next twelve
to eighteen 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
26
<PAGE>
complementary technologies. From time to time, in the ordinary course of
business, the Company evaluates potential acquisitions of such businesses,
products or technologies. However, the Company has no present understandings,
commitments or agreements with respect to any material acquisition of other
businesses, products or technologies, other than the Xionics acquisition
noted above.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Most of the Company's foreign sales are denominated 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 translated
into the functional currency on a monthly basis and the resulting gain or
loss is recorded within non-operating income in the statement of operations.
Many of the Company's non-functional currency receivables and payables are
hedged through managing net asset positions, product pricing and other means.
The Company's strategy is to minimize its non-functional currency net assets
or net liabilities in its foreign subsidiaries. The Company's policy is not
to speculate in financial instruments for profit on the exchange rate price
fluctuations, trade in currencies for which there are not underlying
exposures, or enter into trades for any currency to intentionally increase
the underlying exposure. As of September 30, 1999 and June 30, 1999, the
Company had foreign currency exchange contracts to exchange Yen for
approximately $1,667,000 and $1,030,000, respectively. The Company uses
financial instruments, including local currency debt arrangements, to offset
the foreign exchange gains or losses of the financial instruments against
gains or losses on the underlying operations cash flows or investments. If
foreign currency rates fluctuate by 10% from rates at September 30, 1999 and
1998, the effect on the company's consolidated financial statements would not
be material. However, there can be no assurance that there will not be a
material impact in the future.
The Company's cash equivalents and short-term investments
("investments") are exposed to financial market risk due to fluctuation in
interest rates, which may affect its interest income and the fair values of
its investments. The Company manages the exposure to financial market risk by
performing ongoing evaluation of its investment portfolio and investing in
short-term investment grade corporate securities and U.S. government and
other agencies' obligations which mature 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. If market rates were to increase
immediately and uniformly by 10% from levels as of September 30, 1999 and
1998, the decline in the fair value of the portfolio would not be material.
Further, the Company has the ability to hold its fixed income investments
until maturity and, therefore, the Company would not expect to recognize such
an adverse impact in income or cash flows.
27
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and various of its current and former officers and
Directors are parties to several class action lawsuits filed on behalf of all
persons who purchased or acquired the Company's common stock (excluding the
defendants and parties related to them) for the period July 27, 1995 through
May 22, 1996. The first, a state court proceeding designated IN RE OAK
TECHNOLOGY SECURITIES LITIGATION, Master File No. CV758510 pending in Santa
Clara County Superior Court in Santa Clara, California, consolidates five
class actions. This lawsuit also names as defendants several of the Company's
venture capital fund investors, two of its investment bankers and two
securities analysts. The plaintiffs alleged violations of California
securities laws and statutory deceit provisions as well as breaches of
fiduciary duty and abuse of control. On December 6, 1996, the state court
judge sustained the Oak defendants' demurrer to all causes of action alleged
in the plaintiffs' First Amended Consolidated Complaint, but allowed the
plaintiffs the opportunity to amend. The plaintiffs' Second Amended
Consolidated Complaint was filed on August 1, 1997. On December 3, 1997, the
state court judge sustained the Oak defendants' demurrer to the plaintiffs'
Second Amended Consolidated Complaint without leave to amend to the causes of
action for breach of fiduciary duty and abuse of control, and to the
California Corporations Code Sections 25400/25500 claims with respect to the
Company, a number of the individual officers and directors, and the venture
capital investors. The judge also sustained the demurrer with leave to amend
to the California Civil code Sections 1709/1710 claims; however, the
plaintiffs elected not to amend this claim. Accordingly, the only remaining
claim in state court action, IN RE OAK TECHNOLOGY SECURITIES LITIGATION, is
the California Corporations Code Sections 25400/25500 cause of action against
four officers of the Company and the Company's investment bankers and
securities analysts. Plaintiffs recently filed a motion to reinstate the
California Corporation Code Sections 25400/25500 claims against the Company
and the remaining Oak defendants filed a cross-motion to dismiss this
remaining claim against them. These motions were heard on October 1, 1999,
and the state court judge ruled that pursuant to the California Supreme
Court's recent decision in STOR MEDIA, INC. V. SUPERIOR COURT, the Company
was a seller who could be held liable under the state securities laws because
the Company had an employee stock purchase plan. Therefore, the judge ruled
that the Company should be reinstated as a defendant in the lawsuit. The
state court judge denied the defendants cross-motion for reconsideration on
the California Corporations Code Section 25400/25500 claims. 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 number of depositions are currently being taken,
including the depositions of those officers of the Company who were officers
during the class period.
The Company and several of its current and former officers and
Directors are also parties to four putative class action lawsuits pending in
the U.S. District Court for the Northern District of California. These
actions have been consolidated as IN RE OAK TECHNOLOGY, INC. SECURITIES
LITIGATION, Case No. C-96-20552-SW(PVT). This action alleges certain
violations of federal securities laws and is brought on behalf of purchasers
of the Company's common stock for the period July 27, 1995 through May 22,
1996. This action also names as a defendant one of the Company's investment
bankers. On July 29, 1997, the federal court judge granted the Oak defendants
Motion to Dismiss the plaintiffs' First Amended Consolidated Complaint, but
granted the plaintiffs leave to amend most claims. The plaintiffs' Second
Amended Consolidated Complaint was filed on September 4, 1997. The
defendants' Motion to Dismiss was heard on December 17, 1997. The federal
court Judge took the matter under submission and has not yet issued a ruling.
Plaintiffs have recently filed a motion seeking the Court's permission to
voluntarily dismiss this action without prejudice. Defendants have requested
that the dismissal be with prejudice. This motion was heard on September 29,
1999 and the parties are waiting for the federal court judge's ruling on the
matter.
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.
28
<PAGE>
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 incur legal and other
expenses.
29
<PAGE>
On July 21, 1997, the Company filed a complaint with the ITC based
on the Company's belief that certain Asian companies were violating U.S.
trade laws by the unlicensed importing or selling of certain CD-ROM
controllers that infringed one or more of the Company's United States
patents. The complaint seeks a ban on the importation into the United States
of any infringing CD-ROM controller or product containing such infringing
CD-ROM controller. A formal investigative proceeding was instituted by the
ITC (Investigation No. 337-TA-401) on August 19, 1997, naming as respondents:
Winbond Electronics Corporation (Winbond); Winbond Electronics North America
Corporation; Wearnes Technology (Private) Ltd.; Wearnes Electronics Malaysia
Sendirian Berhad; and Wearnes Peripheal International (Pte.).
On March 16, 1998, the Company and Winbond entered into a settlement
agreement pursuant to which Winbond obtained a nonexclusive, royalty-bearing
license to the Company's U.S. patents No.'s 5,535,327 and 5,581,715 and the
Company obtained a nonexclusive, royalty-free license to several Winbond
patents. The settlement agreement provided that the parties would jointly
seek termination and dismissal of investigation No. 337-TA-401 as to Winbond
and its four affiliated companies: Winbond Electronics North America
Corporation; Wearnes Technology (Private) Ltd.; Wearnes Electronics Malaysia
Sendirian Berhad; and Wearnes Peripheal International (Pte.). On April 15,
1998, Investigation No. 337-TA-401 was ordered terminated as to all parties.
As originally filed with the ITC, the Company's complaint also
identified as proposed respondents: United Microelectronics Corporation
(UMC); Lite-On Group; Lite-On Technology Corp.; Behavior Tech Computer Corp.
and Behavior Tech Computer (USA) Corp. Prior to the ITC's institution of the
formal investigation proceeding, the Company and UMC entered into a
settlement agreement, effective July 31, 1997, pursuant to which UMC agreed
to cease and desist the manufacture and/or importation into the United States
of its specified CD-ROM controllers, except under certain limited conditions
which expired on January 31, 1998. The settlement agreement additionally
provided for the withdrawal of the Company's ITC complaint against UMC and
the above-named Lite-On and Behavior Tech companies. In September 1997,
October 1997, February 1998 and April 1998, the Company received $2.6
million, $4.7 million, $0.7 million and $2.6 million, respectively, pursuant
to this settlement. Proceeds from the settlement were recorded as
miscellaneous income and included in nonoperating income for the periods
ended September 30, 1997, December 31, 1997, March 31, 1998 and June 30,
1998, respectively.
On October 27, 1997, the Company filed a complaint in the United
States District Court, Northern District of California against UMC for breach
of contract, breach of the covenant of good faith and fair dealing and fraud
based on UMC's breach of the settlement agreement arising out of the ITC
action, Case No. C-97-20959. Together with the filing of the complaint, the
Company filed a motion for a preliminary injunction against UMC, seeking to
enjoin UMC from selling the CD-ROM controllers that were the 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. As
Investigation No. 337-TA-409 was resolved on September 27, 1999, the federal
court judge ordered a case management conference on November 5, 1999. At the
conference it was determined that the judge will order that the consolidated
action continue stayed pending the resolution of the parties appeal of the
ITC ruling to the Federal Circuit Court of Appeals (described below.)
30
<PAGE>
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. Section1659, 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. As Investigation No. 337-TA-409 was resolved on
September 27, 1999, the federal court judge ordered a case management
conference on November 5, 1999. At the conference it was determined that the
judge will order that the consolidated action continue stayed pending the
resolution of the parties appeal of the ITC ruling to the Federal Circuit
Court of Appeals (described below.)
On April 7, 1998, the Company filed a new complaint with the ITC
alleging that five Asian companies are violating U.S. trade laws by the
unlicensed importing or selling of CD-ROM drive controllers that infringe a
United States patent owned by the Company. The Company's complaint is
asserted against United Microelectronics Corp., MediaTek, Inc., Lite-On
Group, Lite-On Technology Corp. and AOpen, Inc. In its complaint, the Company
requests the ITC to investigate the five above-named companies and to enter
an order barring imports into the United States of their allegedly infringing
products and products containing them, including CD-ROM drives and personal
computers. A formal investigative proceeding was instituted by the ITC
(Investigation No. 337-TA-409) on May 8, 1998 naming as respondents United
Microelectronics Corp., MediaTek, Inc., Lite-On Technology Corp. and AOpen,
Inc. The following respondents, all Taiwanese drive manufacturers, were later
added to the proceeding pursuant to an Initial Determination by the
Administrative Law Judge (ALJ) supervising the Investigation following a
motion brought by the Company on August 6, 1998 to add these respondents:
Actima Technology Corp., ASUSTek Computer, Inc., Behavior Tech Computer
Corp., Delta Electronics, Inc. Momitsu Multi Media Technologies,
Pan-International Industrial Corp. and Ultima Electronics Corp. On August 28,
1998, the ALJ entered an Initial Determination that the investigation be
terminated as to respondent UMC. On September 4, 1998, the Company filed a
petition with the Commission for review of the Initial Determination. On
October 7, 1998, the Commission reversed the Initial Determination of the ALJ
as the Commission determined that the Company's complaint against UMC does
state an unfair trade practices claim under Section 337 of the Tariff Act. On
December 23, 1998, the ALJ issued another Initial Determination terminating
the investigation as to respondent UMC for a second time. On December 31,
1998, the Company filed a petition with the Commission for review of the
Initial Determination. On February 3, 1999, the Commission reversed the
Initial Determination of the ALJ for a second time on the grounds that the
Company's complaint against UMC does state an unfair trade practices claim
under Section 337 of the Tariff Act. On May 10, 1999, the ALJ issued another
Initial Determination terminating the investigation as to respondent UMC for
a third time, finding that UMC's activities were licensed. On May 17, 1999,
the Company filed a petition with the Commission for review of the Initial
Determination and on June 28, 1999, the Commission determined to review the
Initial Determination.
Trial before the ALJ as to all respondents except UMC commenced on
January 11, 1999 and concluded on January 28, 1999. On May 14, 1999, the ALJ
entered an Initial Determination that no unfair trade practices were
committed by Mediatek under Section 337 of the Tariff Act. On May 24, 1999,
the Company filed a petition requesting the Commission to review the Initial
Determination and on June 28, 1999 the Commission determined to review it.
The Company believes that both the May 14, 1999 and May 17, 1999 Initial
Determinations are incorrect and the Company intends to pursue its right to
seek protection from importation of UMC's and MediaTek's CD-ROM controllers
under the trade laws of the United States. On September 27, 1999, the
Commission affirmed the ALJ's finding that there were no unfair trade
practices committed by MediaTek under Section 337 of the Tariff Act as the
Commission determined that there was no infringement of the Company's US
Patent No. 5,581,715. On this same date, the Commission also reversed the
ALJ's findings that the Company's patent was invalid and unenforceable and
held that the Company's US Patent No. 5,581,715 was valid and enforceable.
The Commission took no position on the ALJ's Initial Determination
terminating UMC from the investigation.
The Company intends to appeal the Commission's ruling that no unfair
trade practices were committed by MediaTek under Section 337 of the Tariff
Act to the Federal Circuit Court of Appeals.
31
<PAGE>
It is expected that MediaTek will cross-appeal the Commission's ruling on the
validity and enforceability of the Company's US patent. No decision is
expected to be rendered by the Federal Circuit of Appeals for twelve to
eighteen months from the time of appeal. In connection with this proceeding,
the Company will continue to incur legal fees and other expenses.
On February 26, 1999, the Lemelson Medical, Education & Research
Foundation, Limited Partnership (the "Lemelson Partnership") filed a
complaint for patent infringement, naming eighty-eight defendants, including
the Company. The Lemelson Partnership alleges to be the owner of certain
patents issued to Jerome Lemelson (now deceased). The suit is entitled
LEMELSON MEDICAL, EDUCATION & RESEARCH FOUNDATION, LIMITED PARTNERSHIP V.
LUCENT TECHNOLOGIES INC., ET AL., No. CIV 99-0377-PHX-RGS, and was filed in
the United States District Court in Phoenix, Arizona. In this lawsuit, the
Lemelson Partnership claims that the Company uses certain methods, or
imports, sells, or offers to sell certain devices made using certain methods,
claimed in some of the Lemelson patents-in-suit. Specifically, the suit
alleges that Oak infringes certain claims of U.S. Patents Nos. 4,338,626;
4,390,586; 4,511,918; 4,969,038; 4,979,029; 4,984,073; 5,023,714; 5,023,714;
5,039,836; 5,067,012; 5,119,190; 5,119,205; 5,128,753; 5,144,421; 5,249,045;
5,283,641; and 5,351,078. The complaint seeks judgment that the Lemelson
patents-in-suit are not invalid and have been willfully and deliberately
infringed; unspecified compensatory damages, together with interest and
costs; treble damages; reasonable attorneys' fees; as well as injunctive
relief against further infringement of the Lemelson patents-in-suit. The
Company filed an answer and declaratory relief counterclaims on August 12,
1999. The Lemelson Partnership responded to the Company's declaratory relief
claims on September 7, 1999. The Company has reached a verbal settlement with
the Lemelson Partnership. Based on the settlement verbally agreed to, the
settlement will not have a material effect on the Company's consolidated
financial statements.
If any of the above pending actions are decided adversely to the
Company, it would likely have a material adverse affect on the Company's
financial condition and results of operations.
On September 1, 1999 David D. Tsang and certain of his relatives
entered into a consent decree with the Securities and Exchange Commission in
connection with an insider trading investigation. Pursuant to the terms of
the settlement, Mr. Tsang neither admits nor denies the allegation that he
provided nonpublic information to certain relatives. He did not profit
personally from any transaction in question. The Company cooperated fully
with the SEC in the investigation and was not the subject of the
investigation.
32
<PAGE>
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report:
Exhibit
Number Exhibit Title
------- -------------
Exhibit 27.1 Financial Data Schedule
(b) Reports on Form 8-K:
The Company filed no reports on Form 8-K during the quarter ended
September 30, 1999
33
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OAK TECHNOLOGY, INC.
(Registrant)
Date: November 12, 1999
-------------------------------------------
Robert O. Hersh, Vice-President Finance
Chief Financial Officer
(Principal Financial and Accounting Officer)
34
<PAGE>
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
35
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 13,563
<SECURITIES> 113,710
<RECEIVABLES> 5,991
<ALLOWANCES> 570
<INVENTORY> 1,558
<CURRENT-ASSETS> 151,907
<PP&E> 46,256
<DEPRECIATION> 24,538
<TOTAL-ASSETS> 190,459
<CURRENT-LIABILITIES> 11,600
<BONDS> 0
0
0
<COMMON> 41
<OTHER-SE> 177,079
<TOTAL-LIABILITY-AND-EQUITY> 190,459
<SALES> 10,142
<TOTAL-REVENUES> 10,142
<CGS> 5,071
<TOTAL-COSTS> 5,071
<OTHER-EXPENSES> 19,602
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1
<INCOME-PRETAX> (12,186)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,186)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,186)
<EPS-BASIC> (0.30)
<EPS-DILUTED> (0.30)
</TABLE>
