<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 DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from ___________ to __________
COMMISSION FILE NO. 0-25298
OAK TECHNOLOGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0161486
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
139 KIFER COURT
SUNNYVALE, CALIFORNIA 94086
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(408) 737-0888
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
As of December 31, 1998, there were outstanding 40,711,495 shares of the
Registrant's Common Stock, par value $0.001 per share.
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 1998
and June 30, 1998......................................................................... 3
Condensed Consolidated Statements of Operations for the Three Months and
Six Months ended December 31, 1998 and 1997 .............................................. 4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
December 31, 1998 and 1997................................................................ 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 .................................... 26
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................. 27
Item 4. Submission of Matters to a Vote of Security Holders........................................... 31
Item 6. Exhibits and Reports on Form 8-K............................................................... 33
SIGNATURES ........................................................................................ 37
EXHIBIT INDEX ........................................................................................ 38
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
ASSETS
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
----------------- -----------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 34,163 $ 59,803
Short-term investments 61,315 57,422
Accounts receivable, net of allowance for doubtful accounts of
$830 and $809, respectively 22,299 17,605
Inventories 2,594 7,558
Current portion of foundry deposits 17,519 2,944
Prepaid expenses and other current assets 12,041 16,323
------------- -------------
Total current assets 149,931 161,655
Property and equipment, net 25,734 25,114
Foundry deposits 2,712 18,231
Investment in foundry venture 51,234 51,216
Purchased technology 9,488 1,567
Other assets 2,237 3,628
------------- -------------
Total assets $ 241,336 $ 261,411
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 6,104 $ 2,625
Accounts payable 4,630 6,236
Other accrued liabilities 11,538 8,480
------------- -------------
Total current liabilities 22,272 17,341
Deferred income taxes 2,990 2,607
Other long-term liabilities 226 255
------------- -------------
Total liabilities 25,488 20,203
------------- -------------
Stockholders' equity:
Preferred stock, $0.001 par value; 2,000,000 shares authorized; none issued
and outstanding as of December 31, 1998 and
June 30, 1998 -- --
Common stock, $0.001 par value; 60,000,000 shares authorized;
40,711,495 and 41,147,969 shares issued and outstanding as of
December 31, 1998 and June 30, 1998, respectively 41 42
Additional paid-in capital 154,977 156,464
Retained earnings 60,830 84,702
------------- -------------
Total stockholders' equity 215,848 241,208
------------- -------------
Total liabilities and stockholders' equity $ 241,336 $ 261,411
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------------ ------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Net revenues $ 21,861 $ 49,353 $ 41,828 $ 92,646
Cost of revenues 11,559 23,233 22,025 43,988
-------------- -------------- -------------- -------------
Gross profit 10,302 26,120 19,803 48,658
Research and development expenses 12,177 12,175 25,311 23,006
Selling, general and administrative expenses 9,794 7,836 18,187 14,147
Acquired in-process technology -- -- 7,161 --
-------------- -------------- -------------- -------------
Operating income (loss) (11,669) 6,109 (30,856) 11,505
Nonoperating income, net 1,536 5,586 3,487 9,718
-------------- -------------- -------------- -------------
Income (loss) before income taxes (10,133) 11,695 (27,369) 21,223
Income taxes (benefit) (440) 4,093 (3,497) 7,428
-------------- -------------- -------------- -------------
Net income (loss) $ (9,693) $ 7,602 $ (23,872) $ 13,795
-------------- -------------- -------------- -------------
-------------- -------------- -------------- -------------
Net income (loss) per share:
Basic $ (0.24) $ 0.18 $ (0.59) $ 0.33
-------------- -------------- -------------- -------------
-------------- -------------- -------------- -------------
Diluted $ (0.24) $ 0.18 $ (0.59) $ 0.32
-------------- -------------- -------------- -------------
-------------- -------------- -------------- -------------
Shares used in computing net income (loss) per share:
Basic 40,679 41,824 40,804 41,716
-------------- -------------- -------------- -------------
-------------- -------------- -------------- -------------
Diluted 40,679 42,643 40,804 42,762
-------------- -------------- -------------- -------------
-------------- -------------- -------------- -------------
</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>
Six Months Ended
December 31,
--------------------------------------------
1998 1997
-------------------- --------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (23,872) $ 13,795
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 5,682 3,375
Acquired in-process technology 7,161 --
Deferred income taxes 383 (2,193)
Foundry deposits utilized 944 455
Changes in operating assets and liabilities:
Accounts receivable (4,694) (3,119)
Inventories 4,964 138
Prepaid expenses and other current assets 4,282 (1,199)
Accounts payable and accrued expenses (730) (5,188)
-------------------- -------------------
Net cash provided by (used in) operating activities (5,880) 6,064
-------------------- -------------------
Cash flows from investing activities:
Purchases of short-term investments (30,597) (31,773)
Proceeds from matured short-term investments 26,704 33,790
Additions to property and equipment, net (4,297) (8,139)
Acquisition of ViewPoint, Inc., net of cash acquired (9,467) --
Acquisition of XLI Inc. common stock (3,675) --
Payment of certain XLI Inc. liabilities at acquisition date (2,094) --
Investment in foundry venture -- (11,616)
Other assets 1,705 --
----------------- ----------------
Net cash used in investing activities (21,721) (17,738)
----------------- ----------------
Cash flows from financing activities:
Issuance of debt 3,525 5,146
Repayment of debt (75) (5,347)
Issuance of common stock, net 609 1,569
Treasury stock acquisitions (2,098) --
-------------------- -------------------
Net cash provided by (used in) financing activities 1,961 1,368
-------------------- -------------------
Net decrease in cash and cash equivalents (25,640) (10,306)
Cash and cash equivalents, beginning of period 59,803 87,609
-------------------- -------------------
-------------------- -------------------
Cash and cash equivalents, end of period $ 34,163 $ 77,303
-------------------- -------------------
-------------------- -------------------
Supplemental information:
Cash paid (refunded) during the period:
Interest $ 28 $ 175
-------------------- -------------------
-------------------- -------------------
Income taxes $ (8,033) $ 12,918
-------------------- -------------------
-------------------- -------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PREPARATION
The accompanying unaudited consolidated financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission (the "Commission"). In the opinion of management, the
consolidated financial statements reflect all adjustments considered
necessary for a fair presentation of the consolidated financial position,
operating results and cash flows for those periods presented. The results of
operations for the interim periods presented are not necessarily indicative
of the results that may be expected for the full fiscal year or in any future
period. This quarterly report on Form 10-Q should be read in conjunction with
the audited consolidated financial statements and notes thereto for the year
ended June 30, 1998, included in the Oak Technology, Inc. (the "Company")
1998 Annual Report on Form 10-K filed with the Commission.
Effective July 1, 1998, the Company adopted the provisions of the
Financial Accounting Standards Board's (FASB) Statement of Financial
Accounting Standards (SFAS) No. 130, REPORTING OF COMPREHENSIVE INCOME. SFAS
No. 130 established standards for the display of comprehensive income and its
components in a full set of financial statements. Comprehensive income
includes all changes in equity during a period except those resulting from
the issuance of shares of stock and distributions to shareholders. There were
no differences between net income (loss) and comprehensive income (loss)
during the three and six month periods ended December 31, 1998 and 1997.
RECENT ACCOUNTING PRONOUNCEMENTS. In June, 1997, the FASB issued SFAS No
131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS
No. 131 establishes standards for the way public business enterprises report
information about operating segments in annual financial statements and requires
those enterprises to report selected information about operating segments in
interim financial reports issued to stockholders. SFAS No. 131 is effective for
financial statements for periods beginning after December 15, 1997. The Company
will provide the segment information required by SFAS No. 131 beginning with its
annual financial statements for the fiscal year ended June 30, 1999.
The FASB recently issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 addresses the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts. Under SFAS No. 133, entities are required to carry all
derivative instruments in the balance sheet at fair value. The accounting for
changes in fair value (i.e. gains or losses) of a derivative instrument
depends on whether it has been designated and qualifies as part of a hedging
relationship and, if so, the reason for holding it. The Company must adopt
SFAS No. 133 from July 1, 1999. The Company does not anticipate that SFAS No.
133 will have a material impact on its financial statements.
2. INVENTORIES
Inventories are stated at the lower of cost (first in, first out) or market
and consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
--------------- ------------
<S> <C> <C>
Purchased parts and work in process........... $ 979 $ 5,612
Finished goods................................ 1,615 1,946
--------------- ------------
--------------- ------------
$ 2,594 $ 7,558
--------------- ------------
--------------- ------------
</TABLE>
6
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. FOUNDRY DEPOSITS
In June and November 1995, the Company entered into agreements with Taiwan
Semiconductor Manufacturing Company ("TSMC") and Chartered Semiconductor
Manufacturing Pte. Ltd. ("Chartered") to obtain certain additional wafer
capacity. The agreements call for the Company to commit to certain future wafer
purchases and to deposit funds with the suppliers as either a portion of the
price of the additional wafers in advance of their delivery or as a non-interest
bearing deposit to secure the availability of additional wafers. The price of
such wafers will be determined in the future periods in which specific orders
are actually placed. If the Company is not able to use, assign, or sell the
additional wafer quantities, all or a portion of the deposits may be forfeited.
As of December 31, 1998, the Company has $16.7 million of deposits with
TSMC which under the agreement (as previously amended) must be utilized
against calendar year 1999 wafer purchases. Should the Company not purchase
sufficient wafers from TSMC during calendar 1999 (the final year of the
amended agreement) to utilize the entire amount of the remaining prepayment,
the unused portion of the prepayment will be forfeited.
As of December 31, 1998, the Company has $3.5 million of deposits with
Chartered. During the third quarter of fiscal year 1999, the Company
negotiated a new (third) amendment effective November 6, 1998, to its foundry
agreement with Chartered. The new amendment resulted in the elimination of
Chartered's right to reinstate required future cash deposits of approximately
$36 million which had been suspended in a previous amendment subject to
certain conditions being met. The new amendment extends the period of time
over which the Company may utilize the existing $3.5 million deposit by three
years to December 31, 2002, but provides limitations on the maximum amounts
of the deposit which can be utilized by the Company in each of the four
calendar years 1999-2002. Under the newly amended agreement, should the
Company fail to utilize the maximum amount of the deposit for a given
calendar year, the remainder of the deposit available to be utilized for that
calendar year will be forfeited to Chartered. Additionally, should the
Company fail to make certain minimum amounts of wafer purchases in any given
calendar year, Chartered may elect to terminate the agreement and retain any
unused portion of the total deposit.
The Company currently believes the terms and conditions of the TSMC
foundry agreement, as amended, will be met and that the remaining deposits
will be utilized. The Company has not yet finalized its future wafer
purchasing plans from Chartered to determine what impact, if any, the
recently completed amendment will have on the Company's deposit with
Chartered. No assurance can be given regarding full utilization of
the remaining deposits with TSMC and Chartered, since full utilization is
based on the assumption that wafer purchasing volumes will increase from
current levels, in part due to new product introductions.
4. INVESTMENT IN FOUNDRY VENTURE
In October 1995, the Company entered into a series of agreements with
United Microelectronics Corporation ("UMC") to form, along with other
investors, a separate Taiwanese company, United Integrated Circuits
Corporation ("UICC"), for the purpose of building and managing a
semiconductor manufacturing facility in the Science Based Industrial Park in
Hsin Chu City, Taiwan, Republic of China. As an investor in this venture, the
Company has rights to a portion of the total wafer capacity for the
manufacture of its proprietary products. The Company paid approximately $51.2
million for approximately 9.3% of the total outstanding shares of the foundry
venture. The investment in UICC has been accounted for under the cost method
of accounting.
On October 3, 1997, a fire damaged the UICC facility. UICC management
has publicly stated that a majority of the equipment and inventory and a
significant portion of the building were completely destroyed at an estimated
loss of approximately $324 million. UICC reached a $300 million insurance
settlement for claims stemming from the fire and in accordance with the
coinsurance clause, UICC had to pay approximately $23.5 million of damages.
Despite the damage payment, UICC management has represented that UICC's
financial status has remained unaffected given significant realized
investment gains made during 1998. UICC has further stated that it expects to
complete reinforcement of the building structure and to install fab equipment
by May 1999, and to be in production by the last quarter of calendar 1999,
using primarily .18 micron process technology.
7
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. INVESTMENT IN FOUNDRY VENTURE (CONTINUED)
Given the Company's disputes with UMC (see "Legal Proceedings"), the
Company intends to sell its interest in UICC at an appropriate time, however,
at present, no definitive time period can be given. In light of this
intention, as well as the fire, the Company has evaluated its investment in
the UICC facility to determine whether there has been an impairment and as
the Company believes that estimated future cash inflows expected to be
generated by the facility and/or the disposition of the investment are in
excess of the carrying amount of the investment, no impairment loss has been
recognized as of December 31, 1998.
5. NET INCOME (LOSS) PER SHARE
Basic and diluted net income (loss) per share have been computed using the
weighted average number of shares of common stock and dilutive common equivalent
shares from stock options and warrants outstanding in accordance with Statement
of Financial Accounting Standards No. 128, "Earnings per Share." The following
table provides a reconciliation of the components of the basic and diluted
earnings (loss) per share computations:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
---------------------------- ---------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income (loss)................................... $ (9,693) $ 7,602 $ (23,872) $ 13,795
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average number of common
shares outstanding............................... 40,679 41,824 40,804 41,716
------------- ------------- ------------- -------------
Shares used in computing basic net income (loss) per share 40,679 41,824 40,804 41,716
------------- ------------- ------------- -------------
Weighted average number of dilutive common
Equivalent shares used in computing diluted net
income per share:
Options........................................ -- 733 -- 925
Warrants....................................... -- 86 -- 121
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Shares used in computing diluted net income (loss) per share 40,679 42,643 40,804 42,762
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net income (loss) per share:
Basic.......................................... $ (0.24) $ 0.18 $ (0.59) $ 0.33
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Diluted........................................ $ (0.24) $ 0.18 $ (0.59) 0.32
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
Approximately 395,000 and 173,000 of stock options were excluded from
the computation for the three and six months ended December 31, 1998,
respectively since they were antidilutive during the loss periods.
6. STOCKHOLDERS' EQUITY
During the third quarter of fiscal year 1999, pursuant to a plan
previously approved by the Company's Board of Directors on January 22, 1998
to repurchase up to two million shares of its common stock, the Company
repurchased approximately 200,000 shares of its common stock at a cost of
approximately $630,000. The Company has now repurchased all two million
shares authorized.
On November 18, 1998, the Company amended the Rights Agreement dated as
of August 19, 1997 between the Company and BankBoston, N.A., as Rights Agent
to eliminate all of the "Continuing Director" provisions. The "Continuing
Director" provisions in the Rights Plan were those provisions that required
that certain actions, including, but not limited to, the redemption and
termination of the Rights Plan could only be taken by those directors who
were members of the Company's Board of Directors at the time the Rights Plan
was adopted and any person who subsequently became a member of the Company's
Board if such person's nomination for election to the Board was recommended
or approved by a majority of the Continuing Directors then on the Company's
Board.
8
<PAGE>
OAK TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
This Amendment to the Rights Plan was made in response to the Delaware
Court of Chancery's recent decision in Carmody v. Toll Brothers, Inc., which
in the view of the Company's Board of Directors, based on advice of counsel,
cast doubt on the legality under Delaware law of "Continuing Director"
provisions.
On August 12, 1998, the Company repriced 2,638,750 stock options to
employees and certain officers under its 1994 Stock Option Plan to $3.25, the
fair market value as of that date. The repriced shares were treated as
cancelled and regranted and they did not retain their original vesting terms;
but rather, restarted vesting over 50 months.
7. ACQUISITIONS
On July 2, 1998, the Company acquired ViewPoint Technology, Inc.
(ViewPoint), a privately held company that was developing solutions for the
CD-RW drive market. ViewPoint had developed a controller that supports high
encoding speeds for CD-RW drives and this component is expected to complement
the Company's expertise in the block decoder area and be utilized in the
Company's next generation CD-RW drives. The Company paid approximately $10.1
million for all the outstanding shares of ViewPoint. The transaction was
accounted for under the purchase method of accounting, and ViewPoint's
development programs were integrated into the Company's overall development
programs from the date of acquisition. Of the $10,130,000 purchase price,
$0.9 million was allocated to cash, fixed assets, and other tangible assets;
$4.4 million was allocated to purchased technology and other intangible
assets; and $4.8 million was allocated to in-process research and development
programs and, accordingly, was charged to operations in the quarter ended
September 30, 1998.
On August 11, 1998 the Company acquired Xerographic Laser Images
Corporation (XLI), a provider of print quality enhancement technology for the
digital office equipment market. XLI will operate as a division of the
Company's wholly owned subsidiary, Pixel Magic, and will serve to leverage
Pixel's position in the digital office equipment market by broadening its
expertise in resolution enhancement technology. The Company paid $3,675,000
million to the XLI shareholders on the effective date of the merger, and at
that date, the shareholders had the right to receive additional payments of
up to $11,365,000 million subject to the achievement of certain milestones by
XLI over a three-year period ending December 31, 2000. Pursuant to a
post-closing audit and related post-closing adjustment set forth in the
acquisition agreement, it was determined that XLI had a net deficit (for
purposes of calculating a contingent cash adjustment, as defined in the
acquisition agreement) of $1,937,673 at the acquisition date which resulted
in a contingent cash adjustment of $1,112,673, thereby reducing the
contingent payment amount to $10,252,327. The transaction was also accounted
for under the purchase method of accounting, and XLI's operations have been
included in the Company's consolidated financial statements from the date of
acquisition. The cash purchase price for XLI was allocated as follows (in
thousands):
Net liabilities assumed $(3,090)
In-process research and development 2,376
Purchased technology and other intangible assets 4,389
-------
$ 3,675
-------
-------
The purchased technology and other intangible assets acquired from
ViewPoint and XLI will be amortized over three years. The amounts of the
purchase price assigned to the fair market values of in-process research and
development and purchased technology represent Company management's best
estimate. The Company will continue to review these estimates during the
remainder of the current fiscal year, as provided by Accounting Principles
Board Opinion No. 16, to ensure the Company's allocation complies with
appropriate financial reporting practices.
9
<PAGE>
OAK TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. CONTINGENCIES
The Company and various of its current and former officers and Directors
are parties to several class action lawsuits filed on behalf of all persons
who purchased or acquired the Company's stock (excluding the defendants and
parties related to them) for the period July 27, 1995 through May 22, 1996.
The first, a state court proceeding designated IN RE OAK TECHNOLOGY
SECURITIES LITIGATION, Master File No. CV758510 pending in Santa Clara County
Superior Court in Santa Clara, California, consolidates five class actions.
This lawsuit also names as defendants several of the Company's venture
capital fund investors, two of its investment bankers and two securities
analysts. The plaintiffs allege violations of California securities laws and
statutory deceit provisions as well as breaches of fiduciary duty and abuse
of control. On December 6, 1996, the state court Judge sustained the Oak
defendants' demurrer to all causes of action alleged in plaintiffs' First
Amended Consolidated Complaint, but allowed plaintiffs the opportunity to
amend. The plaintiffs' Second Amended Consolidated Complaint was filed on
August 1, 1997. On December 3, 1997, the state court Judge sustained the Oak
defendants' demurrer to plaintiffs' Second Amended Consolidated Complaint
without leave to amend to the causes of action for breach of fiduciary
duty and abuse of control, and to the California Corporations Code
Sections 25400/25500 claims with respect to the Company, a number of the
individual officers and directors, and the venture capital investors. The
judge also sustained the demurrer with leave to amend to the California
Civil code Sections 1709/1710 claims, however plaintiffs elected not to
amend this claim. Accordingly, the only remaining claims in state court
action, IN RE OAK TECHNOLOGY SECURITIES LITIGATION, is the California
Corporations Code Sections 25400/25500 cause of action against four officers
of the Company and the Company's investment bankers and securities analysts.
On July 16, 1998, the state court provisionally certified a national class
of all persons who purchased the Company's stock during the class period. The
class was provisionally certified with the order held in abeyance pending
resolution of the question of whether a nationwide class may bring a
California Corporations Code Sections 25400/25500 claim. This issue was
resolved in favor of allowing such nationwide class actions by the California
Supreme Court, Case No. 5058723, on January 4, 1999, in the DIAMOND
MULTIMEDIA SECURITIES LITIGATION appeal by the California Supreme Court.
Discovery has commenced in this action. Defendants and certain third parties
have produced documents and a small number of depositions have been taken.
The Company and various of its current and former officers and Directors
are also parties to four putative class action lawsuits pending in the U.S.
District Court for the Northern District of California. These actions have
been consolidated as IN RE OAK TECHNOLOGY, INC. SECURITIES LITIGATION, Case
No. C-96-20552-SW(PVT). This action alleges certain violations of federal
securities laws and is brought on behalf of purchasers of the Company's stock
for the period July 27, 1995 through May 22, 1996. This action also names as
a defendant one of the Company's investment bankers. On July 29, 1997, the
federal court Judge granted the Oak defendants Motion to Dismiss the
plaintiffs' First Amended Consolidated Complaint, but granted plaintiffs
leave to amend most claims. The plaintiffs' Second Amended Consolidated
Complaint was filed on September 4, 1997. Defendants Motion to Dismiss was
heard on December 17, 1997. The federal court Judge took the matter under
submission and has not yet issued a ruling.
Additionally, various of the Company's current and former officers and
Directors are defendants in three consolidated derivative actions pending in
Santa Clara County Superior Court in Santa Clara, California, entitled IN RE
OAK TECHNOLOGY DERIVATIVE ACTION, Master file No. CV758510. This lawsuit, which
asserts a claim for breach of fiduciary duty and a claim under California
securities law based upon the officers' and Directors' trading in securities of
the Company, has been stayed pending resolution of the class actions.
In all of the state and putative federal class actions, the plaintiffs are
seeking monetary damages and equitable relief. In the derivative action, the
plaintiffs are also seeking an accounting for the defendants' sales of Company
stock and the payment of monetary damages to the Company.
All of these actions are in the early stages of proceedings. Based on
its current information, the Company believes the suits to be without merit
and will defend its position vigorously. Although it is reasonably possible
the Company may incur a loss upon conclusion of these claims, an estimate of
any loss or range of loss cannot be made. No provision for any liability
that may result upon adjudication has been made in the Company's Consolidated
Financial Statements.
In connection with the above described legal proceedings, the Company
has incurred and expects to continue to incur legal and other expenses.
10
<PAGE>
OAK TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. CONTINGENCIES (CONTINUED)
The Company and its current Directors are also parties to six putative
class actions filed on behalf of all Oak Technology, Inc. shareholders (other
than defendants) in the Court of Chancery of the State of Delaware in and for
New Castle County concerning a proposal by a management-led investor group
known as "Gold Acquisition Group" to acquire all of the outstanding shares of
the Company for a price of $4.50 per share. Plaintiffs have requested
consolidation of the actions under the caption IN RE OAK TECHNOLOGY, INC.
SHAREHOLDERS LITIGATION, C.A. No. 16789 ("Delaware Shareholders Litigation").
The other civil action numbers are 16792, 16793, 16794, 16818, and 16831.
Plaintiffs allege that the offer is inadequate and that the defendants
breached their fiduciary duties of loyalty and entire fairness. On December
14, 1998, a Special Committee of the Board of Directors that had been formed
to evaluate the proposal announced that it would not recommend the proposal
to the Company's full Board of Directors. In addition, on December 21, 1998,
Gold Acquisition Group announced that its proposal had expired and to date,
it has not been renewed. Based on its investigation to date, the Company
believes the suits to be without merit and will defend its position
vigorously. No provision for any liability that may result upon adjudication
has been made in the Company's Consolidated Financial Statements.
The Company and its current Directors are also parties to a putative
class action filed on behalf of all Oak Technology, Inc. shareholders (other
than defendants) in Santa Clara County Superior Court, designated KRIM V. OAK
TECHNOLOGY, INC., et al., Case No. 778281. The allegations of Plaintiffs in
this action are nearly identical to the Delaware Shareholders Litigation.
This action has been stayed by agreement of the parties as a result of the
Special Committee's announcement that it would not recommend to the Company's
full Board of Directors the proposal made by Gold Acquisition Group to
acquire all of the outstanding shares of the Company for a price of $4.50 per
share as well as the subsequent announcement of the expiration of the
proposal by Gold Acquisition Group. Based on its investigation to date, the
Company believes the suit to be without merit and will defend its position
vigorously. No provision for any liability that may result upon adjudication
has been made in the Company's Consolidated Financial Statements.
In September, 1998, the Company and certain of its current Directors
became parties to a putative class action lawsuit pending in the Court of
Chancery in the State of Delaware, entitled MANNING V. OAK TECHNOLOGY, ET
AL., Civil Action No. 16656NC. This action alleges violations of the
Delaware General Corporation Law and breaches of fiduciary duty and is
brought on behalf of all owners of Oak Technology common stock at any time
between August 19, 1997 and the date of class certification. Plaintiffs'
claims are based upon the Board of Directors' adoption on or about August 19,
1997 of a Stockholder Rights Plan that included a provision that limited the
redemption or modification of the Plan to its Continuing Directors or their
designated successors. Plaintiffs allege that the Stockholder Rights Plan
with the Continuing Directors provision disenfranchises public stockholders
by forcing them to vote for incumbent directors who enjoy full voting
rights; that it restricts the ability of future directors to exercise their
full statutory prerogatives; and that the particular provision at issue is
an unreasonable and disproportionate response to any threatened takeover.
Plaintiffs are seeking an injunction and a declaratory judgment that the
Stockholder Rights Plan is invalid and unenforceable and monetary damages for
the alleged violations of fiduciary duty. On November 18, 1998, in light of
the change in the law due to the decision in CARMODY V. TOLL BROS., the
Company's Board of Directors voted to amend the Shareholders Rights Plan to
eliminate the Continuing Directors provision. On December 11, 1998,
plaintiffs amended their complaint to include a cause of action which
asserted that the directors elected after the adoption of the Company's
Shareholder Rights Plan were not validly elected and another cause of action
for breach of fiduciary duty related to the proposal by the Gold Acquisition
Group to acquire all of the outstanding stock of the Company for $4.50 per
share (also the subject of the DELAWARE SHAREHOLDERS LITIGATION and the KRIM
litigation described above). A tentative settlement has been reached with the
plaintiffs. The settlement should not have a material effect on the
Company's Consolidated Financial Statements. To date, no provision for any
loss has been made in the Company's Consolidated Financial Statements.
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OAK TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. CONTINGENCIES (CONTINUED)
In connection with the above-described legal proceedings, the Company
expects to incur legal and other expenses.
The Company is party to various other legal proceedings, including a
number of patent-related matters. In the opinion of management, including
internal counsel, these other legal proceedings will not have a material
adverse effect on the Company's consolidated financial position or overall
results of operations. In connection with these matters, however, the
Company has incurred, and expects to continue to incur, substantial legal and
other expenses.
The estimate of potential impact on the Company's consolidated financial
position or overall results of operations for all of the aforementioned legal
proceedings could change in the future.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
EXCEPT FOR THE HISTORICAL FINANCIAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS QUARTERLY REPORT ON FORM 10-Q MAY BE CONSIDERED
"FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES ACT OF 1934, AS
AMENDED. SUCH STATEMENTS INCLUDE DECLARATIONS REGARDING THE INTENT, BELIEF OR
CURRENT EXPECTATIONS OF THE COMPANY AND ITS MANAGEMENT. PROSPECTIVE INVESTORS
ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF
FUTURE PERFORMANCE AND INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING
STATEMENTS. AMONG THE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS ARE:
(I) THAT THE INFORMATION IS OF A PRELIMINARY NATURE AND MAY BE SUBJECT TO
FURTHER ADJUSTMENT, (II) VARIABILITY IN THE COMPANY'S QUARTERLY OPERATING
RESULTS, (III) GENERAL CONDITIONS IN THE SEMICONDUCTOR INDUSTRY, (IV) RISKS
RELATED TO PENDING LEGAL PROCEEDINGS, (V) DEVELOPMENT BY COMPETITORS OF NEW OR
SUPERIOR PRODUCTS OR THE ENTRY OF NEW COMPETITORS INTO THE COMPANY'S MARKETS,
(VI) THE COMPANY'S ABILITY TO DIVERSIFY ITS PRODUCT AND MARKET BASE BY
DEVELOPING AND INTRODUCING NEW PRODUCTS WITHIN DESIGNATED MARKET WINDOWS AT
COMPETITIVE PRICE AND PERFORMANCE LEVELS, (VII) WILLINGNESS OF PROSPECTIVE
CUSTOMERS TO DESIGN THE COMPANY'S PRODUCTS INTO THEIR PRODUCTS, (VIII)
AVAILABILITY OF ADEQUATE FOUNDRY CAPACITY AND ACCESS TO PROCESS TECHNOLOGIES,
(IX) THE COMPANY'S ABILITY TO PROTECT ITS PROPRIETARY INFORMATION AND OBTAIN
ADEQUATE LICENSES OF THIRD PARTY TECHNOLOGY ON ACCEPTABLE TERMS, (X) RISKS
RELATED TO USE OF INDEPENDENT MANUFACTURERS AND THIRD PARTY ASSEMBLY AND TEST
VENDORS, (XI) DEPENDENCE ON KEY PERSONNEL, (XII) RELIANCE ON A LIMITED NUMBER OF
LARGE CUSTOMERS, (XIII) DEPENDENCE ON SALES OF CD-ROM CONTROLLER PRODUCTS, (XIV)
RISKS RELATED TO INTERNATIONAL BUSINESS OPERATIONS, (XV) ABILITY OF THE COMPANY
TO MAINTAIN ADEQUATE PRICE LEVELS AND MARGINS WITH RESPECT TO ITS PRODUCTS,
(XVI) MANAGEMENT OF CHANGING OPERATIONS RELATED TO THE COMPANY'S ATTEMPT TO
DIVERSIFY ITS PRODUCT AND MARKET BASE, (XVII) CURRENT DEPENDENCE ON SALES TO THE
ASIAN MARKETS, (XVIII) THE ABILITY TO ATTRACT AND RETAIN QUALIFIED MANAGEMENT
AND TECHNICAL PERSONNEL AND (XIX) OTHER RISKS IDENTIFIED FROM TIME TO TIME IN
THE COMPANY'S REPORTS AND REGISTRATION STATEMENTS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION, INCLUDING THE ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
JUNE 30, 1998.
GENERAL
The Company designs, develops and markets high performance integrated
semiconductors and related software to original equipment manufacturers
worldwide that serve the optical storage, consumer electronics and digital
office equipment markets. The Company's products consist primarily of integrated
circuits and supporting software and firmware to provide a complete solution for
customers.
The Company contracts with independent foundries to manufacture all of
its products, enabling the Company to focus on its design strengths, minimize
fixed costs and capital expenditures and gain access to advanced manufacturing
facilities. Except pursuant to its agreements with TSMC and Chartered, the
Company's foundries generally are not obligated to supply products to the
Company for any specific period, in any specific quantity or at a specific
price.
During the third quarter of fiscal 1998, the Company restructured its
operations along three market-focused groups: Optical Storage Group, Consumer
Group, and the Digital Office Equipment Group (Pixel Magic), at the same time
discontinuing its product development and marketing efforts in its PC audio and
3D graphics businesses. Since then, the Company has completed three acquisitions
(ODEUM Microsystems, Viewpoint Technology, Inc., and Xerographic Laser Images
Corporation), and made a joint venture investment (Omni Peripherals Pte, Ltd.),
all aimed at expanding the potential product offerings for these three target
markets. The ViewPoint and XLI acquisitions were completed during the first
quarter of fiscal year 1999 ended September 30, 1998.
As repositioned, the Company provides high-performance, integrated
semiconductors to original equipment manufacturers (OEMs) worldwide who serve
the optical storage, consumer electronics and digital office equipment
markets. The Company's products, consisting primarily of integrated circuits
and supporting software and firmware, enable its OEM customers to deliver
cost-effective, powerful systems to the end-user for storage, home
entertainment and imaging applications. A leading merchant supplier of
controllers for CD-ROM and CD-RW drives, the Company's product offerings for
its three target market segments have expanded to
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include controllers for DVD drives; MPEG-2 audio/video decoders for VideoCD
(VCD) and DVD players; integrated circuits for digital broadcast systems such
as cable, satellite and terrestrial set-top boxes; and multitasking imaging
and compression processors for the emerging class of digital office
equipment. The Company's mission is to continue to seek opportunities for
value-added silicon in these emerging market segments where it can leverage
its core competencies to offer powerful, cost-effective and complete
solutions to its OEM partners.
In its press release regarding the results of operations for the
second quarter of fiscal year 1999, the Company announced that it expects to
record net losses for the third and fourth quarters of fiscal year 1999 as
the Company transitions to its next generation products for the optical
storage market and its first generation products for the digital broadcast
market. For fiscal year 1999, the Company expects that a majority of its
revenue will continue to be generated by its CD-ROM and older generation
CD-RW controller product lines. The CD-ROM controller market is a mature
market in which the Company is experiencing declining revenues as a result of
severe pricing and competitive pressures (see Results of Operations).
RESULTS OF OPERATIONS
NET REVENUES. The Company's net revenues in the comparison periods were
primarily derived from sales of its CD-ROM and CD-RW controller products
which comprised 67% and 69% of the Company's net revenues in the three month
and six month periods, respectively, ended December 31, 1998. Net revenues
decreased 56% to $21.9 million in the three months ended December 31, 1998
from $49.4 million in the comparable period of fiscal 1998. For the six month
period ended December 31, 1998, net revenues decreased 55% to $41.8 million
from $92.6 million in the comparable period of fiscal 1998. For both the
three and six-month periods, approximately two-thirds of the revenue
decrease was attributable to a decrease in unit sales of CD-ROM controllers
from the comparable periods of fiscal 1998, with the remainder of the
decrease due to a decline in the average selling price ("ASP") of the CD-ROM
controllers. The decrease in unit sales is primarily the result of a loss of
market share in Taiwan, the maturation of the CD-ROM market, and development
delays in the Company's next-generation CD-ROM product, and to a lesser
extent, economic downturns in the Asian markets to which a large majority of
the Company's products are sold. In the three months ended December 31, 1998
and 1997, sales to the Company's top ten customers accounted for
approximately 75% and 83%, respectively, of the Company's net revenues, with
similar percentages for the six-month periods of both fiscal years.
International sales, principally to Japan, Taiwan, Korea, Singapore, and
Belgium accounted for approximately 86% and 94% of the Company's net revenues
in each of the three months ended December 31, 1998 and 1997, respectively.
The comparable percentages for the six-month periods ended December 31, 1998
and 1997 were 86% and 95%, respectively.
The Company anticipates that sales of existing CD-ROM and CD-RW
controller products will continue to decline during the remainder of the
current fiscal year. Revenues for at least the remaining two quarters of
fiscal year 1999 will continue to be significantly less than the comparable
periods of the previous fiscal year. See "Factors That May Affect Future
Results" below.
GROSS MARGIN. Cost of revenues includes the cost of wafer
fabrication, assembly and testing performed by third-party vendors and direct
and indirect costs associated with the procurement, scheduling and quality
assurance functions performed by the Company. The Company's gross margin
decreased to 47.1% in the three month period ended December 31, 1998 as
compared to 52.9% during the comparable period in the prior year. The
decrease in gross margin is primarily the result of a decrease in ASPs for
the Company's CD-ROM controller products which was only partially offset by a
decrease in the Company's unit cost for the same products. The Company's
overall gross margin is subject to change due to various factors, including,
among others, competitive product pricing, yields, wafer costs, assembly and
test costs and product mix. The Company expects that ASPs for its existing
products will continue to decline over time and that ASPs for each new
product will decline significantly over the life of the product. The Company
continues to experience severe price pressure on its CD-ROM controller
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
and VideoCD products and therefore, it expects gross margin percentages to
decline for such products. In addition, given the extremely competitive
nature of the optical storage and consumer market, the Company believes that
gross margins for new products in its optical storage market and consumer
market will be lower than historical levels and that, as a result, gross
margins in general will decline in the future.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development costs
are expensed as incurred. Research and development expenses of $12.2 million
for the three months ended December 31, 1998 were flat with the comparable
period of the previous fiscal year. For the six months ended December 31,
1998, R&D expenses
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were $25.3 million, compared to $23.0 million for the year-ago six-month
period. The increase in the year-to-date amounts was principally the result
of the hiring of additional technical personnel and associated expenses since
the previous fiscal year periods, as well as increased purchased technology
amortization expense related to the Odeum, ViewPoint, and XLI acquisitions
made in the fourth quarter of fiscal year 1998 and first quarter of fiscal
year 1999. Research and development expenses increased significantly as a
percentage of net revenues for the current fiscal periods over the comparable
periods in the prior year due primarily to the significant decrease in the
Company's net revenues in the current periods compared to the comparable
periods of fiscal 1998. The Company will continue to invest substantial
resources in research and development in an effort to complete the
development of its new products in the Company's target markets: optical
storage, consumer electronics and digital office equipment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative (S,G&A) expenses increased 25% to $9.8 million in the three
months ended December 31, 1998 from $7.8 million in the comparable period in
the prior year. During the second quarter of fiscal year 1999, the Company
incurred approximately $1.6 million of consulting fees and other expenses
related to the evaluation of a buyout proposal from Gold Acquisition Group.
Additionally, legal expenses related to the complaint the Company filed with
the ITC on April 7, 1998 and additional litigation were higher in the current
fiscal quarter compared to the year-ago second quarter. See "Legal
Proceedings". For the six months ended December 31, 1998, SG&A expenses
increased 29% to $18.2 million from $14.1 million in the comparable period of
the prior fiscal year. In addition to the consulting fees and legal expenses
discussed above, the six-month period increase was also the result of the
hiring of additional management and administrative personnel since the
year-ago periods, and associated expenses. S,G&A expenses increased
significantly as a percentage of net revenues for the current fiscal periods
over the comparable periods in the prior year due primarily to a significant
decrease in the Company's net revenues in the comparison periods. The Company
expects to continue to incur higher S,G&A expenses as a percentage of net
revenues during the remainder of fiscal 1999 as compared to comparable
year-ago periods, however, the Company expects to be able to keep absolute
dollar S,G&A expenses in the remaining quarters of fiscal 1999 flat or
slightly less than expenses incurred in the second quarter.
ACQUIRED IN-PROCESS TECHNOLOGY. During the first quarter of fiscal
1999, the Company acquired ViewPoint and XLI (see note 7 to the condensed
consolidated financial statements). Of the combined purchase prices of the two
companies, $7.2 million was allocated to in-process research and development
(IPR&D) and was charged to operations ($4.8 million related to ViewPoint, $2.4
million related to XLI). Substantially all of the remainder of the purchase
prices of the two companies (aside from allocations to tangible assets totaling
$0.9 million) has been allocated to purchased technology and other intangible
assets (totaling $8.8 million) recorded on the Company's balance sheet, and will
be amortized to operations on a straight-line basis over three years.
NONOPERATING INCOME. During the second quarter of fiscal 1999,
nonoperating income decreased to $1.5 million from $5.6 million during second
quarter of fiscal 1998, and decreased to $3.5 million for the six month period
from $9.7 million in the year-ago six-month period. In the year-ago quarter and
six-month period, the Company recorded as nonoperating income approximately $4.8
million and $7.5 million, respectively, it received related to the settlement
agreement between the Company and United Microelectronics Corporation in
connection with a complaint the Company had filed with the International Trade
Commission on July 21, 1997. (See "Legal Proceedings"). Interest income (net of
expense) was lower in the three-month and six-month periods ended December 31,
1998 than in the prior year periods due to a reduced invested cash balance and
lower interest rates. Partially offsetting the reductions in settlement income
and interest income were translation gains recorded in the first two quarters of
fiscal 1999 (related primarily to the strengthening of the Japanese Yen),
compared to translation losses in the first two quarters of fiscal year 1998
when the Yen was weakening.
INCOME TAXES. The effective tax benefit for the three months ended
December 31, 1998 was 4.4%, reflecting an adjustment of the year-to-date
benefit recorded to a lowered estimate of the loss carryback benefits
available to the Company as a percentage of its estimated loss before taxes
for the fiscal year. The overall effective tax benefit rate for the six
months ended December 31, 1998 is 12.8%. No tax benefit has been assigned to
the write-off of IPR&D, since it is not deductible for tax purposes.
Excluding the impact of the IPR&D, the tax benefit recorded is 17.3% of the
pre-tax loss, and is less than the statutory income tax rates due to
limitations on loss carryback benefits available to the Company. The Company
recorded a 35% effective tax rate in the first and second quarters of fiscal
1998; the effective tax rate for fiscal 1998 as a whole was subsequently
reduced to 15% as a result of lower taxable income and substantial R&D
credits earned by the Company, offset by a partial valuation allowance.
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FACTORS THAT MAY AFFECT FUTURE RESULTS
The following factors should be carefully considered in evaluating the
Company and its business.
QUARTERLY FLUCTUATIONS. The Company's quarterly revenue and operating
results have varied significantly in the past and are likely to vary
substantially from quarter to quarter in the future. The Company's operating
results are affected by a wide variety of factors, many of which are outside the
Company's control, including but not limited to, the gain or loss of significant
customers, increased competitive pressures, the timing of new product
introductions by the Company or its competitors and market acceptance of new or
enhanced versions of the Company's and its customers' products. Other factors
include the availability of foundry capacity, fluctuations in manufacturing
yields, availability and cost of raw materials, the cyclical nature of the
semiconductor industry, the market for PCs and the specific markets addressed by
the Company's products, seasonal customer demand, the Company's ability to
diversify its product offerings, the competitiveness of the Company's customers,
the timing of significant orders and order cancellations or rescheduling, and
changes in pricing policies by the Company, its competitors or its suppliers,
including decreases in ASPs of the Company's products. In addition, the
Company's quarterly operating results could be materially adversely affected by
legal expenses incurred in connection with, or any adverse judgment in, the
Company's ongoing shareholder legal proceedings. The Company's operating results
could also be adversely affected by economic conditions generally in various
geographic areas where the Company or its customers do business. These factors
are difficult to forecast, and these or other factors could materially affect
the Company's quarterly or annual operating results. There can be no assurance
as to the level of sales or earnings that may be attained by the Company in any
given period in the future.
The semiconductor industry has historically been characterized by rapid
technological change, cyclical market patterns, significant price erosion,
periods of over-capacity and production shortages, variations in manufacturing
costs and yields and significant expenditures for capital equipment and product
development. In addition, the industry has experienced significant economic
downturns at various times, characterized by diminished product demand and
accelerated erosion of product prices. The Company may experience substantial
period-to-period fluctuations in operating results due to general semiconductor
industry conditions. The downturns in the industry often occur in connection
with, or in anticipation of, maturing product cycles (of both the semiconductor
companies and their customers) and declines in general economic conditions.
These downturns have been characterized by abrupt fluctuations in product
demand, production overcapacity and subsequent accelerated erosion of average
selling prices, and in some cases, have lasted for more than a year. The Company
may experience substantial period-to-period fluctuations in future operating
results due to general industry conditions or events occurring in the general
economy and the Company's operating results and financial condition could be
materially and adversely impacted by a significant industry-wide downturn. Even
if customers' aggregate demand were not to decline, the availability of
additional capacity can adversely impact pricing levels, which can also depress
revenue levels. Also, during such periods, customers benefiting from shorter
lead times may delay some purchase into future periods. There can be no
assurance the Company will not experience such downturns in the future, which
could have a material impact on the Company's operating results and financial
condition.
In addition, the Company currently places noncancelable orders to
purchase its products from independent foundries on an approximately three
month rolling basis and is currently committed with two of its foundries for
certain minimum amounts of capacity (for the next several fiscal quarters
with one of the foundries and for the next several calendar years with the
other foundry), while its customers generally place purchase orders with the
Company less than four weeks prior to delivery that may be rescheduled or
under certain circumstances may be canceled without significant penalty. Due
to the Company's relatively narrow customer base for certain devices and the
short product life cycles of such products, such cancellations can leave the
Company with significant inventory exposure, which could have a material
adverse effect on the Company's operating results. Consequently, if
anticipated sales and shipments in any quarter are rescheduled, canceled, or
do not occur as quickly as expected, expense and inventory levels could be
disproportionately high and the Company's business, financial condition and
results of operations for that quarter or for the year would be materially
adversely affected.
The markets in which the Company competes are intensely competitive
and are characterized by rapid technological change, declining unit ASP's and
rapid product obsolescence. The Company expects competition to increase in
the future from existing competitors and from other companies that may enter
the Company's existing or future markets with solutions that may be less
costly or provide higher performance or additional features. The Company's
existing and potential competitors include many large domestic and
international companies that have 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
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include a number of emerging companies as well as some of the Company's own
customers and suppliers. The Company anticipates increased competition from
the captive suppliers to the optical storage market as this market
transitions to DVD. The Company is currently attempting to enter several new
segments of the consumer electronics market in which the Company has not
previously operated. These markets are intensely competitive and the Company
will have to compete with large domestic and international companies, some of
whom have long standing relationships with the Company's target customers.
Certain of the Company's principal competitors maintain their own
semiconductor foundries and may therefore benefit from certain capacity, cost
and technological advantages. The Company believes that its ability to
compete successfully depends on a number of factors, both within and outside
of its control, including the price, quality and performance of the Company's
and its customers' products, the timing and success of new product
introductions by the Company, its customers and its competitors, the rate of
infrastructure development in the digital broadcast market, the development
of technical innovations, the ability to obtain adequate foundry capacity and
sources of raw materials, the efficiency of production, the rate at which the
Company's customers design the Company's products into their products, the
market acceptance of the Company's customers products, the number and nature
of the Company's competitors in a given market, the assertion of intellectual
property rights and general market and economic conditions. The Company's
future operating results are likely to be affected by these factors as well
as others.
PRICING ISSUES. The willingness of prospective customers to design
the Company's products into their products depends, to a significant extent,
upon the ability of the Company to have product available at the appropriate
market window and to price its products at a level that is cost effective for
such customers. The markets for most of the applications for the Company's
products, especially in the consumer electronics market and the optical
storage market, are characterized by intense price competition. As the
markets for the Company's products mature and competition increases, as has
been the trend for the optical storage and digital video disk segment of the
consumer electronics market, the Company anticipates that ASPs on its
products will decline. The Company continually attempts to pursue cost
reductions, including process enhancements, in order to maintain acceptable
gross profit margins. Gross profit margins also vary reflecting the impact of
changes in the general condition of the economy, capacity utilization levels
in the semiconductor industry, customer acceptance of new technologies and
products, product functionality and capabilities, shifts in product mix,
manufacturing yields and the effect of ongoing manufacturing cost reduction
activities. If the Company is unable to reduce its costs sufficiently to
offset declines in ASPs or is unable to successfully introduce new higher
performance products with higher ASPs, the Company's operating results will
be materially adversely affected. In addition, if the Company experiences
yield or other production problems or shortages of supply that increase its
manufacturing costs, fails to reduce its manufacturing costs, or fails to
utilize its prepaid deposits with the TSMC and Chartered foundries, the
result would be a material adverse effect on the Company's business,
financial condition and operating results.
NEW PRODUCT INTRODUCTIONS. The markets for the Company's products
are characterized by evolving industry standards, rapid technological change
and product obsolescence. The Company's performance is highly dependent upon
the successful development and timely introduction of its next generation
CD-RW and digital video disk products as well as new products in the digital
broadcast market and its first generation PC DVD product at competitive price
and performance levels. The Company's financial performance is dependent upon
timely and successful execution of these next generation and new products as
the majority of the Company's revenue for the first half of fiscal 1999 has
come from mature CD-ROM and CD-RW products, the sales of which are
anticipated to further decline in the second half of fiscal 1999. In an
effort to diversify its product and market base, the Company has invested
substantial resources in optical storage as well as in its other core
technologies, consumer electronics and digital imaging. There can be no
assurance that products currently under development in these core
technologies or any other new products will be successfully developed or will
achieve market acceptance, thereby affecting the Company's ability to achieve
diversification of its products and markets, and thereby revenue
diversification. The failure of the Company to introduce these new products
successfully or the failure of new products to achieve market acceptance
would have a material adverse effect on the Company's business, financial
condition and results of operations. The success of new product introductions
is dependent on several factors, including recognition of market
requirements, product cost, timely completion and introduction of new product
designs, improvement of existing technologies and development and
implementation of new process technologies in order to continue to reduce
semiconductor die size, improve device performance and manufacturing yields,
adapt products and processes to technological changes and adopt emerging
industry standards. In both the optical storage and consumer electronics
market, particularly DVD, a variety of standards and formats are being
proposed, making it difficult to develop product to market requirements, and
making it even more difficult for the market to develop. The Company's
success is also dependent upon securing sufficient foundry capacity for
volume manufacturing of wafers and achievement of acceptable manufacturing
yields from the Company's contract manufacturers. Semiconductor design and
process methodologies are subject to rapid technological change.
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Decreases in geometries call for sophisticated design efforts, advanced
manufacturing equipment and cleaner fabrication environments. Due to the
design complexity of its products, especially with the increased levels of
integration that are required, the Company has experienced delays in
completing development and introduction of new products, and there can be no
assurance that the Company will not encounter such delays in the development
and introduction of future products. In particular, the Company has
experienced delays in its products for the optical storage market and the
digital office equipment market. There can be no assurance that the Company
will successfully identify new product opportunities and develop and bring
new products to market in a timely manner, that the Company's products will
be selected for design into the products of its targeted customers or that
products or technologies developed by others will not render the Company's
products or technologies obsolete or noncompetitive. Furthermore, there can
be no assurance that the products of the Company's customers will be
successfully introduced into the market. The failure of the Company's new
product development efforts, the failure of the Company to achieve market
acceptance of its new products and the failure of the products of the
Company's customers to achieve market acceptance would have a material
adverse effect on the Company's business, financial condition and operating
results.
NEED FOR ADDITIONAL CAPITAL. In order to remain competitive, the
Company must continue to make investments in new facilities and capital
equipment. The Company spent $4.3 million on capital additions in the first
two quarters of fiscal 1999 and although it expects to spend lesser amounts
in the remaining quarters of fiscal year 1999, significant amounts of capital
additions could be required in subsequent years. Additionally, in order to
obtain an adequate supply of wafers, especially wafers manufactured using
advanced process techniques, the Company has entered into and will continue
to consider various possible transactions, including various "take or pay"
contracts (such as those described in Foundry Deposits later in this
document) that commit the Company to purchase specified quantities of wafers
over extended periods. Manufacturing arrangements such as these may require
substantial capital investment, which may require the Company to seek
additional financing.
The Company believes that existing liquid resources and funds
generated from operations, if any, combined with its ability to borrow funds
will be adequate to meet its operating and capital requirements and
obligations into the foreseeable future. The Company believes that a
company's level of financial resources is an important factor in its
industry. Accordingly, the Company may from time to time seek additional
equity or debt financing. There can be no assurance that such funds will be
available on terms acceptable to the Company when needed. Any future equity
financing will also lead to dilution to the existing shareholders.
ACQUISITIONS. The Company has begun to pursue, and will continue to
pursue, opportunities to acquire key technology to augment its technical
capabilities or to achieve faster time to market as alternatives to
internally developing such technology. Acquisitions involve numerous risks,
including difficulties in integration of the operations, technologies, and
products of the acquired companies; the risk of diverting management's
attention from normal daily operations of the business; risks of entering
markets in which the Company has no or limited direct prior experience and
where competitors in such markets have stronger market positions; the
coordination of sales, marketing and research and development; and the
potential loss of key employees of the acquired company. In addition,
investments in emerging technology present risks of loss of value of one or
more of the investments due to failure of the technology to gain the
predicted market acceptance.
Failure to manage growth effectively and successfully integrate
acquisitions made by the Company could adversely affect the Company's
business and operating results. In addition, with such acquisitions, there is
the risk that future operating performance may be unfavorably impacted due to
acquisition related costs such as, but not limited to, in-process research
and development charges, additional development expenses, lower gross margins
generated by the sales of acquired products and restructuring costs
associated with duplicate facilities.
In the fourth quarter of fiscal year 1998, the Company acquired ODEUM
Microsystems, Inc. (ODEUM) and allocated approximately $1.3 million of the
purchase price to in-process research and development (which was expensed) and
approximately $2.2 million to purchased technology, goodwill and other
intangible assets which are recorded on the Company's balance sheet. In the
first quarter of fiscal year 1999, the Company acquired ViewPoint and allocated
approximately $4.8 million to in-process research and development and
approximately $4.4 million to purchased technology and other intangible assets.
Also in the first quarter of fiscal year 1999, the Company acquired XLI and
allocated approximately $2.4 million of the purchase price to in-process
research and development and approximately $4.4 million to purchased technology
and other intangible assets. For the ViewPoint and XLI acquisitions, the
valuation of the acquired in-process research and development used by the
Company in making its determination as to the amount of in-process research and
development expense was supported by valuation studies prepared by an
independent third-party appraiser. For the ODEUM acquisition, the acquired
in-process research and development valuation was based on Oak management's best
estimate based on its
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analysis of the progress of the ODEUM research and development in process at
the acquisition date and the anticipated cash flows to be derived from the
resulting products.
In September 1998, a representative of the Securities and Exchange
Commission (the "SEC") provided the American Institute of Certified Public
Accountants with guidance as to the factors to be considered in the valuation
of in-process research and development. Although the Company believes that
the amounts of the recorded in-process research and development expense are
reasonable when applying these factors, there can be no assurance that the
SEC will not review the Company's valuations, which review could result in
the Company making adjustments to the reported amounts of in-process research
and development expense for the years ended June 30, 1998 and 1999. Any such
adjustment could result in an increase in the amount of purchased technology
and other intangibles recorded with respect to the acquisitions of ODEUM,
ViewPoint, and XLI, which would result in higher amortization expenses, and
therefore, adversely affect the Company's future operating results.
INTELLECTUAL PROPERTY MATTERS. The Company's ability to compete is
affected by its ability to protect its proprietary information. The Company
considers its technology to be proprietary and relies on a combination of
patents, trademarks, copyrights, trade secret laws, confidentiality
procedures and licensing arrangements to protect its intellectual property
rights. The Company currently has 11 patents granted, 32 patents in
preparation in the United States, 83 patents pending in the United States and
three international patents granted and 19 international patents pending. The
Company intends to seek additional international patents and additional
United States patents on its technology. There can be no assurance that
additional patents will issue from any of the Company's pending applications
or applications in preparation, or be issued in all countries where the
Company's products can be sold, or that any claims allowed from pending
applications or applications in preparation will be of sufficient scope or
strength to provide meaningful protection or any commercial advantage to the
Company. Additionally, competitors of the Company may be able to design
around the Company's patents. There can be no assurance that any patents held
by the Company will not be challenged, invalidated or circumvented, or that
the rights granted thereunder will provide competitive advantages to the
Company. An action is currently pending in the Federal District Court for the
Northern District of California seeking to invalidate one of the Company's
patents relating to it's optical storage products. Moreover, while the
Company holds or has applied for patents relating to the design of its
products, some of the Company's products are based in part on standards,
including MPEG-1, MPEG-2, JPEG and JBIG and the Company does not hold patents
or other intellectual property rights for such standards. The laws of certain
foreign countries in which the Company's products are or may be manufactured
or sold, including various countries in Asia, may not protect the Company's
products or intellectual property rights to the same extent as do the laws of
the United States and thus make the possibility of piracy of the Company's
technology and products more likely. There can be no assurance that the steps
taken by the Company to protect its proprietary information will be adequate
to prevent misappropriation of its technology or that the Company's
competitors will not independently develop technologies that are
substantially equivalent or superior to the Company's technology.
The semiconductor industry is characterized by vigorous protection
and pursuit of intellectual property rights, which has resulted in
significant, often protracted and expensive litigation. Although there is
currently no pending intellectual property litigation against the Company,
the Company or its foundries may, from time to time, be notified of claims
that the Company may be infringing patents or other intellectual property
rights owned by third parties. If it is necessary or desirable, the Company
may seek licenses under such patents or other intellectual property rights.
However, there can be no assurance that licenses will be offered or that the
terms of any offered licenses will be acceptable to the Company. The failure
to obtain a license from a third party for technology used by the Company
could cause the Company to incur substantial liabilities and to suspend the
manufacture of products or the use by the Company's foundries of processes
requiring the technology. Furthermore, the Company may initiate claims or
litigation against third parties for infringement of the Company's
proprietary rights or to establish the validity of the Company's proprietary
rights. In fiscal 1997 and again in fiscal 1998, the Company filed a
complaint with the International Trade Commission (ITC) against certain Asian
manufacturers of optical storage controller devices based on the Company's
belief that such devices infringed one or more of the Company's patents. The
complaint seeks a ban on the importation into the United States of any
infringing CD-ROM controller or products containing such infringing CD-ROM
controllers. (See "Legal Proceedings"). The Company has incurred significant
legal expenses in connection with both ITC actions. Any litigation by or
against the Company could result in significant expense to the Company and
divert the efforts of the Company's technical and management personnel,
whether or not such litigation results in a favorable determination for the
Company. In the event of an adverse result in any such litigation, the
Company could be required to pay substantial damages, cease the manufacture,
use and sale of infringing products, expend significant resources to develop
non-infringing technology, discontinue the use of certain processes or obtain
licenses to the infringing technology. There can be no assurance that the
Company would be successful in such development or that such licenses would
be available on reasonable terms, or at all, and any such development or
license could require expenditures by the Company of
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substantial time and other resources. Patent disputes in the semiconductor
industry have often been settled through cross-licensing arrangements,
however, the Company may not be able to settle an alleged patent infringement
claim through a cross-licensing arrangement. If a successful claim is made
against the Company or its customers and a license is not made available to
the Company on commercially reasonable terms or the Company is required to
pay substantial damages or awards, the Company's business, financial
condition and results of operations would be materially adversely affected.
In addition, certain technology used in the Company's products is
licensed from third parties, and pursuant thereto the Company is required to
fulfill confidentiality obligations and in certain cases pay royalties. Some
of the Company's products, particularly those targeted for the DVD (both PC
and consumer) market, require certain types of copy protection software that
the Company must license from third parties. Should the Company lose its
rights to or be unable to obtain the necessary copy protection software, the
Company would be unable to sell and market certain of its products. The
Company licenses technology from Sun Microsystems, Inc. for use in its
consumer products under an agreement requiring royalty payments, and also has
a number of joint development and supply arrangements, and on occasion buys
products off the shelf for use with its own products. The Company's agreements
with third parties, often have no specified term and may be terminated by
either party in the event of breach by the other. The Company's business could
be adversely affected by the loss for any reason of certain of these
third-party agreements. Given the trend to include increasing levels of
functionality on a chip, in the future it may be necessary or desirable for
the Company to seek additional licenses to intellectual property rights held
by third parties or purchase products manufactured and/or sold by third
parties or purchase products manufactured and/or sold by third parties with
respect to some or all of its product offerings. There can be no assurance
that such licenses or purchases will be available on terms acceptable to the
Company, if at all. The inability of the Company to enter into such license
arrangements on acceptable terms or to maintain its current licenses on
acceptable terms could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company also generally enters into confidentiality agreements
with its employees and consultants and confidentiality and license agreements
with its customers and potential customers, and limits access to and
distribution of the source and object code of its software and other
proprietary information. Under some circumstances, the Company grants
licenses that give its customers limited access to the source code of the
Company's software which increases the likelihood of misappropriation or
misuse of the Company's technology. Accordingly, despite precautions taken by
the Company, it may be possible for unauthorized third parties to copy
certain portions of the Company's technology or to obtain and use information
that the Company regards as proprietary. There can be no assurance that the
steps taken by the Company will be adequate to prevent misappropriation of
its technology or to provide an adequate remedy in the event of a breach or
misappropriation by others.
MANUFACTURING ISSUES. The Company contracts with independent
foundries to manufacture all of its products, enabling the Company to focus
on its design strengths, minimize fixed costs and capital expenditures and
gain access to advanced manufacturing facilities. The Company's foundry
agreements with TSMC and Chartered require up-front, nonrefundable
prepayments or deposits and these fixed costs could affect the Company's
operating margins if the Company is unable to utilize the minimum number of
wafers required under the agreements. The Company is dependent on its
foundries to allocate to the Company a portion of their foundry capacity
sufficient to meet the Company's needs to produce products of acceptable
quality and with acceptable manufacturing yields and to deliver products to
the Company in a timely manner. These foundries fabricate products for other
companies and some manufacture products of their own design. While the
Company believes there is adequate foundry capacity available to meet its
current requirements, there can be no assurance that the Company will
continue to have access to sufficient capacity to meet its needs in the
future. If there is a decrease in available foundry capacity, it is likely
that the lead time required to manufacture the Company's products will
increase.
Product supply and demand fluctuations common to the semiconductor
industry are historically characterized by periods of manufacturing capacity
shortages immediately followed by periods of overcapacity, which are caused
by the additions of manufacturing capacity in large increments. The industry
has moved from a period of capacity shortages in 1995 to what has been a
period of excess capacity for approximately the last twelve months, although
capacity currently appears to be tightening. During a period of industry
overcapacity, profitability can drop sharply as factory utilization declines
and high fixed costs of operating a wafer fabrication facility are spread
over a lower net revenue base. Despite industry overcapacity, there can be no
assurance that the Company can achieve timely, cost-effective access to such
capacity when needed.
The Company generally does not have long-term volume production
contracts with its customers. Accordingly, customers generally buy the
Company's products on a purchase order basis, often with short lead
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times. In periods of manufacturing capacity shortages, the Company may not be
able to meet the customers required delivery times. Customer orders are also
subject to rescheduling and cancellation which could result in the Company
having excess inventory given that the Company does not enjoy such
cancellation or rescheduling privileges with its foundries. In addition,
whether any specific product design will result in volume production orders
and, if so, the quantities included in any such orders, are factors beyond
the control of the Company. Insufficient orders will result in
underutilization of the Company's manufacturing facilities and the Company's
prepayments and deposits with TSMC and Chartered which would adversely impact
the Company's business, financial condition and operating results.
The Company's results of operations could also be adversely affected if
particular suppliers are unable to provide a sufficient and timely supply of
product, whether because of raw material shortages, capacity constraints,
unexpected disruptions at the plants, delays in qualifying new suppliers or
other reasons, or if the Company is forced to purchase materials from higher
cost suppliers or to pay expediting charges to obtain additional supply, or if
the Company's test facilities are disrupted for an extended period of time.
Production could also be constrained by delays if there is a need to move
production from one facility to another. Such problems with supply could
adversely affect the Company's business, financial condition and operating
results. As the Company generally does not use multiple sources of supply for
its products, the consequences of these factors occurring is magnified.
The Company had anticipated that it would be able to satisfy a small
portion of its manufacturing requirements from UICC; however, due to the October
1997 fire at the UICC, the Company will not be able to utilize this foundry in
the foreseeable future. UICC management has indicated that capacity will be
available through substitute capacity arrangements; however, no assurance can be
given as to the availability of such capacity. The loss of any of The Company's
foundries as a supplier, the inability of the Company in a period of increased
demand for its products to expand the foundry capacity of its current suppliers
or qualify other wafer manufacturers for additional foundry capacity, industry
overcapacity, any inability to obtain timely and adequate deliveries from the
Company's current or future suppliers or any other circumstances that would
require the Company to seek alternative sources of supply could delay shipments
of the Company's products, which could damage relationships with its current and
prospective customers, provide an advantage to the Company's competitors and
have a material adverse effect on the Company's business, financial condition
and operating results.
Disruption of operations at any of the manufacturing facilities
utilized by the Company or any of its subcontractors for any reason,
including work stoppages, fire, earthquake, flooding or other natural
disasters, would cause delays in shipments of the Company's products. There
can be no assurance that alternative capacity would be available on a timely
basis on terms acceptable to the Company, if at all, thereby resulting in a
loss of customers. This could have a material adverse effect on the Company's
business, financial condition and operating results.
The manufacture of semiconductors is a highly complex and precise
process, with current trends in the Company's markets leading to increasingly
complex products. Minute levels of contaminants in the manufacturing
environment, defects in the masks used to print circuits on a wafer,
difficulties in the fabrication process or other factors can cause a substantial
percentage of wafers to be rejected or a significant number of die on each wafer
to be nonfunctional. Many of these problems are difficult to diagnose and time
consuming or expensive to remedy. The Company's products are particularly
complex and difficult to manufacture. The greater integration of functions and
complexity of operations of the Company's products increase the risk that latent
defects or subtle faults could be discovered by customers or end users after
volumes of product have been shipped. If such defects were significant, the
Company could incur material recall and replacement costs for product warranty.
The relationships with customers could also be adversely impacted. There can be
no assurance that the Company's foundries will not experience irregularities or
adverse yield fluctuations in their manufacturing processes. Any yield or other
production problems or shortages of supply experienced by the Company or its
foundries could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company's reliance on independent manufacturers and third party
assembly and testing vendors involves a number of additional risks, including
the unavailability of, or interruption in access to, certain process
technologies and reduced control over delivery schedules, quality assurance and
costs. In addition, as a result of the Company's dependence on foreign
subcontractors, the Company is subject to the risks of conducting business
internationally, including foreign government regulation and general political
risks, such as political and economic instability, potential hostilities,
changes in diplomatic and trade relationships, currency fluctuations, unexpected
changes in, or imposition of, regulatory requirements, tariffs, import and
export restrictions, and other barriers and restrictions, potentially adverse
tax consequences, the burdens of complying with a variety of foreign laws and
other factors beyond the Company's control.
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DEPENDENCE ON CD-ROM CONTROLLER PRODUCTS. Sales of the Company's
CD-ROM and CD-RW controller products comprised 69% and 80% of the Company's
net revenues in the quarters ended December 31, 1998 and 1997, respectively.
Sales of CD-ROM and CD-RW controller products are expected to continue to
account for a substantial portion of the Company's total revenues for fiscal
1999. The market for CD-ROM controller products continues to mature and
therefore, it is expected that sales of such products will decline and will be
influenced by the traditional seasonality and volatility associated with the
PC market. It is further anticipated that the proliferation of CD-RW and
eventually DVD drives will impact the demand for CD-ROM controller products.
Due to the backward compatibility of DVD-ROM drives, it is critical that the
Company maintain its CD-ROM customer base throughout this transition to
DVD-ROM. Although the Company is currently sampling its first DVD-ROM
controller, there can be no assurance that this product will be accepted by
the customers or that such product will be able to sustain the current level
of optical storage product sales. Given certain royalty issues related to DVD,
it is currently unclear whether there will be a merchant market for DVD, and
if there will be, how big it will be. Furthermore, although the Company is
currently a leading supplier of CD-RW controllers, due to product delays the
Company expects to experience lower unit sales from its CD-RW product until it
is in production with its next generation CD-RW product. As the CD-ROM market
has begun to mature and transition toward the emerging CD-RW and DVD-ROM
markets, there have been a number of new competitors entering the market. This
increased competition combined with the pressure from the sub-$1000 PC segment
for lower cost components have caused tremendous price erosion on CD-ROM
controller prices. Furthermore, there is currently a trend toward integrating
increased functionality on the CD-ROM and CD-RW controller, potentially making
the controller more costly through increased development costs and
manufacturing costs. In addition, the Company's revenues and its gross margins
from its CD-ROM and CD-RW controller products will be dependent on the
Company's ability to introduce such integrated products in a commercially
competitive manner. To provide integrated CD-ROM, CD-RW and DVD controller
products, the Company has been and will continue to be required to expand the
scope of its research and development efforts to provide these new functions,
which will require the hiring of engineers skilled in the respective areas and
additional management coordination among the Company's engineering and
marketing groups. Alternatively, the Company may find it necessary or
desirable to license or acquire technology to enable the Company to provide
these functions, and there can be no assurance that any such technology will
be available for license or purchase on acceptable terms to the Company. In
addition, with new functions being added to the CD-ROM and CD-RW controller
products, companies that historically provided chips with these functions are
now entering the CD-ROM and CD-RW controller market with integrated products
containing these functions as well as the controller function. Accordingly,
given the above-stated factors, there can be no assurance that the Company
will be able to sustain the current level of such product sales or current
operating margins. In addition, there can be no assurance that the market for
optical storage controller products in general, or the Company's optical
storage controller products in particular, will support the Company's planned
operations in the future. The Company's future revenue generation is much
dependent on the successful introduction of its next generation CD-RW product
and first generation PC DVD product, and there can be no assurance that the
products will achieve customer acceptance. The Company has recently
experienced, and continues to experience, a decrease in the overall level of
sales of, and prices for, the Company's CD-ROM and older generation CD-RW
controller products, due to introductions of products by competitors, a
decline in demand for CD-ROM controller products, product obsolescence and
delays in its integrated CD-ROM controller product which have had a material
adverse effect on the Company's business, financial condition and results of
operations.
RISKS PERTAINING TO INTERNATIONAL BUSINESS. During the quarters
ended December 31, 1998 and 1997, 86% and 94%, respectively, of the Company's
net revenues were derived from international sales. A substantial portion of
the Company's international revenues are derived from manufacturers of CD-ROM
drives in Japan, Taiwan, Korean, Belgium and Singapore. Most of the Company's
foreign sales are negotiated in US dollars; however, invoicing is often done
in local currency. As a result, the Company may be subject to the risks of
currency fluctuations. Assets and liabilities which are denominated in
non-functional currencies are remeasured into the functional currency on a
monthly basis and the resulting gain or loss is recorded within non-operating
income in the statement of operations. Many of the Company's non-functional
currency receivables and payables are hedged through managing net asset
positions, product pricing and other means. The Company's strategy is to
minimize its non-functional currency net assets or net liabilities in its
foreign subsidiaries. The Company's policy is not to speculate in financial
instruments for profit on the exchange rate price fluctuations, trade in
currencies for which there are not underlying exposures, or enter into trades
for any currency to intentionally increase the underlying exposure. The
Company uses financial instruments, including local currency debt
arrangements, to offset the gains or losses of the financial instruments
against gains or losses on the underlying operations cash flows or
investments. The Company expects that there could be hedges of anticipated
transactions or investments in foreign subsidiaries in the future. The
Company is also subject to the additional risks of conducting business
outside of the United States. These risks include unexpected changes in, or
impositions of, legislative or regulatory requirements, delays resulting from
difficulty in obtaining export licenses for certain technology, tariffs,
quotas and other trade barriers and restrictions,
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longer payment cycles, greater difficulty in accounts receivable collection,
potentially adverse taxes, the burdens of complying with a variety of foreign
laws and other factors beyond the Company's control. For example, the Company
has made a significant investment in foundry capacity in Taiwan and is
subject to the risk of political instability in Taiwan, including, but not
limited to, the potential for conflict between Taiwan and the Peoples
Republic of China. In addition, China is the primary market for the Company's
DVD and cable and satellite products and therefore, any political or economic
instability in China could reduce the demand for these products
significantly. The Company is also subject to general geopolitical risks in
connection with its international operations, such as political, social and
economic instability, potential hostilities and changes in diplomatic and
trade relationships. There can be no assurance that such factors will not
adversely affect the Company's operations in the future or require the
Company to modify its current business practices. In addition, the laws of
certain foreign countries in which the Company's products are or may be
developed, manufactured or sold, including various countries in Asia, may not
protect the Company's products or intellectual property rights to the same
extent as do the laws of the United States and thus make the possibility of
piracy of the Company's technology and products more likely. There can be no
assurance that one or more of the foregoing factors will not have a material
adverse effect on the Company's business, financial condition or operating
results or require the Company to modify its current business practices.
LIMITED CUSTOMER BASE. A limited number of customers historically
has accounted for a substantial portion of the Company's net revenues. In the
quarters ended December 31, 1998 and 1997, sales to the Company's top ten
customers accounted for approximately 75% and 83%, respectively, of the
Company's net revenues. These customers were all purchasers of the Company's
CD-ROM and CD-RW products. At December 31, 1998 one customer accounted for
48% of the Company's accounts receivable. Although the Company is currently
attempting to diversify its products, markets, and customer base, the Company
expects that sales to a limited number of customers will continue to account
for a substantial portion of its net revenues for the foreseeable future. The
Company has experienced significant changes from year to year in the
composition of its major customer base and believes this pattern will
continue. The Company does not have long term purchase agreements with any of
its customers. Customers generally purchase the Company's products pursuant
to short-term purchase orders. The loss of, or significant reduction in
purchases by, current major customers would have a material adverse effect on
the Company's business, financial condition and operating results. Philips
recently announced that it will cease ordering the Company's CD-RW product as
Philips has its own solution. There can be no assurances that the Company's
current customers will continue to place orders or that existing orders will
not be canceled. If sales to current customers cease or are reduced, there
can be no assurance that the Company will be able to continue to obtain the
orders from new customers necessary to offset any such losses or reductions.
The loss of business or cancellation of orders from any key customers,
significant changes in scheduled deliveries to any of these customers or
decreases in the prices of products sold to any of these customers could have
a material adverse effect on the Company's business, financial condition and
results of operations.
COMPETITION. The markets in which the Company competes are intensely
competitive and are characterized by rapid technological change, declining
unit ASPs and rapid product obsolescence. The Company expects competition to
increase in the future from existing competitors and from other companies
that may enter the Company's existing or future markets with solutions that
may be less costly or provide higher performance or additional features. The
Company's existing and potential competitors include many large domestic and
international companies that have substantially greater financial,
manufacturing, technical, marketing, distribution and other resources,
broader product lines and longer standing relationships with customers than
the Company. The Company's competitors also include a number of emerging
companies as well as some of the Company's own customers and suppliers. The
Company is currently attempting to enter several new markets in which the
Company has not previously operated. These markets are intensely competitive
and the Company will have to compete with large domestic and international
companies that have long standing relationships with the Company's target
customers. Specifically, the Company's ability to compete successfully in the
PC DVD and digital broadcast markets will depend on its ability to develop
partnerships with other companies established in the industries and to gain
recognition in such markets. There can be no assurance that participation in
these new markets will produce positive results for the Company. Certain of
the Company's principal competitors maintain their own semiconductor
foundries and may therefore benefit from certain capacity, cost and
technological advantages. In addition, in the digital office equipment
market, the Company's most intense competition comes from captive suppliers
and the Company anticipates increased competition from the captive suppliers
to the optical storage market as this market transitions to DVD. The Company
believes that its ability to compete successfully depends on a number of
factors, both within and outside of its control, including the price, quality
and performance of the Company's and its customers' products, the timing and
success of new product introductions by the Company, its customers and its
competitors, the development of technical innovations, the ability to obtain
adequate foundry capacity and sources of raw materials, the efficiency of
production, the rate at which the Company's customers design the Company's
products into their products, the market acceptance of the products of the
Company's customers, the number and nature of the Company's competitors in a
given market, the assertion of intellectual property rights and general
market and economic conditions. There can be no assurance that the Company
will be able to compete successfully in the future.
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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.
The Company is in the process of recruiting replacements for certain senior
management positions as well as additional senior managers and technical
personnel. Competition for these persons is intense and there can be no
assurance that the Company will be able to attract and retain qualified
replacements or additional senior managers and technical personnel.
YEAR 2000 RISK FACTOR. Many currently installed computer systems and
software products are coded to accept only two digit entries in the date code
field. These date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than one year, computer systems and/or software used by many companies may need
to be upgraded to comply with such "Year 2000" requirements.
The Company has begun a review of its Year 2000 readiness in three
main areas: Internal systems, external vendors and products. The review will
consist of the following phases: Inventory/Assessment, Conversion/Vendor
Readiness, Contingency Planning, Testing and Implementation. The
Inventory/Assessment phase of the project was substantially completed as of
December 31, 1998, and the Company has begun the Conversion/Vendor Readiness
phase. The entire Year 2000 project is expected to be complete by September,
1999.
For internal systems, the Company will be looking at all network
components, PCs, Unix workstations, business applications, CAD systems, desktop
applications, operating systems, testers, telephone system, FAX, copiers,
security and environmental systems. With the recent implementation of the Oracle
ERP system and upgrades of PCs to Pentium CPUs and other upgrades, the Company
does not anticipate any major Year 2000 related renovation work for internal
systems. However, the failure of any internal system to achieve Year 2000
readiness could result in material disruption to the Company's operations. The
Company has begun requesting Year 2000 readiness and warranty statements from
external product and service vendors. Even where assurances are received from
third parties there remains a risk that failure of systems and products of other
companies on which the Company relies could have a material adverse effect on
the Company. The Company will examine how its products may be affected by Year
2000. The inability of any of the Company's products to properly manage and
manipulate data in the year 2000 could result in increased warranty costs,
customer satisfaction issues, potential lawsuits and other material problems.
All product related assessments and testing are expected to be
completed by April, 1999. Updates or status on products will be available on
the Company's web site (www.oaktech.com). The Company considers a product or
system to be Year 2000 compliant if the date/time data is accurately
processed (including, but not limited to, calculating, comparing, and
sequencing) from, into and between the twentieth and twenty-first centuries,
and the years 1999 and 2000 along with leap year calculations. To date, the
Company has not identified any non-compliant products and therefore, no
material costs have been incurred with respect to remediation. The Company
expects to complete a preliminary estimate of Year 2000 costs related to
product compliance during the first quarter of calendar 1999. The Company
believes that it is unlikely to experience a material adverse impact on its
financial condition or results of operations due to product related Year 2000
compliance issues. However, since the assessment process is ongoing, Year
2000 implications are not fully known, and potential liability issues are not
clear. Therefore, the full potential impact of the Year 2000 on the Company
is not known at this time.
At this point, the Company believes that total cost of achieving Year
2000 readiness will be less than $1.5 million. At the end of the assessment
phase, the Company will be able to more accurately estimate the total costs for
Year 2000 readiness. The foregoing statements are based upon management's best
estimates at the present time, which were derived utilizing numerous assumptions
of future events, including the continued availability of certain resources,
third party modification plans and other factors. There can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, the
nature and amount of programming required to upgrade or replace each of the
affected programs, the rate and magnitude of related labor and consulting costs
and the success of the Company's external customers and suppliers in addressing
the Year 2000 issue.
The Company is actively responding to all customer requests for
compliance, surveys and other general information related to its Year 2000
programs. The Company will also request assurance from its key customers that
they, and their products which incorporate Oak products, are Year 2000
compliant.
As the Year 2000 project continues, the Company may discover
additional Year 2000 problems, may not be able to develop, implement, or test
remediation or contingency plans in a timely manner, or may find that the
costs of these activities exceed current expectations and become material. In
many cases, the Company is relying on assurances from suppliers and customers
that new and upgraded information systems and other products will be Year
2000 compliant. The Company plans to test certain third-party products, but
cannot be sure that its tests will
24
<PAGE>
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 developed a contingency plan that addresses how
it plans to handle any of the "worst-case" Year 2000 issues that may confront
it but instead has focused its resources on identifying material, remediable
problems and reducing uncertainties generally, through the Year 2000 project
described above.
The Company's evaluation is on-going and it expects that new and
different information will become available to it as that evaluation continues.
As a result, the Company has no reasonable basis to conclude that the Year 2000
problem will not have a materially adverse effect on the Company's operations.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its cash requirements
from cash generated from operations, the sale of equity securities, bank lines
of credit and long-term and short-term debt. The Company's principal sources of
liquidity as of December 31, 1998 consisted of approximately $95.5 million in
cash, cash equivalents and short-term investments. The Company also has
approximately $13.1 million in lines of letters of credit with Taiwanese
financial institutions, all of which was available at December 31, 1998.
Additionally, approximately $15 million in lines of credit exist with Japanese
financial institutions, of which approximately $9 million was available at
December 31, 1998.
In the six months ended December 31, 1998, operating activities used
net cash of approximately $5.9 million. The Company's net loss of
approximately $23.8 million was offset by receipt of income tax refunds
totaling $8.0 million, and the non-cash effect of depreciation and
amortization ($5.7 million) and in-process research and development writeoffs
($7.2 million). An increase in accounts receivable of $4.7 million, due to
sales to Japanese customers under extended payment terms, also contributed to
the use of cash. Investing activities utilized cash of approximately $21.7
million primarily due to the ViewPoint and XLI acquisitions ($15.2 million,
net of cash acquired) and additions to property, plant and equipment of $4.3
million. Borrowings under the Company's line of credit in Japan increased by
$3.5 million, necessitated by the accounts receivable increase at the
Company's Japanese subsidiary. Additionally, the Company repurchased 658,000
shares of it common stock during the first half of fiscal year 1999, for a
total of approximately $2.1 million and repurchased an additional 200,000
shares in the third quarter of fiscal 1999.
The Company believes that its existing cash, cash equivalents,
short-term investments and credit facilities will be sufficient to provide
adequate working capital and to fund necessary purchases of property and
equipment through at least the next twelve months. If during the next 12 to 18
month period the Company fails to increase its revenue or is unable to reduce
its expenses below its revenues, then the Company is likely to be in a
position where it will need to seek additional financing. However, there can
be no assurance that the Company will not be required to seek other financing
sooner or that such financing, if required, will be available on terms
satisfactory to the Company. The Company may also utilize cash to acquire or
invest in complementary businesses or products or to obtain the right to use
complementary technologies. From time to time, in the ordinary course of
business, the Company evaluates potential acquisitions of such businesses,
products or technologies. However, the Company has no present understandings,
commitments or agreements with respect to any material acquisition of other
businesses, products or technologies.
25
<PAGE>
FOUNDRY DEPOSITS AND INVESTMENT IN FOUNDRY VENTURE
FOUNDRY DEPOSITS. The Company contracts with independent foundries
to manufacture all of its semiconductor products, enabling the Company to
focus on its design strengths, minimize fixed costs and capital expenditures
and gain access to advanced manufacturing facilities. The Company's primary
suppliers under such arrangements during the first half of fiscal year 1999
were TSMC, Sony, and LG Semicon Co. Ltd. in Korea. The Company also uses
wafer fabrication facilities at Chartered, Rohm, and NEC. The foundries
generally are not obligated to supply products to the Company for any
specific period, in any specific quantity or at a specific price, except as
may be provided in a particular purchase order. However, in order to obtain
an adequate supply of wafers, especially wafers manufactured using advanced
process techniques, the Company has entered into and will continue to
consider various possible transactions, including various "take or pay"
contracts, such as those with TSMC and Chartered as described in Note 3 to
the condensed consolidated financial statements that commit the Company to
purchase specified quantities of wafers over extended periods. Manufacturing
arrangements such as these may require substantial capital investment, which
may require the Company to seek additional financing. There can be no
assurance that such additional financing, if required, will be available when
needed or if available, will be on satisfactory terms.
INVESTMENT IN FOUNDRY VENTURE. As described in Note 4 to the condensed
consolidated financial statements, the Company has an investment in a foundry
venture in Taiwan. Given the Company's disputes with UMC (see "Legal
Proceedings"), the Company intends to sell its interest in UICC at an
appropriate time. However, no definitive time period can be given. In
addition, there can be no assurance that a market will develop for the shares
representing the Company's equity investment at any time in the future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has performed an analysis to assess the potential effect of
reasonably possible near-term changes in interest and foreign currency
exchange rates. The effect of such rate changes is not expected to be
material to the Company's results of operations, cash flows or financial
condition. Net foreign currency gains and losses were not material for the
three or six months ended December 31, 1998.
26
<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 stock (excluding the defendants and
parties related to them) for the period July 27, 1995 through May 22, 1996.
The first, a state court proceeding designated IN RE OAK TECHNOLOGY SECURITIES
LITIGATION, Master File No. CV758510 pending in Santa Clara County Superior
Court in Santa Clara, California, consolidates five class actions. This
lawsuit also names as defendants several of the Company's venture capital fund
investors, two of its investment bankers and two securities analysts. The
plaintiffs allege violations of California securities laws and statutory
deceit provisions as well as breaches of fiduciary duty and abuse of control.
On December 6, 1996, the state court Judge sustained the Oak defendants'
demurrer to all causes of action alleged in plaintiffs' First Amended
Consolidated Complaint, but allowed plaintiffs the opportunity to amend. The
plaintiffs' Second Amended Consolidated Complaint was filed on August 1, 1997.
On December 3, 1997, the state court Judge sustained the Oak defendants'
demurrer to plaintiffs' Second Amended Consolidated Complaint without leave
to amend to the causes of action for breach of fiduciary duty and abuse of
control, and to the California Corporations Code Sections 25400/25500 claims
with respect to the Company, a number of the individual officers and
directors, and the venture capital investors. The judge also sustained the
demurrer with leave to amend to the California Civil code Sections 1709/1710
claims, however plaintiffs elected not to amend this claim. Accordingly, the
only remaining claims in state court action, IN RE OAK TECHNOLOGY SECURITIES
LITIGATION, is the California Corporations Code Sections 25400/25500 cause of
action against four officers of the Company and the Company's investment
bankers and securities analysts. On July 16, 1998, the state court
provisionally certified a national class of all persons who purchased the
Company's stock during the class period. The class was provisionally certified
with the order held in abeyance pending resolution of the question of whether
a nationwide class may bring a California Corporations Code Sections
25400/25500 claim. This issue was resolved in favor of allowing such
nationwide class actions by the California Supreme Court, Case No. 5058723, on
January 4, 1999, in the DIAMOND MULTIMEDIA SECURITIES LITIGATION appeal by the
California Supreme Court. Discovery has commenced in this action. Defendants
and certain third parties have produced documents and a small number of
depositions have been taken.
The Company and various of its current and former officers and Directors
are also parties to four putative class action lawsuits pending in the U.S.
District Court for the Northern District of California. These actions have
been consolidated as IN RE OAK TECHNOLOGY, INC. SECURITIES LITIGATION, Case
No. C-96-20552-SW(PVT). This action alleges certain violations of federal
securities laws and is brought on behalf of purchasers of the Company's stock
for the period July 27, 1995 through May 22, 1996. This action also names as
a defendant one of the Company's investment bankers. On July 29, 1997, the
federal court Judge granted the Oak defendants Motion to Dismiss the
plaintiffs' First Amended Consolidated Complaint, but granted plaintiffs
leave to amend most claims. The plaintiffs' Second Amended Consolidated
Complaint was filed on September 4, 1997. Defendants Motion to Dismiss was
heard on December 17, 1997. The federal court Judge took the matter under
submission and has not yet issued a ruling.
Additionally, various of the Company's current and former officers and
Directors are defendants in three consolidated derivative actions pending in
Santa Clara County Superior Court in Santa Clara, California, entitled IN RE
OAK TECHNOLOGY DERIVATIVE ACTION, Master file No. CV758510. This lawsuit,
which asserts a claim for breach of fiduciary duty and a claim under
California securities law based upon the officers' and Directors' trading in
securities of the Company, has been stayed pending resolution of the class
actions.
In all of the putative state and federal class actions, the plaintiffs are
seeking monetary damages and equitable relief. In the derivative action, the
plaintiffs are also seeking an accounting for the defendants' sales of Company
stock and the payment of monetary damages to the Company.
All of these actions are in the early stages of proceedings. Based on
its current information, the Company believes the suits to be without merit
and will defend its position vigorously. Although it is reasonably possible
the Company may incur a loss upon conclusion of these claims, an estimate of
any loss or range of loss cannot be made. No provision for any liability that
may result upon adjudication has been made in the Company's Consolidated
Financial Statements.
In connection with these legal proceedings, the Company has incurred and
expects to continue to incur legal and other expenses.
The Company and its current Directors are also parties to six putative
class actions filed on behalf of all Oak Technology, Inc. shareholders (other
than defendants) in the Court of Chancery of the State of Delaware in and for
27
<PAGE>
New Castle County concerning a proposal by a management led investor group
known as "Gold Acquisition Group" to acquire all of the outstanding shares of
the Company for a price of $4.50 per share. Plaintiffs have requested
consolidation of the actions under the caption IN RE OAK TECHNOLOGY, INC.
SHAREHOLDERS LITIGATION, C.A. No. 16789 ("Delaware Shareholders Litigation").
The other civil action numbers are 16792, 16793, 16794, 16818, and 16831.
Plaintiffs allege that the offer is inadequate and that the defendants
breached their fiduciary duties of loyalty and entire fairness. On December
14, 1998, a Special Committee of the Board of Directors that had been formed
to evaluate the proposal announced that it would not recommend the proposal
to the Company's full Board of Directors. In addition, on December 21, 1998,
Gold Acquisition Group announced that its proposal had expired and to date,
it has not been renewed. Based on its investigation to date, the Company
believes the suits to be without merit and will defend its position
vigorously. No provision for any liability that may result upon adjudication
has been made in the Company's Consolidated Financial Statements
The Company and its current Directors are also parties to a putative class
action filed on behalf of all Oak Technology, Inc. shareholders (other than
defendants) in Santa Clara County Superior Court, designated KRIM V. OAK
TECHNOLOGY, INC., et al., Case No. 778281. The allegations of Plaintiffs in
this action are nearly identical to the Delaware Shareholders Litigation. This
action has been stayed by agreement of the parties as a result of the Special
Committee's announcement that it would not recommend to the full Board of
Directors the proposal made by Gold Acquisition Group to acquire all of the
outstanding shares of the Company for a price of $4.50 per share as well as the
subsequent announcement of the expiration of the proposal by Gold Acquisition
Group. Based on its investigation to date, the Company believes the suit to be
without merit and will defend it position vigorously. No provision for any
liability that may result upon adjudication has been made in the Company's
Consolidated Financial Statements
In September, 1998 the Company and certain of its current Directors
became parties to a putative class action lawsuit pending in the Court of
Chancery in the State of Delaware, entitled MANNING V. OAK TECHNOLOGY, ET
AL., Civil Action No. 16656NC. This action alleges violations of the
Delaware General Corporation Law and breaches of fiduciary duty and is
brought on behalf of all owners of Oak Technology common stock at any time
between August 19, 1997 and the date of class certification. Plaintiffs'
claims are based upon the Board of Directors' adoption on or about August 19,
1997 of a Stockholder Rights Plan that included a provision that limited the
redemption or modification of the Plan to its Continuing Directors or their
designated successors. Plaintiffs allege that the Stockholder Rights Plan
with the Continuing Directors provision disenfranchises public stockholders
by forcing them to vote for incumbent directors who enjoy full voting
rights; that it restricts the ability of future directors to exercise their
full statutory prerogatives; and that the particular provision at issue is an
unreasonable and disproportionate response to any threatened takeover.
Plaintiffs are seeking an injunction and a declaratory judgment that the
Stockholder Rights Plan is invalid and unenforceable and monetary damages for
the alleged violations of fiduciary duty. On November 18, 1998, in light of
the change in the law due to the decision in CARMODY V. TOLL BROS., the
Company's Board of Directors voted to amend the Shareholders Rights Plan to
eliminate the Continuing Directors Provision. On December 11, 1998,
plaintiffs amended their complaint to include a cause of action which
asserted that the Company's Directors elected after the adoption of the
Company's Shareholder Rights Plan were not validly elected and another cause
of action for breach of fiduciary duty related to the proposal by the Gold
Acquisition Group to acquire all of the outstanding stock of the Company for
$4.50 per share (also the subject of the DELAWARE SHAREHOLDERS LITIGATION and
the KRIM litigation described above). A tentative settlement has been
reached with the plaintiffs. The settlement should not have a material
effect on the Company's Consolidated Financial Statements. To date, no
provision for any has been made in the Company's Consolidated Financial
Statements
In connection with the above-described legal proceedings, the Company
expects to incur legal and other expenses.
On July 21, 1997, the Company filed a complaint with the ITC based on the
Company's belief that certain Asian companies were violating U.S. trade laws by
the unlicensed importing or selling of certain CD-ROM controllers that infringed
one or more of the Company's United States patents. The complaint seeks a ban
on the importation into the United States of any infringing CD-ROM controller or
product containing such infringing CD-ROM controller. A formal investigative
proceeding was instituted by the ITC (Investigation No. 337-TA-401) on August
19, 1997, naming as respondents: Winbond Electronics Corporation (Winbond);
Winbond Electronics North America Corporation; Wearnes Technology (Private)
Ltd.; Wearnes Electronics Malaysia Sendirian Berhad; and Wearnes Peripheal
International (Pte.).
On March 16, 1998, the Company and Winbond entered into a settlement
agreement pursuant to which Winbond obtained a nonexclusive, royalty-bearing
license to the Company's U.S. patents No.'s 5,535,327 and
28
<PAGE>
5,581,715 and the Company obtained a nonexclusive, royalty-free license to
several Winbond patents. The settlement agreement provided that the parties
would jointly seek termination and dismissal of investigation No. 337-TA-401
as to Winbond and its four affiliated companies: Winbond Electronics North
America Corporation; Wearnes Technology (Private) Ltd.; Wearnes Electronics
Malaysia Sendirian Berhad; and Wearnes Peripheal International (Pte.). On
April 15, 1998, Investigation No. 337-TA-401 was ordered terminated as to all
parties.
As originally filed with the ITC, the Company's complaint also identified
as proposed respondents: United Microelectronics Corporation (UMC); Lite-On
Group; Lite-On Technology Corp.; Behavior Tech Computer Corp. and Behavior Tech
Computer (USA) Corp. Prior to the ITC's institution of the formal investigation
proceeding, the Company and UMC entered into a settlement agreement, effective
July 31, 1997, pursuant to which UMC agreed to cease and desist the manufacture
and/or importation into the United States of its specified CD-ROM controllers,
except under certain limited conditions which expired on January 31, 1998. The
settlement agreement additionally provided for the withdrawal of the Company's
ITC complaint against UMC and the above-named Lite-On and Behavior Tech
companies. In September 1997, October 1997, February 1998 and April 1998, the
Company received $2.6 million, $4.7 million, $0.7 million and $2.6 million,
respectively, pursuant to this settlement. Proceeds from the settlement were
recorded as miscellaneous income and included in nonoperating income for the
periods ended September 30, 1997, December 31, 1997, March 31, 1998 and June 30,
1998, respectively.
On October 27, 1997, the Company filed a complaint in the United States
District Court, Northern District of California against UMC for breach of
contract, breach of the covenant of good faith and fair dealing and fraud
based on UMC's breach of the settlement agreement arising out of the ITC
action, Case No. C-97-20959. Together with the filing of the complaint, the
Company filed a motion for a preliminary injunction against UMC, seeking to
enjoin UMC from selling the CD-ROM controllers that were the subject of the
ITC action and related settlement agreement, through or to a UMC-affiliated,
Taiwanese entity called MediaTek. On February 23, 1998, the federal court
judge denied the Company's request for a preliminary injunction based on the
court's findings that there was no evidence that UMC was presently engaged in
the manufacture of CD-ROM controllers or other products covered by the
settlement agreement. On December 24, 1997, UMC answered the Company's
complaint and counterclaimed asserting causes of action for recission,
restitution, fraudulent concealment, mistake, lack of mutuality, interference
and declaratory judgment of non-infringement, invalidity and unenforceability
of the Oak patent that was the subject of the original ITC action filed
against UMC. The Company believes these counterclaims to be without merit and
will vigorously defend its patent. Both the Company and UMC seek compensatory
and punitive damages. In addition, the Company seeks permanent injunctive
relief. On June 11, 1998, this case was consolidated for all purposes with a
related case brought against the Company by MediaTek (described below) under
Case No. C-97-20959. On the same date, pursuant to UMC's request, the federal
court judge ordered the consolidated action stayed under 28 U.S.C. Section
1659, based on the judge's conclusion that the civil action involves the same
issues involved in Investigation No. 337-TA-409 before the International Trade
Commission, initiated by Oak (described below). The stay will be lifted upon
final resolution of Investigation No. 337-TA-409, at which time the Company
intends to pursue its action against UMC for breach of contract, breach of the
covenant of good faith and fair dealing and fraud.
In a related action to the lawsuit that was commenced by the Company
against UMC (described above), on December 19, 1997, MediaTek, a UMC
affiliated, Taiwanese entity, filed a complaint in the United States District
Court, Northern District of California, against the Company for declaratory
judgment of non-infringement, invalidity and unenforceability of the Oak
patent that was the subject of the original ITC action against UMC, and
intentional interference with prospective economic advantage, Case No.
C-97-21126. MediaTek seeks compensatory damages of not less than $10 million
and punitive damages. The Company filed its answer on January 8, 1998,
denying all the allegations. The Company believes the suit to be without
merit and will vigorously defend its patent. On June 11, 1998, this case was
consolidated for all purposes with a related case brought by the Company
against UMC (described above) under Case No. C-97-20959. On the same date,
pursuant to UMC's request, the federal court judge ordered the consolidated
action stayed under 28 U.S.C. Section 1659, based on the judge's conclusion
that the civil action involves the same issues involved in Investigation No.
337-TA-409 before the International Trade Commission, initiated by Oak
(described below). The stay will be lifted upon final resolution of
Investigation No. 337-TA-409.
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.
29
<PAGE>
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.
Trial before the ALJ as to all respondents except UMC commenced on
January 11, 1999 and concluded on January 28, 1999. The schedule and
procedures for the trial before the ALJ as to respondent UMC has not yet been
determined. In most cases, the ITC decides within 12 to 15 months after the
filing of a complaint whether or not to issue an order excluding foreign
products that allegedly infringe U.S. patents. Currently, the date set for
completion of the Investigation by the Commission is June 14, 1999, with an
Initial Determination due from the ALJ by March 15, 1999. These dates could
change depending upon the schedule and procedure for the trial as to
respondent UMC. In connection with this legal proceeding, the Company has
incurred and will continue to incur substantial legal and other expenses.
If any of the above pending actions are decided adversely to the Company,
it would likely have a material adverse affect on the Company's financial
condition and results of operations.
30
<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
1. (a) The Company's Annual Meeting was held on November 24, 1998.
(b) The following Directors were elected at the meeting:
<TABLE>
<CAPTION>
PERCENTAGE OF
FOR VOTES RECEIVED
---------- --------------
<S> <C> <C>
Timothy Tomlinson 35,212,241 95%
Young K. Sohn 36,278,428 98%
</TABLE>
The following Directors remained on the Board of Directors subsequent
to the meeting:
Richard B. Black
David D. Tsang
Ta-Lin Hsu
Timothy Tomlinson
Young K. Sohn
(c) Other matters voted on at the meeting were the following:
To approve an amendment to the 1994 Employee Stock Option Plan to
(i) increase the number of shares of Common Stock authorized for
issuance over the term of the Option Plan by 6,000,000 shares, (ii)
render non-employee directors eligible to receive option grants under
the Option Plan and (iii) eliminate the restriction that the
individuals who serve on the Compensation Committee may not receive
option grants under the Option Plan.
<TABLE>
<S> <C>
For 12,583,787
Against 8,128,142
Abstain 106,120
</TABLE>
31
<PAGE>
To approve an amendment to the 1994 Employee Stock Purchase Plan
to (i) increase the number of shares of Common Stock authorized for
issuance over the term of the Purchase Plan by 1,000,000 shares, (ii)
extend for an additional five years the term of the Purchase Plan and
(iii) allow employees of the Company's affiliates to participate in the
Purchase Plan.
<TABLE>
<S> <C>
For 17,415,000
Against 3,613,171
Abstain 122,613
</TABLE>
To ratify the appointment of KPMG Peat Marwick LLP as independent
accountants:
<TABLE>
<S> <C>
For 36,572,763
Against 206,902
Abstain 89,983
</TABLE>
ITEM 5. OTHER INFORMATION
None
32
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith or incorporated by reference
herein.
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<S> <C>
3.01 The Company's Restated Certificate of Incorporation,
as amended (1)
3.02 The Company's Restated Bylaws (2)
3.03 Certificate of Correction to the Restated Certificate
of Incorporation of the Company (16)
4.01 Form of Specimen Certificate for the Company's Common
Stock (3)
4.02 Amended and Restated Registration Rights Agreement
dated as of October 15, 1993 among the Company and
various investors (3)
4.03 The Company's Restated Certificate of Incorporation,
as amended (See Exhibit 3.01)
4.04 The Company's Restated Bylaws (See Exhibit 3.02)
4.05 Form of Certificate of Designation of Series A Junior
Participating Preferred Stock of the Company dated
August 18, 1997 (16)
4.06 Rights Agreement between the Company and BankBoston,
N.A. dated August 19, 1997 (16)
10.01 1988 Stock Option Plan, as amended and related
documents (3)*
10.02 1994 Stock Option Plan and related documents (3) and
amendment thereto dated February 1, 1996 (4)*
10.03 1994 Outside Directors' Stock Option Plan and related
documents (3)*
10.04 1994 Employee Stock Purchase Plan (3)*
10.05 401(k) Plan and related documents (3) and Amendment
Number One and Supplemental Participation Agreement
thereto (5)*
10.06 Lease Agreement dated August 3, 1988 between John
Arrillaga, Trustee, or his Successor Trustee, UTA
dated 7/20/77 (John Arrillaga Separate Property
Trust) as amended and Richard T. Peery, Trustee, or
his Successor Trustee, UTA dated 7/20/77 (Richard T.
Peery Separate Property Trust) as amended, and Justin
Jacobs, Jr., dba Siri-Kifer Investments, a joint
venture, and the Company, as amended June 1, 1990,
and Consent to Alterations dated March 26, 1991
(lease agreement for 139 Kifer Court, Sunnyvale,
California) (3), and amendments thereto dated June
15, 1995 and July 19, 1995 (5)
10.07 Lease Agreement dated August 22, 1994 between John
Arrillaga, Trustee, or his Successor Trustee, UTA
dated 7/20/77 (John Arrillaga Separate Property
Trust) as amended and Richard T. Peery, Trustee, or
his Successor Trustee, UTA dated 7/20/77 (Richard T.
Peery Separate Property Trust) as amended, and Justin
Jacobs, Jr., dba Siri-Kifer Investments, a joint
venture, and the Company (lease agreement for 140
Kifer Court, Sunnyvale, California) (3), and
amendment thereto dated June 15, 1995 (5)
</TABLE>
33
<PAGE>
<TABLE>
<S> <C>
10.08 Form of Indemnification Agreement, between the
Company and each of its Directors and executive
officers (14)
10.09 VCEP Agreement dated July 30, 1990 between the
Company and Advanced Micro Devices, Inc.(3)
10.10 Product License Agreement dated April 13, 1993
between the Company and Media Chips, Inc., as amended
September 16, 1993 (3)
10.11 Resolutions of the Board of Directors of the Company
dated July 27, 1994 setting forth the provisions of
the Executive Bonus Plan (3) (12)*
10.12 Employee Incentive Plan effective January 1, 1995
(3)*
10.13 Option Agreement between Oak Technology, Inc., and
Taiwan Semiconductor Manufacturing Co., Ltd. dated as
of August 8, 1996 (14)**
10.14 Foundry Venture Agreement between the Company and
United Microelectronics Corporation dated as of
October 2, 1995 (6) (12)
10.15 Fab Ven Foundry Capacity Agreement among the Company,
Fab Ven and United Microelectronics Corporation dated
as of October 2, 1995 (7) (12)
10.16 Written Assurances Re: Foundry Venture Agreement
among the Company, United Microelectronics
Corporation and Fab Ven dated as of October 2, 1995
(8) (12)
10.17 Lease Agreement dated June 15, 1995 between John
Arrillaga, Trustee, or his Successor Trustee, UTA
dated 7/20/77 (John Arrillaga Separate Property
Trust) as amended and Richard T. Peery, Trustee, or
his Successor Trustee, UTA dated 7/20/77 (Richard
T.Peery Separate Property Trust) as amended, and the
Company (lease agreement for 130 Kifer Court,
Sunnyvale, California) (9), and amendments thereto
dated June 15, 1995 and August 18, 1995 (10)
10.18 Deposit Agreement dated November 8, 1995 between
Chartered Semiconductor Manufacturing Ltd. and the
Company (11), and Amendment Agreement (No. 1) thereto
dated September 25, 1996 (13)**
10.19 Amendment Agreement (No. 2) dated April 7, 1997 to
Deposit Agreement dated November 8, 1995 between
Chartered Semiconductor Manufacturing Ltd. and the
Company(15) and addendum thereto dated September 26,
1997 (17)**
10.20 First Amendment to Plan of Reorganization and
Agreement of Merger dated October 27, 1995 among the
Company, Oak Acquisition Corporation, Pixel Magic,
Inc. and the then shareholders of Pixel dated June
25, 1996 and Second Amendment thereto dated June 13,
1997 (16)
10.21 First Amendment to Non-Compete and Technology
Transfer Agreement by and among the Company, Pixel
Magic, Inc. and Peter D. Besen dated June 13, 1997
(16)**
10.22 Agreement of Termination of Employment Agreement
between Pixel Magic, Inc. and Peter D. Besen dated
June 13, 1997 (16)
10.23 Agreement of Termination of Employment Agreement
between Pixel Magic, Inc. and Don Schulsinger dated
June 13, 1997 (16)
10.24 Release and Settlement Agreement between the Company
and United Microelectronics Corporation dated July
31, 1997 (16)**
</TABLE>
34
<PAGE>
<TABLE>
<S> <C>
10.25 Sublease Agreement dated December 1, 1997 between
Global Village Communication, Inc. and the Company
(lease agreement for 1150 East Arques Avenue,
Sunnyvale, California) and accompanying lease and
amendment thereto (18)
10.26 Amendment to Option Agreement be and between Taiwan
Semiconductor Manufacturing Co., Ltd., and the
Company (19)**
10.27 Settlement Agreement between Winbond Electronics
Corporation and the Company (19)**
10.28 Amendment Agreement (No.3) to Deposit Agreement Dated
November 8, 1995 between Chartered Semiconductor
Manufacturing Ltd. and Oak Technology Inc.
27.01 Financial Data Schedule
</TABLE>
- ---------------------------
(1) Incorporated herein by reference to exhibit 3.01 of the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996.
(2) Incorporated herein by reference to exhibit 3.05 filed with the
Company's Registration Statement on Form S-1 (File No. 33-87518)
declared effective by the Securities and Exchange Commission on
February 13, 1995 (the "February 1995 Form S-1").
(3) Incorporated herein by reference to the exhibit with the same number
filed with the February 1995 Form S-1.
(4) Incorporated herein by reference to Exhibit 10.1 filed with the
Company's Registration Statement on Form S-8 (File No. 333-4334) on May
2, 1996.
(5) Incorporated herein by reference to the exhibit with the same number
filed with the Company's Annual Report on Form 10-K for the year ended
June 30, 1996.
(6) Incorporated herein by reference to Exhibit 2.1 filed with the
Company's Form 8-K dated October 2, 1995 (the "October 1995 form 8-K").
(7) Incorporated herein by reference to Exhibit 2.2 filed with the October
1995 Form 8-K.
(8) Incorporated herein by reference to Exhibit 2.3 filed with the October
1995 Form 8-K.
(9) Incorporated herein by reference to Exhibit 10.08 filed with the
Company's Annual Report on Form 10-K for the year ended June 30, 1995.
(10) Incorporated herein by reference to Exhibit 10.08 filed with the
Company's Annual Report on Form 10-K for the year ended June 30, 1996.
(11) Incorporated herein by reference to Exhibit 10.04 filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended December
31, 1995.
(12) Confidential treatment has been granted with respect to portions of
this exhibit.
(13) Incorporated herein by reference to Exhibit 10.17 filed with the
Company's Annual Report on Form 10-K for the year ended June 30, 1996.
(14) Incorporated herein by reference to the exhibit with the same number
filed with the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996.
(15) Incorporated herein by reference to the exhibit with the same number
filed with the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1997.
(16) Incorporated herein by reference to the exhibit with the same number
filed with the Company's Annual Report on Form 10-K for the year ended
June 30, 1997.
(17) Incorporated herein by reference to the exhibit with the same number
filed with the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997.
(18) Incorporated herein by reference to the exhibit with the same number
filed with the Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1997.
(19) Incorporated herein by reference to the exhibit with the same number
filed with the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998
- ---------------------------
* Indicates Management incentive plan.
** Confidential treatment granted and/or requested as to portions of the
exhibit.
35
<PAGE>
(b) Reports on Form 8-K
The Company filed a Report on Form 8-K on November 18, 1998, making an
item 5 disclosure that it had amended its Rights Agreement, dated
August 19, 1997, to eliminate those provisions that require that
certain actions may only be taken by "Continuing Directors".
The Company filed a Report on Form 8-K on December 14, 1998, making
an item 5 disclosure that it had announced in a press release that
the special committee appointed by the Company's Board of Directors
will not recommend to the full Board of Directors the proposal by
Gold Acquisition Group to acquire all of the outstanding shares of
the Company for a price of $4.50 per share regarding a buyout of the
Company.
36
<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: February 16, 1999
/s/ ROBERT O. HERSH
-------------------
Robert O. Hersh, Vice-President Finance
Chief Financial Officer
(Principal Financial and Accounting Officer)
37
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
- ------ -------------
<S> <C>
10.28 Amendment Agreement (No.3) to Deposit Agreement Dated November 8,
1995 between Chartered Semiconductor Manufacturing Ltd. and Oak
Technology Inc.
27.01 Financial Data Schedule
</TABLE>
38
<PAGE>
EXHIBIT 10.28
DATED THIS 06TH DAY OF NOVEMBER 1998
BETWEEN
CHARTERED SEMICONDUCTOR MANUFACTURING LTD
AND
OAK TECHNOLOGY, INC.
-------------------------------------------------------
AMENDMENT AGREEMENT (NO. 3)
TO
DEPOSIT AGREEMENT DATED 8 NOVEMBER 1995
-------------------------------------------------------
<PAGE>
AMENDMENT AGREEMENT (NO. 3)
THIS AMENDMENT AGREEMENT (NO. 3) is made the 06th day of November 1998, by and
between:-
(1) CHARTERED SEMICONDUCTOR MANUFACTURING LTD, a company incorporated in
Singapore and having its place of business at 60 Woodlands Industrial
Park D, Street 2, Singapore 738406 ("CSM"); and
(2) OAK TECHNOLOGY, INC., a company incorporated in Delaware and having its
place of business at 139 Kifer Court, Sunnyvale, CA 94086, United
States of America ("Customer").
WHEREAS
(A) CSM and Customer had entered into a Deposit Agreement dated 8 November
1995 (the "Deposit Agreement") for the purpose of Customer depositing
certain funds with CSM and to procure CSM to make available to Customer
certain wafer manufacturing capacity.
(B) CSM and Customer had entered into an Amendment Agreement (No. 1) dated
25 September 1996 and subsequently into an Amendment Agreement (No. 2)
dated 7 April 1997 to effect the suspension and variation of certain
provisions of the Deposit Agreement upon the terms and conditions set
out therein.
(C) CSM and Customer are entering into this Amendment Agreement (No. 3) to
supersede the Deposit Agreement and the Amendment Agreement (No. 2)
upon the terms and conditions set out herein.
NOW THEREFORE, in consideration of the foregoing and the mutual covenants
contained herein, the Parties agree as follows :-
1. DEPOSIT AGREEMENT AND AMENDMENT AGREEMENT (NO. 2) SUPERSEDED
With effect from the date of this Amendment Agreement (No. 3), the
terms and conditions of the Deposit Agreement and Amendment Agreement
(No. 2) shall be superseded by the terms and conditions of this
Amendment Agreement (No. 3) and shall cease to have any force or
effect.
2. THE DEPOSIT
2.1 The Parties acknowledge that Customer has deposited with CSM the sum of
US$4,000,000, of which the amount that has not yet been credited to
Customer equals [US$3,511,350] (the "Deposit").
<PAGE>
2.2 Upon the expiry of the term of this Agreement or the earlier
termination thereof in accordance with Clause 5 or Clause 6.2, CSM
shall be entitled to retain for itself the balance of the Deposit which
has not been credited to Customer, without interest.
3. CUSTOMER LOADING COMMITMENT
3.1 Customer agrees to place purchase orders with CSM for such quantity of
6-inch and 8-inch wafers for delivery during the calendar years set out
below (the "Customer Loading Commitment"). The quantity of wafers for
which orders are placed by Customer is hereinafter referred to as the
"Customer Actual Loading".
<TABLE>
<CAPTION>
------------------------------------------------ --------- ---------- --------- ---------
Year 1999 2000 2001 2002
------------------------------------------------ --------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Customer Loading Commitment 10 10 12 12
(US$/millions)
------------------------------------------------ --------- ---------- --------- ---------
</TABLE>
3.2 The Customer Actual Loading for each calendar year during the term of
this Agreement shall be equal to the Customer Loading Commitment. In
addition, the year-to-year and month-to-month variation in the Customer
Actual Loading shall not exceed 20% without the prior written approval
of CSM.
3.3 With effect from a date to be agreed by the Parties, Customer shall
provide to CSM no later than the 5th day of each month, its rolling
6-monthly forecast of its monthly volume requirements for wafers for
each relevant Customer integrated circuit product to be manufactured
hereunder. The first 3 months of each 6-monthly forecast shall be
backed by purchase orders for such first 3 months.
3.4 The sale of wafers by CSM to Customer, the capacity of which is made
available to Customer under this Agreement, shall be governed by the
terms and conditions of CSM's Manufacturing Agreement to be entered
into by CSM and Customer (the "Manufacturing Agreement").
4. SET OFF AND MAINTENANCE OF DEPOSIT
4.1 CSM shall be entitled to debit from and set-off against the Deposit, a
wafer credit against the total net sales order of wafers sold to
Customer per calendar year, calculated in accordance with this Clause
4.
4.2 Within 30 days from the last day of each calendar year, CSM shall issue
a credit note to Customer stating the amount of credits to be deducted
against the Deposit.
Notwithstanding the foregoing, Customer shall continue to pay CSM for
all wafers manufactured for Customer and billed, in accordance with the
terms of payment as stated ion CSM's tax invoices to Customer.
4.3 CSM's right of deduction and set-off pursuant to Clause 4.2 shall be in
addition to CSM's right to claim any overdue payments separately as a
debt due from Customer and shall not in any way prejudice such right or
any other rights or remedies which CSM may have at law or in equity.
2
<PAGE>
4.4 For the period 01 JANUARY 1999 TO 31 DECEMBER 2002, if Customer fulfils
the Customer Loading Commitment for the calendar year 1999, 2000, 2001
and 2002, for every 6-inch and 8-inch wafer that CSM ships to Customer,
Customer is entitled to a credit of 8% of the total net sales order of
wafers for that calendar year.
For the purpose of clarity, if CSM ships to Customer orders amounting
to US$10,000,000 in calendar year 1999, Customer shall be entitled to a
credit of US$800,000.
4.5 In no event shall the aggregate amount of the refund or wafer credits
granted to Customer pursuant to this Clause 4 for the duration of this
Agreement exceed the Deposit.
4.6 Customer shall not be permitted to rollover any portion of the wafer
credit that was set aside for that calendar year, but was not credited.
The maximum amount of wafer credit claimable by Customer per calendar
year is set out in the table below. For the avoidance of doubt, any
unused credit set aside for any calendar year shall be cancelled and
forfeited.
<TABLE>
<CAPTION>
------------------------------------------------ --------- ---------- --------- ---------
Year 1999 2000 2001 2002
------------------------------------------------ --------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Maximum Wafer Credit 0.800 0.800 0.960 0.960
@ 8% of Customer Loading Commitment
(US$/millions)
------------------------------------------------ --------- ---------- --------- ---------
</TABLE>
5. TERM AND TERMINATION
5.1 The term of this Agreement shall expire on 31 December 2002 and may be
earlier terminated in the following events:-
(a) At the option of CSM, in the event that the Customer Actual
Loading is in aggregate less than 50% of the Customer Loading
Commitment for 12 consecutive calendar months;
(b) At the option of Customer, in the event that CSM fails to
deliver to Customer in aggregate at least 50% of the Customer
Actual Loading for 12 consecutive calendar months;
(c) At the option of either Party, in any of the following
events:-
(i) the inability of the other Party to pay its debts
in the normal course of business; or
(ii) the other Party ceasing or threatening to cease
wholly or substantially to carry on its business,
otherwise than for the purpose of a reconstruction
or amalgamation without insolvency; or
3
<PAGE>
(iii) any encumbrance taking possession of or a receiver,
manager, trustee or judicial manager being appointed
over the whole or any substantial part of the
undertaking, property or assets of the other
Party; or
(iv) the making of an order by a court of competent
jurisdiction or the passing of a resolution for the
winding-up of the other Party or any company
controlling the other Party, otherwise than for
the purpose of a reconstruction or amalgamation
without insolvency.
5.2 Termination of the Agreement pursuant to Clause 5.1 shall take effect
immediately upon the issue of a written notice to that effect by the
Party terminating the Agreement to the other. The termination of this
Agreement howsoever caused shall be without prejudice to any
obligations or rights of either Party which have accrued prior to such
termination and shall not affect any provision of this Agreement which
is expressly or by implication provided to come into effect on or to
continue in effect after such termination.
6. FORCE MAJEURE
6.1 Customer's obligation to place purchase orders in accordance with the
terms of this Agreement shall be suspended upon the occurrence of a
force majeure event such as act of God, flood, earthquake, fire,
explosion, act of government, war, civil commotion, insurrection,
embargo, riots, lockouts, labour disputes affecting CSM or Customer, as
the case may be, for such period as such force majeure event may
subsist. Upon the occurrence of a force majeure event, the affected
Party shall notify the other Party in writing of the same and shall by
subsequent written notice after the cessation of such force majeure
event inform the other Party of the date on which that Party's
obligation under this Agreement shall be reinstated.
6.2 Notwithstanding anything in this Clause 6, upon the occurrence of a
force majeure event affecting either Party, and such force majeure
event continues for a period exceeding 6 consecutive months, the other
Party shall have the option, in its sole discretion, to terminate this
Agreement. Such termination shall take effect immediately upon the
written notice to that effect from the other Party to the Party
affected by the force majeure event.
7. WARRANTY AND INDEMNITY
7.1 Customer warrants that it has the right to use and license the use of
the design and processes provided by Customer or required for the
production of Customer's products under this Agreement and the
Manufacturing Agreement (when signed by the Parties) and hereby grants
to CSM the right to use the aforesaid design and processes for the
performance of its obligations under this Agreement and the Manufacture
Agreement.
7.2 Customer shall indemnify, hold harmless and defend CSM against any
claims that Customer's products or a process or design licensed from or
otherwise provided by Customer and used by
4
<PAGE>
CSM for the performance of its obligations under this Agreement is an
infringement of any letters patent or other intellectual property
rights, including, without limitation, any infringement based on
specifications furnished by Customer or resulting from the use of any
equipment or process specified by Customer.
7.3 CSM shall notify Customer of any claim of infringement or of
commencement of any suit, action, or proceedings alleging infringement
of any intellectual property rights of any third party forthwith after
receiving notice thereof. Customer shall have the right in its sole
discretion and at its expense to participate in the defence of any such
claim, suit, action or proceedings and in any and all negotiations with
respect thereto.
7.4 CSM shall indemnify, hold harmless and defend Customer against any
claims that the wafers manufactured by CSM pursuant to this Agreement
using manufacturing processes provided by CSM for the performance of
its obligations under this Agreement is an infringement of any letters
patent or other intellectual property rights of any third party.
7.5 Customer shall notify CSM of any claim of infringement or of
commencement of any suit, action, or proceedings alleging infringement
of any intellectual property rights of any third party forthwith after
receiving notice thereof. CSM shall have the right in its sole
discretion and at its expense to participate in the defence of any such
claim, suit, action or proceedings and in any and all negotiations with
respect thereto.
7.6 CUSTOMER'S AGGREGATE CUMULATIVE LIABILITY TO CSM ARISING OUT OF THE
INDEMNIFICATION UNDER THIS CLAUSE 7 SHALL NOT EXCEED 5 PERCENT (5%) OF
THE TOTAL AMOUNT RECEIVED BY CSM FROM CUSTOMER IN RESPECT OF THE SALE
OF WAFERS BY CSM TO CUSTOMER. CSM'S AGGREGATE CUMULATIVE LIABILITY TO
CUSTOMER ARISING OUT OF THE INDEMNIFICATION UNDER THIS CLAUSE 13 SHALL
NOT EXCEED 5 PERCENT (5%) OF THE TOTAL AMOUNT RECEIVED BY CSM FROM
CUSTOMER IN RESPECT OF THE SALE OF WAFERS BY CSM TO CUSTOMER. THE
FOREGOING STATES EACH PARTY'S ENTIRE LIABILITY AND OBLIGATION (EXPRESS,
IMPLIED, STATUTORY OR OTHERWISE) WITH RESPECT TO INTELLECTUAL PROPERTY
INFRINGEMENT OR CLAIMS THEREFOR REGARDING ANY OF THE WAFERS
MANUFACTURED OR SOLD OR TECHNOLOGY USED PURSUANT TO THIS AGREEMENT.
8. CONFIDENTIALITY
8.1 All Confidential Information shall be kept confidential by the
recipient unless or until the recipient Party can reasonably
demonstrate that any such Confidential Information is, or part of it
is, in the public domain through no fault of its own, whereupon to the
extent that it is in the public domain or is required to be disclosed
by law this obligation shall cease. For the purposes of this Agreement,
"Confidential Information" shall mean all communications between the
Parties, and all information and other materials supplied to or
received by either of them from the other (a) prior to or on the date
of this Agreement whether or not marked confidential; (b) after the
date of this Agreement which is marked confidential with an appropriate
legend, marking, stamp or other obvious written identification by the
disclosing Party, and (c) all information concerning the business
transactions and the financial arrangements of the Parties with any
person with whom any of them is in a confidential relationship with
regard to the matter in question coming to the knowledge of the
recipient.
5
<PAGE>
8.2 The Company and the Parties and shall take all reasonable steps to
minimise the risk of disclosure of Confidential Information, by
ensuring that only they themselves and such of their employees and
directors whose duties will require them to possess any of such
information shall have access thereto, and will be instructed to treat
the same as confidential.
8.3 The obligation contained in this Clause shall endure, even after the
termination of this Agreement, for a period of 5 years from the date of
receipt of the Confidential Information except and until such
Confidential Information enters the public domain as set out above.
9. NOTICES
9.1 ADDRESSES
All notices, demands or other communications required or permitted to
be given or made under or in connection with this Agreement shall be in
writing and shall be sufficiently given or made (a) if delivered by
hand or commercial courier or (b) sent by pre-paid registered post or
(c) sent by legible facsimile transmission (provided that the receipt
of such facsimile transmission is confirmed and a copy thereof is sent
immediately thereafter by pre-paid registered post) addressed to the
intended recipient at its address or facsimile number set out below. A
Party may from time to time notify the other of its change of address
or facsimile number in accordance with this Clause.
CSM
No. 60 Woodlands Industrial Park D
Street 2, Singapore 738406
Facsimile no: (65) 3622909
Attn: Legal Department
CUSTOMER
139 Kifer Court
Sunnyvale CA 94086,
United States of America
Facsimile no: (408) 737 3838
Attn: Mr David D. Tsang
President
9.2 DEEMED DELIVERY
Any such notice, demand or communication shall be deemed to have been
duly served (a) if delivered by hand or commercial courier, or sent by
pre-paid registered post, at the time of delivery; or (b) if made by
successfully transmitted facsimile transmission, at the time of
dispatch (provided that the receipt of such facsimile transmission is
confirmed and that immediately after such dispatch, a copy thereof is
sent by pre-paid registered post.
10. WAIVER AND REMEDIES
10.1 No delay or neglect on the part of either Party in enforcing against
the other Party any term or condition of this Agreement or in
exercising any right or remedy under this Agreement shall either be or
be deemed to be a waiver or in any way prejudice any right or remedy of
that Party under this Agreement.
6
<PAGE>
10.2 No remedy conferred by any of the provisions of this Agreement is
intended to be exclusive of any other remedy which is otherwise
available at law, in equity, by statute or otherwise and each and every
other remedy shall be cumulative and shall be in addition to every
other remedy given hereunder or now or hereafter existing at law, in
equity, by statute or otherwise. The election of any one or more of
such remedies by either of the Parties hereto shall not constitute a
waiver by such Party of the right to pursue any other available remedy.
10.3 For the avoidance of doubt, nothing in this Agreement shall affect the
rights which have accrued to either Party since the date of this
Agreement.
11. SEVERANCE
If any provision or part of this Agreement is rendered void, illegal or
unenforceable in any respect under any enactment or rule of law, the
validity, legality and enforceability of the remaining provisions shall
not in any way be affected or impaired thereby.
12. ENTIRE AGREEMENT
This Agreement constitutes the entire agreement between CSM and
Customer with respect to the subject matter hereof and shall supersede
all previous agreements and undertakings between Parties.
14. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with
the laws of Singapore. The Parties hereby irrevocably submit to the
non-exclusive jurisdiction of the courts of Singapore.
7
<PAGE>
IN WITNESS WHEREOF the Parties have hereunto entered into this Agreement the
date first above written.
/s/ David D. Tsang
- -----------------------------------------
Name: David D. Tsang
Title: CEO
For and on behalf of
OAK TECHNOLOGY, INC.
/s/ Rob Baxter
- -----------------------------------------
Name: Rob Baxter
Title: Senior Vice President
For and on behalf of
CHARTERED SEMICONDUCTOR MANUFACTURING LTD
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS AS FOUND
ON PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE FISCAL AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 34,163
<SECURITIES> 61,315
<RECEIVABLES> 23,129
<ALLOWANCES> 830
<INVENTORY> 2,594
<CURRENT-ASSETS> 149,931
<PP&E> 44,860
<DEPRECIATION> 19,126
<TOTAL-ASSETS> 241,336
<CURRENT-LIABILITIES> 22,272
<BONDS> 0
0
0
<COMMON> 41
<OTHER-SE> 215,807
<TOTAL-LIABILITY-AND-EQUITY> 241,336
<SALES> 41,828
<TOTAL-REVENUES> 41,828
<CGS> 22,025
<TOTAL-COSTS> 22,025
<OTHER-EXPENSES> 50,659
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29
<INCOME-PRETAX> (27,369)
<INCOME-TAX> (3,497)
<INCOME-CONTINUING> (23,872)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,872)
<EPS-PRIMARY> (0.59)
<EPS-DILUTED> (0.59)
</TABLE>
