<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q/A
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1999
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NO. 0-25298
------------------------
OAK TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 77-0161486
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
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 January 31, 2000, there were outstanding 50,834,618 shares of the
Registrant's Common Stock, par value $0.001 per share.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
FORM 10-Q/A
INDEX
FOR THE QUARTER ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements........................................ 3
Condensed Consolidated Balance Sheets as of December 31,
1999 and June 30, 1999.................................... 3
Condensed Consolidated Statements of Operations for the
Three Months and Six Months Ended December 31, 1999 and
1998...................................................... 4
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended December 31, 1999 and 1998................... 5
Notes to Condensed Consolidated Financial Statements........ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 14
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 30
PART II--OTHER INFORMATION
Item 1. Legal Proceedings........................................... 32
Item 2. Changes in Securities....................................... 36
Item 4. Submission of Matters to a Vote of Security Holders......... 36
Item 6. Exhibits and Reports on Form 8-K............................ 36
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)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 1999
------------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 13,437 $ 19,500
Short-term investments.................................... 106,685 113,703
Accounts receivable, net of allowance for doubtful
accounts of $386 and $555, respectively................. 6,407 8,251
Inventories............................................... 2,637 1,819
Current portion of foundry deposits....................... 7,760 9,061
Prepaid expenses and other current assets................. 12,643 11,121
-------- --------
Total current assets.................................... 149,569 163,455
Property and equipment, net................................. 19,666 22,039
Foundry deposits............................................ -- 7,760
Other assets................................................ 7,255 10,587
-------- --------
Total assets............................................ $176,490 $203,841
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt....... $ 22 $ 25
Accounts payable.......................................... 7,246 3,648
Accrued expenses.......................................... 9,181 8,467
Deferred revenue.......................................... 86 379
-------- --------
Total current liabilities............................... 16,535 12,519
Long-term debt.............................................. -- 5
Deferred income taxes....................................... 1,438 1,438
Other long-term liabilities................................. 372 457
-------- --------
Total liabilities....................................... 18,345 14,419
-------- --------
Stockholders' equity:
Preferred stock, $0.001 par value; 2,000,000 shares
authorized; None issued and outstanding as of
December 31, 1999 and June 30, 1999..................... -- --
Common stock, $0.001 par value; 60,000,000 shares
authorized; 43,360,741 shares issued and 40,978,261
shares outstanding as of December 31, 1999 and
42,916,721 shares issued and 40,915,241 outstanding as
of June 30, 1999........................................ 43 42
Additional paid-in capital................................ 166,359 164,784
Treasury stock............................................ (11,254) (9,437)
Retained earnings......................................... 3,555 34,033
Accumulated other comprehensive loss...................... (558) --
-------- --------
Total stockholders' equity.............................. 158,145 $189,422
-------- --------
Total liabilities and stockholders' equity.............. $176,490 $203,841
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues......................................... $ 11,029 $ 21,861 $ 21,171 $ 41,828
Cost of revenues..................................... 6,611 11,559 11,682 22,025
-------- -------- -------- --------
Gross profit....................................... 4,418 10,302 9,489 19,803
Research and development expenses.................... 15,514 12,177 27,653 25,311
Selling, general and administrative expenses......... 8,753 9,794 16,216 18,187
Acquired in-process technology....................... 225 -- 225 7,161
-------- -------- -------- --------
Operating loss..................................... (20,074) (11,669) (34,605) (30,856)
Nonoperating income, net............................. 1,782 1,536 4,127 3,487
-------- -------- -------- --------
Loss before income taxes........................... (18,292) (10,133) (30,478) (27,369)
Income taxes (benefit)............................... -- (440) -- (3,497)
-------- -------- -------- --------
Net loss........................................... $(18,292) $ (9,693) $(30,478) $(23,872)
======== ======== ======== ========
Net basic and diluted loss per share................. $ (0.45) $ (0.24) $ (0.74) $ (0.59)
======== ======== ======== ========
Shares used in computing basic and diluted loss per
share.............................................. 40,925 40,679 41,008 40,804
======== ======== ======== ========
</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,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(30,478) $(23,872)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 5,725 5,682
Write-off of previously acquired technology............. 1,200 --
Newly acquired in-process technology.................... 225 7,161
Loss on abandonment of property and equipment........... 1,278 --
Deferred income taxes................................... -- 383
Changes in operating assets and liabilities:
Accounts receivable................................... 1,844 (4,694)
Inventories........................................... (818) 4,964
Foundry deposits...................................... 9,061 944
Prepaid expenses and other current assets............. (1,522) 4,282
Accounts payable, accrued expenses and deferred
revenue............................................. 3,934 (730)
Other assets.......................................... 1,087 1,705
-------- --------
Net cash used in operating activities............... (8,464) (4,175)
-------- --------
Cash flows from investing activities:
Purchases of short-term investments....................... (43,732) (30,597)
Proceeds from matured short-term investments.............. 50,191 26,704
Additions to property and equipment, net.................. (2,791) (4,297)
Equity investment in Earjam.com........................... (1,019) --
Acquisition of ViewPoint, Inc., net of cash acquired...... -- (9,467)
Acquisition of XLI Inc. common stock...................... -- (3,675)
Payment of certain XLI Inc. liabilities at acquisition
date.................................................... -- (2,094)
-------- --------
Net cash provided by (used in) investing activities..... 2,649 (23,426)
-------- --------
Cash flows from financing activities:
Issuance of debt.......................................... -- 3,525
Repayment of debt......................................... (6) (75)
Issuance of common stock, net............................. 1,575 609
Treasury stock acquisitions............................... (1,817) (2,098)
-------- --------
Net cash provided by (used in) financing activities..... (248) 1,961
-------- --------
Net decrease in cash and cash equivalents................... (6,063) (25,640)
Cash and cash equivalents, beginning of period.............. 19,500 59,803
-------- --------
Cash and cash equivalents, end of period.................... $ 13,437 $ 34,163
======== ========
Supplemental information:
Cash paid (refunded) during the period:
Interest................................................ $ 3 $ 28
======== ========
Income taxes............................................ $ (13) $ (8,033)
======== ========
Comprehensive income (loss) on short-term investments... $ (558) $ 222
======== ========
</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 condensed consolidated financial statements of
Oak Technology, Inc. and Subsidiaries ("Oak" or "The Company") have been
prepared in conformity with generally accepted accounting principles. However,
certain information or footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission (the "Commission"). In the opinion of
management, the consolidated financial statements reflect all adjustments
considered necessary for a fair presentation of the consolidated financial
position, operating results and cash flows for the 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/A should be read in
conjunction with the audited consolidated financial statements and notes thereto
for the year ended June 30, 1999, included in the Oak Technology, Inc. (the
"Company") 1999 Annual Report on Form 10-K/A previously filed with the
Commission.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities", which will be
effective for the Company's fiscal year 2001. SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument,
including certain derivative instruments embedded in other contracts, be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The statement also requires that changes in the derivative's fair
value be recognized in earnings unless specific hedge accounting criteria are
met. The Company is currently assessing the impact of this new statement on its
consolidated financial position, liquidity, and results of operations.
2. INVENTORIES
Inventories are stated at the lower of cost (first in, first out) or market
and consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------- ---------
1999 1999
------------- ---------
<S> <C> <C>
Purchased parts and work in process.................... $ 1,897 $ 1,269
Finished goods......................................... 3,167 4,385
Reserve for obsolescence............................... (2,427) (3,835)
------- -------
$ 2,637 $ 1,819
======= =======
</TABLE>
3. FOUNDRY DEPOSITS
In June and November 1995, the Company entered into agreements with Taiwan
Semiconductor Manufacturing Company, Ltd. (TSMC) and Chartered Semiconductor
Manufacturing Ltd. (Chartered) to obtain certain additional wafer capacity
through the calendar year 2001. The original agreements called for the Company
to commit to certain future wafer purchases and to deposit funds with the
suppliers as either a portion of the price of the additional wafers in advance
of their delivery, or as a non-interest bearing
6
<PAGE>
OAK TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. FOUNDRY DEPOSITS (CONTINUED)
deposit to secure the availability of additional wafers. The price of such
wafers would be determined in the future periods in which specific orders were
actually placed. If the Company is not able to use, assign, or sell the
additional wafer quantities, all or a portion of the deposits may be forfeited.
The Company has subsequently twice amended its previous agreement with TSMC.
The most recent amendment, dated June 1999, called for $16.8 million of wafer
deposits held by TSMC. as of that date. Under the terms of the existing
agreement (as amended), the Company was to have utilized the entire remaining
amount of the prepayment by December 31, 1999. Under the new amendment, the
period of time over which the Company can utilize the deposit was extended to
December 31, 2000. The maximum of $9.0 million was utilized in calendar 1999,
and the remaining $7.8 million is expected to be utilized in calendar 2000,
although no assurance can be given in this regard.
As of December 31, 1999, the Company had $3.5 million of deposits with
Chartered. The current agreement, as amended, allows the deposits to be utilized
in increments until December 31, 2002. Based on previous forecasts of the
products placed with Chartered, the Company previously recorded a reserve of
$2.8 million against these deposits. As a result of updating forecasts during
the quarter ended December 31, 1999, the Company recorded an additional reserve
of $0.7 million, thereby reserving the remaining balance.
4. NET INCOME (LOSS) PER SHARE
Basic and diluted net loss per share have been computed using the weighted
average number of shares of common stock and dilutive common equivalent shares
from stock options and warrants outstanding in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share." The following
table provides a reconciliation of the components of the basic and diluted loss
per share computations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss.............................. $(18,292) $(9,693) $(30,478) $(23,872)
======== ======= ======== ========
Weighted average number of common
Shares outstanding.................. 40,925 40,679 41,008 40,804
-------- ------- -------- --------
Shares used in computing basic and
diluted net loss per share.......... 40,925 40,679 41,008 40,804
-------- ------- -------- --------
Net loss per basic and diluted
share:.............................. $ (0.45) $ (0.24) $ (0.74) $ (0.59)
======== ======= ======== ========
</TABLE>
For the three month period ended December 31, 1999 and 1998 approximately
763,000 and 395,000 of potentially dilutive common shares, respectively, were
not included in the calculation of net diluted loss per share as they are
considered antidilutive. For the six month period ended December 31, 1999 and
1998 approximately 744,000 and 173,000 of potentially dilutive common shares,
respectively, were not included in the calculation of net diluted loss per share
as they are considered antidilutive.
7
<PAGE>
OAK TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. STOCKHOLDERS' EQUITY
On July 28, 1999, the Company announced that its Board of Directors approved
a stock repurchase plan authorizing the purchase of up to four million shares of
the Company's common stock. Repurchases will be made from time to time in open
market or privately negotiated transactions over one year, unless further
extended by the Board. From July 28, 1999 to December 31, 1999, the Company
repurchased 381,000 shares of the 4 million shares authorized at a cost of
approximately $1.8 million.
6. SUBSEQUENT EVENTS--ACQUISITIONS & DIVESTITURES
On July 29, 1999, the Company announced it had entered into a definitive
agreement to acquire Xionics Document Technologies, Inc. (Xionics). Under the
terms of the agreement, which was approved by the shareholders of both
companies, Oak issued approximately 11.8 million shares of its common stock and
approximately $34.7 million in cash to acquire all of the common stock of
Xionics. The Company will take a special charge of approximately $10 million
against earnings in the third fiscal quarter of 2000 in order to write off the
cost of in-process research and development acquired in the merger. In addition
to the $10 million charge taken, approximately $50 million (representing the
fair value of net intangible assets acquired in the merger) will be recorded on
the Company's balance sheet and amortized over three to five years. The
transaction will be accounted for under the purchase method of accounting, and
was completed in the third quarter of fiscal 2000. The shareholders of both Oak
and Xionics Document Technologies, Inc. also voted to increase the number of
authorized shares of Oak common stock by 70 million to 130 million.
On January 19, 2000, the Company announced the sale of its wireless
broadband business group to Conexant Systems Inc. (NASDAQ:CNXT). Under the terms
of the agreement, Oak received $25 million in cash and stock from Conexant. The
transaction, which closed on January 19, 2000, is expected to result in a gain
of approximately $20 million during the third fiscal quarter of 2000.
During the second quarter of fiscal 2000 the Company made an equity
investment in a start-up venture, Earjam.com, with a first round funding of
approximately $1.0 million for a minority equity position. The Company recorded
a special charge of $0.2 million against earnings in the second fiscal quarter
of 2000 to write-off its share of Earjam.com's in-process research and
development. The Company has invested an additional $2.0 million in Earjam.com
during the third quarter of fiscal 2000 and will take an additional special
charge of $0.3 million in the third fiscal quarter of 2000 to write-off its
remaining share of Earjam.com's in-process research and development. The
investment will be accounted for under the equity method of accounting.
7. CONTINGENCIES
The Company and various of its current and former officers and Directors are
parties to several class action lawsuits filed on behalf of all persons who
purchased or acquired the Company's common stock (excluding the defendants and
parties related to them) for the period July 27, 1995 through May 22, 1996. The
first, a state court proceeding designated IN RE OAK TECHNOLOGY SECURITIES
LITIGATION, Master File No. CV758510 pending in Santa Clara County Superior
Court in Santa Clara, California, consolidates five class actions. This lawsuit
originally named as defendants several of the Company's venture capital fund
investors, two of its investment bankers and two securities analysts. The
plaintiffs alleged violations of California securities laws and statutory deceit
provisions as well as breaches of fiduciary duty and abuse of control. After
several rounds of demurrers, the only remaining claim is the
8
<PAGE>
OAK TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. CONTINGENCIES (CONTINUED)
California Corporations Code Sections 25400/25500 cause of action against the
Company, four officers and the Company's investment bankers and securities
analysts. On July 16, 1998, the state court provisionally certified a national
class of all persons who purchased the Company's stock during the class period.
The class was provisionally certified with the order held in abeyance pending
resolution of the question of whether a nationwide class may bring a California
Corporations Code Sections 25400/25500 claim. This issue was resolved in favor
of allowing such nationwide class actions by the California Supreme Court, Case
No. 5058723, on January 4, 1999, in the DIAMOND MULTIMEDIA SECURITIES LITIGATION
appeal by the California Supreme Court. Discovery has commenced in this action.
The defendants and certain third parties have produced documents and a number of
depositions have been taken, including the depositions of those officers of the
Company who were officers during the class period. This action is set for trial
on July 5, 2000. Based on its current information, the Company believes this
suit to be without merit and will defend its position vigorously. Although it is
reasonably possible the Company may incur a loss upon conclusion of these
claims, an estimate of any loss or range of loss cannot be made. No provision
for any liability that may result upon adjudication has been made in the
Company's Consolidated Financial Statements.
9
<PAGE>
OAK TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. CONTINGENCIES (CONTINUED)
The Company and several of its current and former officers and Directors
were also parties to four putative class action lawsuits pending in the U.S.
District Court for the Northern District of California. These actions were
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 based upon the same allegations as the state court securities
litigation. This action also named as a defendant one of the Company's
investment bankers. On July 29, 1997, the federal court judge granted the Oak
defendants Motion to Dismiss the plaintiffs' First Amended Consolidated
Complaint, but granted the plaintiffs leave to amend most claims. The
plaintiffs' Second Amended Consolidated Complaint was filed on September 4,
1997. The defendants' Motion to Dismiss was heard on December 17, 1997. The
court took the matter under submission. Prior to the issuance of the court's
ruling on the motion to dismiss, the plaintiffs moved to voluntarily dismiss
this action without prejudice. Defendants requested that the action be dismissed
with prejudice. On November 22, 1999, the court dismissed the action without
prejudice.
Additionally, various of the Company's current and former officers and
Directors are defendants in three consolidated derivative actions pending in
Santa Clara County Superior Court in Santa Clara, California, entitled IN RE OAK
TECHNOLOGY DERIVATIVE ACTION, Master File No. CV758510. This lawsuit, which
asserts a claim for breach of fiduciary duty and a claim under California
securities law based upon the officers' and Directors' trading in securities of
the Company, has been stayed pending resolution of the above described class
actions.
In all of the class actions, the plaintiffs are seeking monetary damages and
equitable relief. In the derivative action, the plaintiffs are also seeking an
accounting for the defendants' sales of shares of the Company's common stock and
the payment of monetary damages to the Company. Based on its current
information, the Company believes all the suits described above to be without
merit and will defend its position vigorously. Although it is reasonably
possible the Company may incur a loss upon conclusion of these claims, an
estimate of any loss or range of loss cannot be made. No provision for any
liability that may result upon adjudication has been made in the Company's
Consolidated Financial Statements.
The Company is party to various other legal proceedings, including a number
of patent-related matters. In the opinion of management these other legal
proceedings will not have a material adverse effect on the Company's
consolidated financial position or overall results of operations. In connection
with these matters, however, the Company has incurred, and expects to continue
to incur, legal and other expenses.
If any of the above pending actions are decided adversely to the Company, it
would likely have a material adverse affect on the Company's financial condition
and results of operations.
8. SEGMENT INFORMATION
SFAS No. 131 establishes standards for the reporting by public business
enterprises of information about operating segments, products and services,
geographic areas, and major customers. The method for determining what
information to report is based on the way that management organizes the
operating segments within the Company for making operational decisions and
assessments of financial performance. The Company's chief operating
decision-maker is considered to be the chief executive officer (CEO).
10
<PAGE>
OAK TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. SEGMENT INFORMATION (CONTINUED)
For fiscal year 2000, Oak Technology has three reportable segments which
offer different product lines to each of its target markets: Optical Storage
Group, Consumer Group and Digital Imaging Equipment Group. The Company evaluates
operating segment performance based on net revenues and direct operating
expenses of the segment. The accounting policies of the operating segments are
the same as those described in the summary of accounting policies in the
Company's annual financial statements for the year ended June 30, 1999. No
segments have been aggregated. The Company does not allocate assets to its
individual operating segments.
Information about reported segment income or loss is as follows for the
three and six months ended December 31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Revenues:
Optical Storage...................... $ 2,017 $15,631 $ 3,641 $29,688
Imaging.............................. 6,412 5,731 13,266 10,445
Consumer............................. 2,600 499 4,264 1,695
------- ------- -------- -------
$11,029 $21,861 $ 21,171 $41,828
======= ======= ======== =======
Cost of Goods Sold and Direct Operating
Expenses:
Optical Storage...................... $ 6,676 $11,417 $ 12,506 $23,933
Imaging.............................. 5,595 4,937 10,751 9,365
Consumer............................. 5,343 5,171 10,065 10,526
------- ------- -------- -------
$17,614 $21,525 $ 33,322 $43,824
======= ======= ======== =======
Contribution Margin:
Optical Storage...................... $(4,659) $ 4,214 $ (8,865) $ 5,755
Imaging.............................. 817 794 2,515 1,080
Consumer............................. (2,743) (4,672) (5,801) (8,831)
------- ------- -------- -------
$(6,585) $ 336 $(12,151) $(1,996)
======= ======= ======== =======
</TABLE>
11
<PAGE>
OAK TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. SEGMENT INFORMATION (CONTINUED)
A reconciliation of the totals reported for the operating segments to the
applicable line items in the consolidated condensed financial statements for the
three and six months ended December 31, 1999, 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Contribution margin from operating
segments........................... $ (6,585) $ 336 $(12,151) $ 1,996
Indirect costs of goods sold and
operating expenses................. 13,489 12,005 22,454 32,852
-------- -------- -------- --------
Total operating loss................. (20,074) (11,669) (34,605) (30,856)
Other income......................... 1,782 1,536 4,127 3,487
-------- -------- -------- --------
Loss before taxes.................... $(18,292) $(10,133) $(30,478) $(27,369)
======== ======== ======== ========
</TABLE>
Indirect costs of goods sold and operating expenses includes all costs and
expenses not specifically charged to the operating segments in the financial
information reviewed by the Company's chief decision making officer. These
include inventory reserve provisions and adjustments; operating overhead
included in consolidated cost of goods sold; corporate research and development
expenses; and most of the Company's selling, general and administrative
expenses.
The Company maintains significant operations in the United States, United
Kingdom, Taiwan and Japan. Activities in the United States consist of corporate
administration, product development, logistics and worldwide sales management.
Foreign operations consist of regional sales and limited board-level
manufacturing.
The distribution of net revenues for the three months and six ended
December 31, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue from unaffiliated customers
originating from:
United States......................... $ 2,119 $ 3,092 $ 4,994 $ 5,729
Japan................................. 4,601 12,613 8,893 22,696
Korea................................. 2,178 750 3,536 2,621
Taiwan................................ -- 499 308 1,465
Other Asia............................ 1,593 2,261 2,367 3,821
Europe................................ 538 2,646 1,073 5,496
------- ------- ------- -------
$11,029 $21,861 $21,171 $41,828
======= ======= ======= =======
</TABLE>
12
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OAK TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
9. COMPREHENSIVE INCOME
The following table presents the calculation of comprehensive income as
required by SFAS 130. Comprehensive income has no impact on the Company's net
income, balance sheet or shareholders' equity. The components of comprehensive
income, net of tax, are as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss:............................. $(18,292) $(9,693) $(30,478) $(23,872)
Other comprehensive income (loss):
Change in unrealized gain (loss)
on investments, net............. (168) (214) (558) 222
-------- ------- -------- --------
Total comprehensive loss.............. $(18,460) $(9,907) $(31,036) $(23,650)
======== ======= ======== ========
</TABLE>
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXCEPT FOR THE HISTORICAL FINANCIAL INFORMATION CONTAINED HEREIN, THE
MATTERS DISCUSSED IN THIS QUARTERLY REPORT ON FORM 10-Q/A MAY BE CONSIDERED
"FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED (THE "EXCHANGE ACT"). SUCH STATEMENTS INCLUDE DECLARATIONS REGARDING
THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF THE COMPANY AND ITS MANAGEMENT.
PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE
NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE A NUMBER OF RISKS AND
UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE INDICATED BY
SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE
SET FORTH IN THIS ITEM 2, THOSE DESCRIBED ELSEWHERE IN THIS QUARTERLY REPORT AND
THOSE DESCRIBED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K/A FOR THE YEAR ENDED
JUNE 30, 1999, OTHER QUARTERLY REPORTS ON FORM 10-Q AND OTHER REPORTS FILED
UNDER THE EXCHANGE ACT.
GENERAL
The Company designs, develops and markets high performance integrated
semiconductors and related software to original equipment manufacturers
worldwide that serve the optical storage, consumer electronics and digital
imaging markets. The Company's products consist primarily of integrated circuits
and supporting software and firmware to provide a complete solution for
customers, thereby enabling them to deliver cost effective, powerful systems to
end users for home and business use. The Company's mission is to be a leading
solutions provider for the storage and distribution of digital content.
The Company contracts with independent foundries to manufacture all of its
products, enabling the Company to focus on its design strengths, minimize fixed
costs and capital expenditures and gain access to advanced manufacturing
facilities. Except pursuant to its agreements with TSMC and Chartered, the
Company's foundries generally are not obligated to supply products to the
Company for any specific period, in any specific quantity or at a specific
price.
On February 2, 1999, the Company announced the appointment of Young K. Sohn
to the office of President and Chief Executive Officer. Mr. Sohn initiated a
comprehensive review of all aspects of the Company and put in place a new
management team whose charter is to architect and execute a turnaround plan for
the Company. Throughout fiscal 2000, the Company has been unveiling its
turnaround plan. First, in July 1999, the Company announced that it intends to
focus on the digital imaging and optical storage markets, as these are both
markets in which the Company has a successful legacy and unique core
competencies. Furthermore, with the emergence of the Internet, both markets are
experiencing fundamental change and new growth which the Company believes it is
uniquely positioned to capture. On October 20, 1999, the Company announced that
it was in discussions with larger semiconductor companies regarding a sale of
its digital broadcast business. On January 19, 2000, the broadcast business was
sold to Conexant Systems Inc. for $25 million in stock and cash. The sale of
this business allows the Company to focus on its optical storage and imaging
businesses. Second, in July 1999, the Company announced that it intends to be a
solutions provider rather than a semiconductor provider. As a consequence, the
Company announced that it was redefining its product roadmaps so that it would
be able to provide completely integrated hardware and software solutions to its
customers in the digital imaging and optical storage markets. The announcement
of the merger with Xionics, a software company in the imaging market, on
July 29,1999, represented a step towards Oak providing its customers in the
imaging market with a compete solution. The merger with Xionics closed on
January 11, 2000. To date, the Company has stated that part of its turnaround
strategy is to become the leading supplier of solutions for the digital imaging
market and the leading supplier of CD-RW solutions personal computer and
consumer applications. It is anticipated that additional portions of Oak's
turnaround strategy will continue to be announced periodically.
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<PAGE>
In its press release regarding the results of operations for the second
quarter of fiscal 2000, the Company reported a net loss of $18.3 million, its
eighth consecutive quarterly loss. Low revenues and the continued losses are
primarily due to a product transition in the Company's optical storage business,
which historically has accounted for approximately 80% of its business, as the
Company moves to its next generation CD-RW controllers. Oak is currently
sampling its next generation CD-RW product with five of the top ten CD-RW
manufacturers. However, unit shipments of its next generation CD-RW controllers
are not expected to reach mass production until the third quarter of fiscal
2000. Furthermore, the Company cannot predict the level of customer acceptance
of the product and the product's impact on operating results. The Company
anticipates that net revenues for the next quarter of fiscal year 2000 will be
significantly less than the comparable periods of the previous fiscal year as
the Company transitions to its next generation CD-RW product.
The Company's quarterly and annual operating results have been, and will
continue to be, affected by a wide variety of factors that could have a material
adverse effect on revenues and profitability during any particular period,
including competitive pressures on selling prices, availability and cost of
foundry capacity and raw materials, fluctuations in yield, loss of any strategic
relationships, the Company's ability to introduce new products in accordance
with OEM design requirements and design cycles, new product introductions by the
Company's competitors and market acceptance of product sold by both the Company
and its customers. In the third calendar quarter of fiscal 1999, Taiwan
experienced a severe earthquake. The Company did not incur any significant
damage to its own facilities located in Taipei; however, its primary wafer
manufacturer (TSMC) experienced a disruption in operations for several weeks. To
date, Oak has not experienced any material delays in its wafer deliveries from
its primary manufacturers. However, with the current shortage of foundry
capacity, which is expected throughout calendar 2000, there can be no assurance
that delays will not occur in the future.
In addition, the Company's operating results are subject to fluctuations in
the markets for its customers' products, particularly the consumer electronics
and personal computer markets, which have been extremely volatile in the past.
The Company has devoted a substantial portion of its research and development
efforts in recent quarters to developing chips used in both Digital Video Disk
("DVD") systems, CD-RW drivers and inkjet multi-function peripherals. The
Company's DVD, CD-RW, and digital imaging products are subject to the new
product risks described in the preceding paragraph, including in particular the
Company's ability to timely introduce these products and the market's acceptance
of them, which could have a materially adverse effect on its operating results.
RESULTS OF OPERATIONS
NET REVENUES. Net revenues decreased 50% to $11.0 million for the three
months ended December 31, 1999 from $21.9 million in the comparable period of
fiscal 1999. For the six month period ended December 31, 1999, net revenues
decreased 49% to $21.2 million from $41.8 million in the comparable period of
fiscal 1998.
Net revenues in the Optical Storage business segment were $2.0 million for
the second quarter of fiscal 2000, representing an 87% decrease from the
segment's net revenues of $15.6 million reported in the second quarter of fiscal
1999. Optical Storage business segment revenues were $3.6 million for the first
six months of fiscal 2000, representing an 88% decrease from the segment's net
revenues of $29.7 million reported in the comparable period of fiscal 1999. This
decrease, in both the three and six month periods, is primarily the result of a
loss of market share in Taiwan, the maturation of the CD-ROM market, and
development delays in the Company's next-generation CD-RW controller. Oak is
currently sampling its next generation CD-RW product with five of the top ten
CD-RW manufacturers. However, the Company cannot predict the level of customer
acceptance of the product and the product's impact on operating results.
15
<PAGE>
Net revenues for the Imaging business segment were $6.4 million for the
three months ended December 31, 1999, representing a 12% increase over the
$5.7 million reported in the second quarter of fiscal 1999. For the first six
months of fiscal 2000, Imaging business segment revenues were $13.3 million,
representing a 28% increase from the segment's net revenues of $10.4 million
reported in the comparable period of fiscal 1999. These increases were primarily
due to increased revenues from the segment's compression codec and resolution
enhancement products during the periods.
Net revenues for the Consumer business segment were $2.6 million for the
second quarter of fiscal 2000, representing a 420% increase from the
$0.5 million reported in the same quarter of the prior year. For the first six
months of fiscal 2000, Consumer business segment revenues were $4.3 million,
representing a 153% increase from the segment's net revenues of $1.7 million
reported in the comparable period of fiscal 1999. These increases were primarily
due to increased revenues from the segment's VCD decoder products during the
periods.
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 40%
in the three month period ended December 31, 1999, as compared to 47% during the
comparable period in the prior year. For the first six months of fiscal 2000,
gross margin decreased to 45% from 47% during the same period of the prior year.
Gross margin for the Optical Storage business segment was 46% for the second
quarter of fiscal 2000 compared to 57% for the comparable quarter of the prior
year and 49% for the first six months of fiscal 2000 compared to 51% for the
first six months of the prior year. This decrease is primarily due to a shift in
product mix to lower margin products during the first half of fiscal 2000.
Gross margin for the Imaging business segment was 66% for the second quarter
of fiscal year 2000, representing a 2% increase from the 68% reported in the
second quarter of fiscal 1999 and 67% for the first six months of fiscal 2000
compared to 70% for the first six months of the prior year. These decreases were
primarily due to reduced margins from the segment's power controller products.
Gross margin for the Consumer business segment was 24% for the second
quarter of fiscal year 2000 and 26% for the first six months of fiscal 2000. On
October 20, 1999, the Company announced that it was in discussions with larger
semiconductor companies regarding a sale of its digital broadcast business, the
most significant portion of the Consumer business segment, and on January 19,
2000 the broadcast business was sold to Conexant Systems Inc. The sale of this
business allows the Company to focus on its optical storage and imaging
businesses.
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 average
selling prices (ASPs) for its existing products may continue to decline over
time and that ASPs for each new product may decline significantly over the life
of the product. The Company continues to experience severe price pressure on its
legacy controller products and expects such price erosion to continue. In
addition, given the extremely competitive nature of the optical storage market,
the Company believes that gross margins for new products in its optical storage
market may be somewhat lower than historical levels and that, as a result, gross
margins in general may decline in the future.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development costs are
expensed as incurred. Research and development expenses of $15.5 million for the
three months ended December 31, 1999 increased $3.3 million, or 27%, from
$12.2 million in the comparable period of the previous fiscal year. For the
first six months of fiscal 2000, research and development expenses increased
$2.3 million, from $25.3 million in the second fiscal quarter of the previous
fiscal year. The increase was primarily due to charges totaling $1.2 million
related to the write-off of previously acquired technology no longer in use,
16
<PAGE>
$0.7 million related to the purchase of licensed technology used for research
and development, and write-offs of obsolete capital equipment of $0.5 million
during the second quarter of fiscal 2000. 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 a
significant decrease in the Company's net revenues in the current periods
compared to the comparable periods of fiscal 1999. The Company will continue to
invest substantial resources in research and development of new products in the
Company's target markets: optical storage and digital imaging.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative (S,G&A) expenses decreased by 10% to $8.8 million for the three
months ended December 31, 1999 from $9.8 million in the comparable period of the
prior year. For the first six months of fiscal 2000, selling, general and
administrative expenses decreased by 11% to $16.2 million from $18.2 million
during the comparable period of the prior year. This decrease is primarily due
to lower consulting and legal fees during the second quarter and first half of
fiscal 2000. S,G&A expenses increased significantly as a percentage of net
revenues for the current fiscal periods over the comparable periods in the prior
year due primarily to a significant decrease in the Company's net revenues in
the comparison periods.
ACQUIRED IN-PROCESS TECHNOLOGY. During the first quarter of fiscal 1999,
the Company acquired ViewPoint and XLI. Of the combined purchase prices of the
two companies, $7.2 million was allocated to in-process research and development
(IPR&D) and was charged to operations ($4.8 million related to ViewPoint,
$2.4 million related to XLI). Substantially all of the remainder of the purchase
price of each of the two companies (aside from allocations to tangible assets
totaling $0.9 million) has been allocated to purchased technology and other
intangible assets (totaling $8.8 million) recorded on the Company's balance
sheet, and will be amortized to operations on a straight-line basis over three
years. During the second quarter of fiscal 2000, the Company made an equity
investment in Earjam.com. Of the $1.0 million investment made during the
quarter, $0.2 million was allocated to IPR&D and was charged to operations. The
remaining investment of approximately $0.8 million will be accounted for under
the equity method of accounting.
NONOPERATING INCOME. During the second quarter of fiscal 2000, nonoperating
income increased to $1.8 million from $1.5 million during second quarter of
fiscal 1999. For the first six months of fiscal 2000, nonoperating income
increased to $4.1 million from $3.5 million in the comparable period of the
prior year. This increase is primarily due to increased interest income from
higher average short-term investments and higher interest rates combined with
foreign currency translation gains (related primarily to the strengthening of
the Japanese Yen) recognized during the periods.
INCOME TAXES. Management believes that sufficient future taxable income may
not be generated in order to realize all the Company's deferred tax assets.
Accordingly, during fiscal 1999 a full valuation allowance against deferred tax
assets was established. As this assessment remains unchanged, no income tax
benefit was recognized with respect to operating losses incurred in the second
quarter and first six months of fiscal 2000.
FACTORS THAT MAY AFFECT FUTURE RESULTS
EXPECTED BENEFITS OF THE MERGER WITH XIONICS DOCUMENT TECHNOLOGIES, INC. MAY
NOT BE ACHIEVED.
In order to realize the benefits of the merger, the Company will have to
effectively integrate the operations and management acquired in the merger,
together with technical research and development, sales and marketing, business
development efforts and personnel and also retain key personnel in this process.
The successful execution of these events will involve considerable risk and may
not be successful. If the Company is not successful in accomplishing this
integration, then the objectives of the merger, including improved operating
results will not be realized. A key benefit of the merger is perceived to be the
Company's opportunity to transition from being an integrated circuits provider
to a complete solutions
17
<PAGE>
provider for the growing office equipment markets, and thereby, gain a larger
share of the products outsourced by the Company's original equipment
manufacturer, or OEM, customers. The Company believes that it will have the
resources and technology necessary to be a leading supplier to the digital
office market and will offer one of this industry's most integrated and flexible
platforms. However, if the integration is not successful or is unexpectedly
delayed or more expensive than contemplated, the Company will not realize these
benefits to the fullest extent possible.
If the benefits of the merger to Company stockholders do not exceed the
costs associated with the merger, which costs include integration costs and the
dilution to the Company's stockholders resulting from the issuance of shares in
connection with the merger, then the financial results of the Company, including
earnings per share, could be adversely affected.
The market price of the Company's common stock could decline as a result of
the merger if:
- The integration is unsuccessful or proves to be more expensive or
time-consuming than expected;
- The Company does not achieve the perceived benefits of the merger as
rapidly or to the extent anticipated by financial analysts; or
- The effect of the merger on the Company's financial results are not
consistent with the expectations of financial analysts.
The Company will take a special charge of approximately $10 million against
earnings in the third fiscal quarter of 2000 in order to write off the cost of
in-process research and development acquired in the merger. The Securities and
Exchange Commission has recently begun disapproving large in-process research
and development write-offs. If the write-off is not as the Company expects, a
larger portion of the purchase price paid in the merger will have to be
allocated to the assets on the Company's balance sheet and amortized over a
period of time. This in turn will have an adverse effect on the Company's
earnings per share throughout the amortization period, as a small amount of the
asset booked will be treated as an expense each quarter. In addition to the
$10 million charge taken, approximately $50 million (representing the fair value
of net intangible assets acquired in the merger) will be recorded on the
Company's balance sheet and amortized over three to five years.
THE COMPANY HAS EXPERIENCED AND EXPECTS TO CONTINUE TO EXPERIENCE
SIGNIFICANT PERIOD-TO-PERIOD FLUCTUATIONS IN ITS REVENUES AND OPERATING RESULTS,
WHICH MAY RESULT IN VOLATILITY IN THE PRICE OF ITS STOCK
The Company's quarterly revenues and operating results have varied
significantly in the past and are likely to vary substantially from quarter to
quarter in the future. Accordingly, you should not rely on period-to-period
comparisons as an indication of future performance. In addition, these
variations may cause the Company's stock price to fluctuate. If quarterly
results fail to meet public expectations, the price of the Company's stock may
decline.
The Company's revenues and operating results are affected by a wide variety
of factors, including factors that generally affect everyone in its industry and
factors that are more specific to its business and product lines. The principal
risk the Company faces in its business and one which has had, and is expected to
continue to have, a significant effect on its revenues and operating results, is
its dependence on the optical storage market. Other factors specific to its
business and product lines include the following:
- The Company's ability to diversify its product offerings and the markets
for its products;
- The current market for its products;
- The loss or gain of important customers;
- The timing of significant orders and order cancellations or reschedulings;
- Pricing policy changes by the Company and its competitors and suppliers;
18
<PAGE>
- The potential for significant inventory exposure;
- The timing of the development and introduction of new products or enhanced
versions of existing products;
- Market acceptance of new products;
- Increased competition in product lines;
- Barriers to entry into new product lines;
- The competitiveness of the Company's customers; and
- The inability to obtain foundry capacity.
The Company is in the process of diversifying its business so that its
product offerings include not only integrated circuits, but also software and
platform solutions. However, a significant portion of the Company's revenues
will continue to come from its semiconductor product offerings. The
semiconductor industry historically has been characterized by rapid
technological change and product obsolescence, cyclical market patterns and
seasonal customer demand, significant price erosion, periods of over-capacity
and under-capacity, periods of production shortages, variations in manufacturing
costs, including raw materials, and yields, and significant expenditures for
capital equipment and product development. In addition, the industry has
experienced significant economic downturns at various times, characterized by
diminished product demand and accelerated erosion of product prices. Any
downturns in the industry may cause the Company's business, financial condition
and results of operations to suffer.
The Company has experienced in the past and may in the future experience
substantial period-to-period fluctuations in operating results due to these
general semiconductor industry conditions. The downturns in the industry often
occur in connection with, or in anticipation of, maturing product cycles (of
both the semiconductor companies and their customers) and declines in general
economic conditions. These downturns have been characterized by abrupt
fluctuations in product demand, production over-capacity and subsequent
accelerated erosion of average selling prices, and in some cases have lasted for
more than a year. Even if customers' aggregate demand were not to decline, the
availability of additional capacity can adversely impact pricing levels, which
can also depress revenue levels.
In addition, the Company's quarterly operating results could be materially
adversely affected by legal expenses incurred in connection with, or any
judgment or settlement in, the Company's ongoing stockholder legal proceedings.
See "The Company is a Defendant in Several Lawsuits."
THE COMPANY HAS A RECENT HISTORY OF OPERATING LOSSES AND MAY NOT BECOME OR
REMAIN PROFITABLE
Although the Company experienced periods of profitability following its
reincorporation in Delaware in October 1994 in connection with its initial
public offering (the Company was first incorporated in California in 1987), the
Company has at times sustained significant losses since the initial public
offering and may not become profitable in the future. While the Company had net
income of $5.9 million in fiscal 1998, its current loss trend began in calendar
year 1998, resulting in an operating loss of $9.1 million for fiscal 1998 and an
operating loss of $61.9 million for fiscal 1999 (in each case before adjustments
for non-operating income or loss, or income tax expense or benefit). The
Company's operating losses generally have been due to its dependence on its
optical storage business, which historically has accounted for approximately 80%
of its business. In fiscal 1998, the Company failed to timely and/or adequately
develop its integrated CD-ROM controller product and second generation CD-RW
product. Consequently, for fiscal 1999, the Company was dependent on mature
CD-ROM products and its first generation CD-RW product for its revenue. These
mature products have continued to decline in both unit sales volume and average
sales price in each successive quarter. The Company is currently in initial
production with its next generation CD-RW product and will reach volume
production in the third quarter of fiscal 2000. Although the Company is
currently sampling the product with five of the top ten CD-RW drive
manufacturers, at
19
<PAGE>
this time, it cannot accurately predict the level of customer acceptance of the
product and the product's impact on operating results.
Net revenues for the first two quarters of the fiscal year 2000 were
significantly less than the comparable periods of the previous fiscal year as it
completed its transition to its next generation CD-RW controllers. The Company
expects that the average selling prices (ASPs) for its optical storage products
will continue to decline over time and that ASPs for each new optical storage
product will decline significantly over the life of the product. In addition,
given the extremely competitive nature of the optical storage market, the
Company believes that gross margins for new products in its optical storage
market will be lower than historical levels. However, the Company believes that
with the addition of the Software products from the Xionics Document
Technologies merger and additional planned software and solution product
offerings from the Company's Imaging Group, gross margins in general will
increase in the future.
If the Company incurs additional losses or fails to achieve profitability in
the future, this will significantly harm its business and may affect the trading
price of its common stock.
THE COMPANY'S FINANCIAL PERFORMANCE IS HIGHLY DEPENDENT ON THE TIMELY AND
SUCCESSFUL INTRODUCTION OF NEW PRODUCTS
The markets for the Company's products are characterized by evolving
industry standards, rapid technological change and product obsolescence. The
Company's financial performance is highly dependent upon timely and successful
execution of next generation and new products, including those from acquired
businesses, particularly in light of the continued decline in sales from the
Company's mature CD-ROM and CD-RW products and the Company's failure to timely
develop new products for the optical storage market in fiscal 1998 and 1999, and
the failure to timely and successfully introduce next generation and new
products that achieve market acceptance in the future could seriously damage the
Company's business, financial condition and results of operations. Specifically,
the Company's performance is highly dependent upon the successful development
and timely introduction of its next generation CD-RW controller, MPEG-2 decoder
for the DVD player market, and embedded imaging processing solutions for the
digital office equipment market, in particular, embedded digital color copier
technology and foundation technology and image processing chips for
multifunction peripherals.
In both the optical storage and consumer electronics markets, particularly
DVD, a variety of standards and formats are being proposed, making it difficult
to develop product to market requirements, and making it even more difficult for
the market to develop. Product delay's in the Company's Optical Storage Group
have resulted primarily from difficulties in allocating engineering personnel
among competing projects, engineering resource limitations, and unanticipated
engineering complexity. Although recently, the Company timely introduced its
next generation CD-RW product and refocused its Optical Storage Group on a
defined product roadmap, there can be no assurance that these or other factors
will not contribute to future delays. In the digital office equipment market in
which the Company's recent acquired business competed with software products and
the Company with integrated circuits, the Company will need to address a variety
of other factors related to that market with respect to new product development.
Product delays in the past in both the Company's Imaging Group and its recently
acquired business have resulted from numerous factors such as changing OEM
customer product specifications, difficulties in allocating engineering
personnel among competing projects, other resource limitations, difficulties
with independent contractors, changing market or competitive requirements and
unanticipated engineering complexity. There can be no assurance that these or
other factors will not contribute to future delays; that OEM customers will
tolerate those delays; or that delayed office devices, once introduced, will
meet with market acceptance or success. Among other technological changes,
embedded PDF and color capability are rapidly emerging as market requirements
for printers and other imaging devices. Some of the Company's competitors have
the capacity to supply these solutions, and some of their solutions are
well-received in the marketplace. The Company faces the challenges of competing
with products that require greater color capability and image complexity
including web-based documents, and to work with higher performing devices in
networked environments. Any significant inability to meet these challenges
20
<PAGE>
with the development of products that can effectively compete in the OEM
software and solutions market could cause future results of operations to differ
materially from current expectations.
Due to the design complexity of the Company's products, especially with the
increased levels of integration that are required, the Company has experienced
delays in completing development and introduction of new products, particularly
in its products for the optical storage and the digital office equipment
markets. In addition, in light of the short product life cycles associated in
the markets related to acquired businesses, any delay or unanticipated
difficulty associated with new product development or introduction could result
in a material adverse effect on the Company's business, results of operations
and financial condition.
No assurance can be given that the Company will successfully identify new
product opportunities and develop and bring new products to market in a timely
manner or that its products will be selected for design into the products of its
targeted customers. Also, there can be no assurance that the products of the
Company's customers will be successfully introduced into the market. If the
Company fails in its new product development efforts or its products fail to
achieve market acceptance, its revenues will decline and its business, financial
condition and results of operations will be severely damaged.
THE COMPANY'S FUTURE REVENUES ARE HIGHLY DEPENDENT ON SALES OF ITS CD-RW
CONTROLLER PRODUCT
The Company's future revenue generation is highly dependent on the
successful introduction of its next generation CD-RW product, although the
Company can provide no assurance that this product will achieve customer
acceptance. The Company is no longer developing any CD-ROM controllers, but
since the early part of fiscal 1999 has been instead focusing its development
efforts on controllers for CD-RW and DVD drives. If the Company's recently
introduced CD-RW product fails to achieve market acceptance, it will need other
sources of revenue to offset the discontinuation of sales of its CD-ROM
controllers. In fiscal 1999, revenue generated from the Company's optical
storage CD-ROM and CD-R/ RW businesses declined 73% and 36%, respectively,
compared to the previous year, primarily due to delays in the development of the
next-generation integrated CD-ROM device and CD-RW product. Similarly, in fiscal
1998, revenue generated from the Company's optical storage CD-ROM business
declined 25% from the prior year primarily due to delays in the next-generation
single chip and integrated CD-ROM device.
Although the Company was a leading supplier of CD-RW controllers, due to
product delays in its second generation CD-RW product, the Company lost its
leadership in this market. While the Company is currently in initial production
with its next generation CD-RW product, no assurance can be given this product
will be competitive in the marketplace or widely accepted by targeted customers.
In addition, even if this product proves to be competitive and is accepted by
targeted customers, there is no assurance that the Company's customers will be
successful.
The Company also faces increased competition in the emerging CD-RW and DVD
markets. In addition, the current trend toward integrating increased
functionality on the CD-RW or DVD controller potentially adds to the development
and manufacturing costs of producing the controller. The Company's revenues and
gross margins from its optical storage controller products will be dependent on
the Company's ability to introduce the integrated products in the CD-RW and DVD
markets in a commercially competitive manner.
The decrease in the overall level of sales of, and prices for, the Company's
CD-ROM and older generation CD-RW controller product due to introductions of
newer products by competitors, the decline in demand for CD-ROM controller
products generally, product obsolescence and delays in the Company's integrated
CD-ROM controller product and its next generation CD-RW product, have had a
material adverse effect on the Company's business, financial condition and
results of operations, and will continue to have that effect if the Company
fails to successfully introduce new products to the market.
The Company also anticipates that the royalty streams derived from OEMs'
shipments of office equipment containing the Company's products, and the sale of
related products and services to
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manufacturers of office equipment will account for a significant portion of its
revenue for the foreseeable future, although not as significant as CD-RW for the
remainder of fiscal 2000 and possibly fiscal 2001. In order to assure that the
Company will derive future royalty streams from the shipment of OEM devices, the
Company and its OEMs are required to develop and release in a regular and timely
manner new office products with increased speed, enhanced output resolutions,
reduced memory requirements, multiple functions, and network connectivity. The
Company's OEMs are under tremendous pressure to continually shorten the
development cycles of these products, leading to increased complexity and cost
of development to the Company and its OEMs. The Company's success will depend
on, among other things: market acceptance of the Company's technology and
products and the office devices of the Company's OEMs; the ability of the
Company and its OEMs to meet industry changes and market demands in a timely
manner; achievement of new design wins by the Company; successful implementation
of the Company's technology and products in new office devices being developed
by its OEMs; and successful marketing of those devices by the OEMs. Revenues
from the office equipment market will depend heavily on the Company's ability to
integrate its recent acquired business, Xionics Document Technologies,
successfully in order to develop complete product solutions and compete more
effectively and successfully against other suppliers and outsourcers as well as
its own OEM customers and other manufacturers.
THE COMPANY'S FUTURE REVENUES RELATED TO ITS IMAGING GROUP ARE HIGHLY
DEPENDENT ON ITS RELATIONSHIP WITH HEWLETT-PACKARD
Historically, contracts and licenses with Hewlett-Packard generated a
significant portion (66% in fiscal 1999) of the revenues related to the digital
office equipment business of Xionics Document Technologies, the company acquired
in the third quarter of fiscal 2000. In addition, the Company's Imaging Group
has sold integrated circuits to Hewlett-Packard in the past. For the past four
sequential fiscal quarters, sales of integrated circuits to Hewlett-Packard
represented 4% of Oak's Imaging Group's revenue. It is anticipated that these
revenues will constitute a significant portion of the Company's overall revenues
going forward. Therefore, any significant disruption or deterioration of its
relationship with Hewlett-Packard would have a material adverse effect on the
Company's business, results of operations and financial condition. The Company
has met all of its obligations necessary to secure the right to receive ongoing
payments from Hewlett-Packard various agreements with Hewlett-Packard, and is
also current in performing its obligations under various these agreements.
However, there can be no assurance that the Company will continue to meet all
such obligations in the future. Hewlett- Packard has the right to terminate each
of its agreements with the Company if the Company materially breaches its
obligations under that agreement and does not cure such breach within 30 days.
In addition, competitors of the Company, including without limitation Adobe
Systems Inc., Peerless Systems Corporation, Electronics for Imaging, Inc. and
Texas Instruments are continuously engaged in efforts to expand their business
relationship with Hewlett-Packard at the Company's expense, and are likely to
continue those efforts in the future. There can be no assurance that one or more
of the Company's competitors will not be successful in competing with the
Company for some or all of Hewlett-Packard's business. Further, although
Hewlett-Packard has shown a strong tendency to outsource embedded systems
software and development for its office products over the past several years,
there can be no assurance that this trend will continue or that
Hewlett-Packard's internal development groups will not compete successfully for
some or all of this outsourced business in the future. Finally, any adverse
change in Hewlett-Packard's business, results of operations or financial
condition could in turn have a material adverse effect on the Company's
business, results of operations and financial condition.
THE COMPANY'S MARKETS ARE INTENSELY COMPETITIVE AND EXPERIENCE RAPID
TECHNOLOGICAL CHANGE
The markets in which the Company competes are intensely competitive and are
characterized by rapid technological change, declining unit average sales prices
and rapid product obsolescence. If the Company cannot successfully respond to
the technological advances of others or if its new products or product
enhancements do not achieve market acceptance, the Company's business, operating
results and financial condition could be seriously harmed. The Company expects
competition to increase in the future from existing competitors and from other
companies that may enter the Company's existing or future markets
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with solutions that may be less costly or provide higher performance or
additional features. The Company's principal competitors in the optical storage
market are MediaTek, Toshiba and Ricoh; its principal competitors in the digital
office market are Adobe Systems, Inc., Peerless Systems Corporation, Electronics
for Imaging, Inc., and in-house, captive suppliers, and the Company expects
increased competition from the merchant market in the future. Many of these
existing competitors as well as those customers expected to compete in the
future have substantially greater financial, manufacturing, technical,
marketing, distribution and other resources, broader product lines and longer
standing relationships with customers than the Company. In addition, much of the
Companies success is dependent on the success of its OEM customers. The
Company's OEM customers in both the optical storage, consumer and office
equipment markets compete fiercely with one another for market share in a market
characterized by rapid development cycles, short product life cycles and
ever-increasing consumer demand for greater performance and functionality at
reduced prices.
The markets for most of the applications for the Company's products,
especially in the consumer electronics market and the optical storage market,
are characterized by intense price competition. As the markets for these
products mature and competition increases, as has been the trend for the optical
storage and DVD segment of the consumer electronics market, the Company
anticipates that average sales prices on products will decline. If the Company
is unable to reduce costs sufficiently to offset declines in average sales
prices or is unable to successfully introduce new higher performance products
with higher average sales prices, operating results will be materially adversely
affected.
The future growth of the digital office equipment market is highly dependent
on OEMs' continuing to outsource an increasing portion of their product
development work. While the trend toward outsourcing on the part of the
Company's OEM customers has accelerated in recent years, any reversal of this
trend could have a material adverse effect on the Company's business, financial
condition, and results of operations. Similarly, significant market trends
leading to changes in the way the Company's competitors do business may enable
them to compete more effectively against the Company than they have in the past.
For example, in response to market demand, Adobe Systems, Inc. has recently
begun licensing the source code of its PostScript page description language
interpreters to certain development partners, including competitors of the
Company. These changes, if they enable competitors to compete more effectively
for business from the Company's customers, could have a material adverse effect
on the Company's business, financial condition and results of operations.
Additionally, changes in strategy by the Company's competitors, for example
price reductions, new product introductions or new marketing/distribution
methods, could make it more difficult for the Company to compete effectively,
cause reduced market demand for the Company's products and/or render the
Company's products obsolete.
There can be no assurance that the Company or its OEM customers will be able
to compete successfully against current or future competitors, or that
competitive pressures faced by it and its customers will not result in reduced
revenues and profit margins and otherwise seriously harm its business, financial
condition and results of operations.
THE COMPANY MAY BE UNABLE TO PROTECT ITS INTELLECTUAL PROPERTY AND
PROPRIETARY RIGHTS, WHICH MAY AFFECT ITS ABILITY TO COMPETE
The Company's ability to compete is affected by its ability to protect its
proprietary information. The Company considers its technology to be proprietary
and relies on a combination of patents, trademarks, copyrights, trade secret
laws, confidentiality procedures and licensing arrangements to protect its
intellectual property rights. However, these measures afford only limited
protection. The Company's competitors may be able to effectively design around
the Company's patents. There can be no assurance that any of the Company's
patents will not be challenged, invalidated or circumvented, or that the rights
granted under those patents will provide competitive advantages to the Company.
Moreover, while the Company holds or has applied for patents relating to the
design of its products, some of its products are based in part on standards, for
which it does not hold patents or other intellectual property rights. In
addition, the laws of certain foreign countries in which the Company's products
are or may be
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manufactured or sold, including various countries in Asia, may not protect the
Company's products or intellectual property rights to the same extent as do the
laws of the United States and thus make the possibility of piracy of the
Company's technology and products more likely. There can be no assurance that
the steps taken by the Company to protect its proprietary information will be
adequate to prevent misappropriation of its technology or that the Company's
competitors will not independently develop technologies that are substantially
equivalent or superior to the Company's technology. Moreover, the Company
intends to seek additional international and United States patents on its
technology. There can be no assurance that additional patents will issue from
any of the Company's pending applications or applications in preparation, or be
issued in all countries where the Company's products can be sold, or that any
claims allowed from pending applications or applications in preparation will be
of sufficient scope or strength to provide meaningful protection or any
commercial advantage to the Company.
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. With
respect to its page description language software and drivers for the digital
office equipment market and in limited circumstances with respect to firmware
and drivers for its optical storage products, the Company grants licenses that
give its customers access to and restricted use of the source code of the
Company's software which increases the likelihood of misappropriation or misuse
of the Company's technology. Accordingly, despite the Company's precautions, 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 the Company takes 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.
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 its proprietary rights and in the past has incurred significant
legal expenses in connection with claims of this type it has initiated. Any
litigation by or against the Company could result in significant expense to the
Company and divert the efforts of its technical and management personnel,
whether or not that litigation results in a favorable determination for the
Company. In the event of an adverse result in any litigation, the Company could
be required to pay substantial damages, cease the manufacture, use and sale of
infringing products, expend significant resources to develop non-infringing
technology, discontinue the use of certain processes or obtain licenses to the
infringing technology. There can be no assurance that the Company would be
successful in developing new technology or that those licenses would be
available on reasonable terms, or at all, and any development or license could
require the Company's expenditures of substantial time and other resources.
THE COMPANY MAY BE UNABLE TO OBTAIN THIRD PARTY INTELLECTUAL PROPERTY RIGHTS
AND/OR MAY BE LIABLE FOR SIGNIFICANT DAMAGES
Certain technology used in the Company's products is licensed from third
parties, and in connection with these licenses, the Company is required to
fulfill confidentiality obligations and, in some cases, pay royalties. Some of
the Company's products, require various types of copy protection software that
the Company must license from third parties. Should the Company lose its rights
to, or be unable to obtain the necessary copy protection software, the Company
would be unable to sell and market certain of its products. The Company's
agreements with third parties often have no specified term and may be terminated
by either party in the event of breach by the other. The Company's business
could be adversely affected by the loss for any reason of these third-party
agreements. Given the trend to include increasing levels of functionality on a
chip, in the future it may be necessary or desirable for the Company to seek
additional licenses to intellectual property rights held by third parties or
purchase products manufactured and/or sold by third parties with respect to some
or all of its product offerings. There can be no assurance that those licenses
or purchases will be available on terms acceptable to the Company, if at all.
The inability of the Company to enter into those license arrangements on
acceptable terms or to maintain its
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current licenses on acceptable terms could have a material adverse effect on the
Company's business, financial condition and results of operations.
In addition, the semiconductor industry is characterized by vigorous
protection and pursuit of intellectual property rights, which has resulted in
significant, often protracted and expensive litigation. The Company or its
foundries may, from time to time, be notified of claims that the Company may be
infringing patents or other intellectual property rights owned by third parties.
If it is necessary or desirable, the Company may seek licenses under those
patents or other intellectual property rights. However, there can be no
assurance that licenses will be offered or that the terms of any offered
licenses will be acceptable to the Company. The failure to obtain a license from
a third party for technology used by the Company could cause the Company to
incur substantial liabilities and suspend the manufacture of products or the use
by the Company's foundries of processes requiring the technology.
The Company has historically indemnified its customers for certain costs and
damages of patent infringment in circumstances where the Company's product is
the factor creating the customer's infringement exposure. This practice
generally excludes coverage in circumstances where infringement arises out of
the combination of our products with products of others. This indemnification
practice, however, could have a material adverse effect on the results of
operations.
Although patent disputes in the semiconductor industry have often been
settled through cross-licensing arrangements, the Company may not be able in any
or every instance, to settle an alleged patent infringement claim through a
cross-licensing arrangement. The Company has a more limited patent portfolio
than many of its competitors. If a successful claim is made against the Company
or its customers and a license is not made available to the Company on
commercially reasonable terms or the Company is required to pay substantial
damages or awards, the Company's business, financial condition and results of
operations would be materially adversely affected.
THE COMPANY DEPENDS ON THIRD PARTY FOUNDRIES AND VENDORS TO MANUFACTURE
PRODUCTS
The Company contracts with independent foundries to manufacture a majority
of its products and with independent vendors to assemble and test these
products. The Company's failure to adequately manage its relationships with
these foundries and vendors could negatively impact its ability to manufacture
and sell its products and its results of operations.
The Company relies on its foundries to allocate to the Company a portion of
their foundry capacity sufficient to meet its needs to produce products of
acceptable quality and with acceptable manufacturing yield and to deliver
products to the Company in a timely manner. These foundries fabricate products
for other companies and some manufacture products of their own design. If these
foundries fail or are unable to satisfy the Company's product, quality and other
requirements, the Company's business, financial condition and results of
operation could suffer.
The Company also relies on third-party subcontractors to assemble and test
its products. The failure of any of these subcontractors to meet the Company's
production requirements could cause the Company's business, financial condition
and operating results to suffer.
The Company's reliance on independent manufacturers and third party assembly
and testing vendors involves a number of additional risks, including:
- The loss of any foundry as a supplier;
- Inability to expand foundry capacity in a period of increased demand for
the Company's products;
- Inability to obtain timely and adequate deliveries from current or future
suppliers;
- Delays in shipments of the Company's products;
- Disruption of operations at any of the Company's manufacturing facilities;
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- Product defects and the difficulty of detecting and remedying product
defects;
- The unavailability of, or interruption in access to, certain process
technologies; and
- Reduced control over delivery schedules, quality assurance and costs.
As the Company generally does not use multiple services of supply for its
products, the consequences of these factors occurring is magnified.
During the third calendar quarter of 1999, Taiwan, the location of the
Company's primary wafer manufacturer, Taiwan Semiconductor Manufacturing
Company, experienced a severe earthquake. To date, the Company has not
experienced any material delays of its wafer deliveries from its primary
manufacturer. However, there is a current shortage of foundry capacity that is
expected to last at least through calendar 2000, and therefore, there is no
assurance that the Company will not experience delays in the future.
THE COMPANY'S FAILURE TO ACCURATELY FORECAST DEMAND FOR ITS PRODUCTS COULD
NEGATIVELY IMPACT ITS RESULTS OF OPERATIONS
Under its foundry agreements, the Company is required to place
non-cancelable orders and purchase its products on an approximately three-month
rolling basis. The Company's customers, on the other hand, generally place
purchase orders with the Company less than four weeks prior to delivery that may
be rescheduled or under certain circumstances may be cancelled, without
significant penalty. This limits the Company's ability to react to fluctuations
in demand for its products. If the Company overestimates the product necessary
to fill orders, it will build excess inventories which could harm its gross
margins and operating results. If the Company underestimates the product
necessary to fill orders, it may not be able to obtain an adequate supply of
products which could harm its revenues.
Product supply and demand fluctuations common to the semiconductor industry
are historically characterized by periods of manufacturing capacity shortages
immediately followed by periods of overcapacity, which are caused by the
addition of manufacturing capacity in large increments. The industry has moved
from a period of capacity shortages in 1995 to what has been a period of excess
capacity for approximately the last twelve months, and has now returned to a
capacity shortage situation. No assurance can be given that the Company can or
will achieve timely, cost-effective access to that capacity when needed.
THE COMPANY DERIVES A LARGE PORTION OF ITS REVENUES FROM INTERNATIONAL
SALES, DEPENDS ON FOREIGN SUBCONTRACTORS AND IS SUBJECT TO THE RISKS OF DOING
BUSINESS IN FOREIGN COUNTRIES
A large portion of the Company's revenues are derived from international
sales. International sales, principally to Japan, Korea, Singapore and Europe,
accounted for approximately 86% and 92% of the Company's net revenues in fiscal
1999 and 1998, respectively. Of this amount, Japan accounted for 52% and 38% of
the Company's net revenues in fiscal 1999 and 1998, respectively; Korea
accounted for 10% and 20% for fiscal 1999 and 1998, respectively; Singapore
accounted for 10% and 11% for fiscal 1999 and 1998, respectively; and Europe
accounted for 11% and 9% for fiscal 1999 and 1998, respectively. The Company
also depends on foreign subcontractors for the manufacture of its products. Most
of the Company's foreign sales and purchases are negotiated in US dollars,
although invoicing is often done in local currency. As a result, the Company may
be subject to the risks of currency fluctuations in the foreign countries in
which it does business.
The Company also is subject to other risks of conducting business outside of
the United States. These risks include:
- Unexpected changes in, or impositions of, foreign legislative or
regulatory requirements;
- Delays resulting from difficulty in obtaining export licenses for certain
technology;
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- Tariffs, quotas and other trade barriers and restrictions;
- Longer payment cycles;
- Greater difficulty in collecting accounts receivable;
- Potentially adverse taxes and adverse tax consequences;
- The burdens of complying with a variety of foreign laws;
- Political, social and economic instability;
- Potential hostilities;
- Changes in diplomatic and trade relationships; and
- Fluctuations in foreign currencies
The Company's significant investment in foundry capacity in Taiwan is a
prime example of its exposure to these types of risks. Due to this investment,
the Company is subject to the risk of political instability in Taiwan, including
the potential for conflict between Taiwan and the People's Republic of China. In
addition, the fact that China is the primary market for the Company's consumer
DVD products is another example. Any political or economic instability in China
could significantly reduce the demand for these products.
Recently Taiwan experienced a severe earthquake. The Company did not incur
any significant damage to its own facilities located in Taipei; however, its
primary wafer manufacturer, Taiwan Semiconductor Manufacturing Company,
experienced a disruption in operations for several weeks. To date, the Company
has not experienced any material delays of its wafer deliveries from its primary
manufacturer.
In addition, the Company has several significant OEM customers in Japan,
South Korea, and other parts of Asia. Although the adverse economic
circumstances recently prevailing in Japan and elsewhere in Asia have begun to
show signs of abating, they could still affect these customers' willingness or
ability to do business with the Company in the future or their success in
developing and launching in particular office equipment devices containing the
Company's products.
While these factors or the impact of these factors are difficult to
forecast, any one or more of these factors could adversely affect the Company's
operations in the future or require the Company to modify its current business
practices.
THE COMPANY DEPENDS ON A LIMITED NUMBER OF CUSTOMERS FOR A SUBSTANTIAL
PORTION OF ITS REVENUES, AND A LOSS OF, OR A SIGNIFICANT REDUCTION IN PURCHASES
BY, CURRENT MAJOR CUSTOMERS WOULD SIGNIFICANTLY REDUCE ITS REVENUES
The Company has derived a substantial portion of its net revenues from a
limited number of customers and expects this concentration to continue. For
fiscal years 1999 and 1998, sales to the Company's top ten customers accounted
for approximately 70% and 81%, respectively, of the Company's net revenues. Two
customers accounted for over 10% of revenues in fiscal 1999, compared to three
customers in fiscal 1998. One of these two customers accounted for 16.5% of the
Company's revenues in fiscal 1999 and the other 16.7% of the Company's revenues
in fiscal 1999. At June 30, 1999, one international customer accounted for
approximately 40% of accounts receivable. In addition, the Company has
experienced significant changes from year to year in the composition of its
major customer base, including the loss in the past year of a customer
responsible for approximately 16% of the Company's sales in fiscal year 1999,
and the Company believes this pattern will continue. Customers generally
purchase the Company's products pursuant to short-term purchase orders, and the
Company has no long term purchase agreements with any of its customers. The loss
of, or significant reduction in purchases by, current major customers of the
Company would significantly reduce its revenues.
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THE COMPANY IS A DEFENDANT IN SEVERAL LAWSUITS
The Company and various of its current and former officers and directors are
parties to several class action lawsuits filed on behalf of all persons who
purchased or acquired the Company's common stock for the period from July 27,
1995 to May 22, 1996, alleging state and federal securities law and other
violations. Additionally, various of the Company's current and former officers
and directors are defendants in three consolidated derivative actions which
allege a breach of fiduciary duty and a claim under California securities laws.
Based on its current information, the Company believes the class actions and
derivative suits to be without merit and will defend its position vigorously.
Although it is reasonably possible the Company may incur losses upon resolution
of these claims, an estimate of loss or range of loss cannot be made. No
provision for any liability that may result upon adjudication has been made in
the Company's financial statements. The Company is also a party to various other
legal proceedings, including a number of patent-related matters. In the opinion
of management, these legal proceedings will not result in any material liability
to the Company. In connection with these matters, however, management time has
been, and will continue to be, expended and the Company has incurred, and
expects to continue to incur, substantial legal and other expenses.
THE COMPANY MUST CONTINUE TO MAKE SIGNIFICANT CAPITAL INVESTMENTS, AND THE
INABILITY TO RAISE THE ADDITIONAL CAPITAL NECESSARY TO FUND THESE INVESTMENTS ON
ACCEPTABLE TERMS COULD SERIOUSLY HARM THE COMPANY'S BUSINESS
In order to remain competitive, the Company must continue to make
investments in new facilities and capital equipment, and significant amounts of
capital additions could be required in subsequent years. Additionally, in order
to obtain an adequate supply of wafers, especially wafers manufactured using
advanced process techniques, the Company has entered into and will continue to
consider various possible transactions, including various "take or pay"
contracts that commit the Company to purchase specified quantities of wafers
over extended periods. Manufacturing arrangements such as these may require
substantial capital investment, which may require the Company to seek additional
financing. The Company believes that existing liquid resources and funds
generated from operations, if any, combined with its ability to borrow funds
will be adequate to meet its operating and capital requirements and obligations
into the foreseeable future. The Company believes that the level of a Company's
financial resources is an important factor in its industry. Accordingly, the
Company may from time to time seek additional equity or debt financing. There
can be no assurance that those funds will be available on terms acceptable to
the Company when needed. Any future equity financing will also lead to dilution
to existing shareholders.
THE COMPANY MAY MAKE FUTURE ACQUISITIONS OR ENTER INTO JOINT VENTURES THAT
MAY NOT BE SUCCESSFUL
In the future, the Company may acquire additional businesses, products and
technologies, or enter into joint venture arrangements, that could complement or
expand its business. Acquisitions involve numerous risks including:
- Difficulties in integration of the operations, technologies, and products
of the acquired companies;
- Diverting management's attention from normal daily operations of the
business;
- Entering markets in which there is limited direct prior experience and
where competitors have stronger market positions;
- Coordination of sales, marketing and research and development; and
- Potential loss of key employees.
- The maintenance of corporate culture, controls, procedures and policies
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. Also, any future acquisitions could require the
Company to issue dilutive equity securities, incur debt or contingent
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liabilities, amortize goodwill and other intangibles, or write-off in-process
research and development and other acquisition-related expenses. Further, the
Company may not be able to integrate acquired businesses, products or
technologies with its existing operations. If the Company is unable to fully
integrate an acquired business, product or technology, it may not receive the
intended benefits of that acquisition.
THE COMPANY WILL DEPEND ON KEY PERSONNEL TO MANAGE ITS BUSINESS, AND THE
LOSS OF ANY KEY PERSONNEL COULD SERIOUSLY HARM ITS BUSINESS
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 including highly skilled engineering and technical
employees. Specifically, it is important for the Company to retain the services
of Young K. Sohn, the Company's current president and chief executive officer.
The Company is in the process of recruiting replacements for certain senior
management positions as well as technical personnel. Competition for these
people is intense because of this limited number of candidates and the growth of
high-tech companies, 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. Moreover, none of the key technical or senior management
personnel of the recently acquired Xionics Document Technologies are bound by
long-term employment arrangements. There is no assurance that the Company will
be able to find suitable replacements for any senior management personnel who
may leave the Company.
PROVISIONS IN THE COMPANY'S CHARTER DOCUMENTS AND RIGHTS PLAN COULD MAKE IT
MORE DIFFICULT TO ACQUIRE THE COMPANY AND MAY REDUCE THE MARKET PRICE OF THE
COMPANY'S STOCK
The Company's board of directors has the authority to issue up to 2,000,000
shares of preferred stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
any further vote or action by the stockholders. The rights of the holders of
common stock, may be subject to, and may be adversely affected by, the rights of
the holders of any preferred stock that may be issued in the future. The
issuance of preferred stock may have the effect of delaying, deferring or
preventing a change of control of the Company without further action by the
stockholders and may adversely affect the voting and other rights of the holders
of common stock. The Company has no present plans to issue shares of preferred
stock. Further, certain provisions of the Company's charter documents, including
provisions eliminating the ability of stockholders to take action by written
consent and limiting the ability of stockholders to raise matters at a meeting
of stockholders without giving advance notice, may have the effect of delaying
or preventing changes in control or management of the Company, which could have
an adverse effect on the market price of the stock. In addition, the Company's
charter documents do not permit cumulative voting and provide that its board of
directors will be divided into three classes, each of which serves for a
staggered three-year term, which may also make it more difficult for a
third-party to gain control of the board of directors.
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In addition, 400,000 shares of the Company's preferred stock are designated
as series A junior participating preferred stock under a rights plan, commonly
referred to as a "poison pill". Under certain circumstances involving a proposed
change-in-control of the Company, the rights related to the series A junior
participating preferred stock may be triggered, the effect of which may delay or
prevent a third party from gaining control of or acquiring the Company.
YEAR 2000 RISKS MAY AFFECT THE COMPANY
The following provides a year 2000 update and supplements the discussion
included in the section titled Management's Discussion and Analysis of Financial
Condition and Results of Operations in the Company's 1999 Annual Report on
Form 10-K/A for the fiscal year ended June 30, 1999.
During the first week of calendar year 2000, the Company completed the
transition from calendar year 1999 to 2000 with no reported significant impact
to the Company's operations. The Company will continue to evaluate year 2000
related exposures at its suppliers and customers over the next several weeks.
The Company will also continue to monitor its systems, facilities and products
to ensure that no year 2000 problems occur over the next few months.
To date, the Company has not identified any non-compliant products or
systems and no material costs have been incurred with respect to remediation.
The Company believes that it is unlikely to experience a material adverse impact
on its financial condition or results of operations due to Year 2000 compliance
issues.
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, 1999 consisted of approximately $120.1 million in
cash, cash equivalents and short-term investments. The Company also has
approximately $8.4 million in letters of credit with Taiwanese financial
institutions, all of which was available at December 31, 1999. The Company had
outstanding commitments to purchase capital equipment of approximately
$0.9 million at December 31, 1999. Additionally, the Company repurchased 381,000
shares of its common stock during the six months ended December 31, 1999, for a
total of approximately $1.8 million.
The Company believes that its existing cash, cash equivalents, short-term
investments and credit facilities will be sufficient to provide adequate working
capital and to fund the Xionics acquisition and operating needs over the next
twelve months. If, however, during the next twelve to eighteen month period the
Company fails to increase its revenue or is unable to reduce its expenses below
its revenues, then the Company may be in a position where it will need to seek
additional financing. However, there can be no assurance that the Company will
not be required to seek other financing sooner or that such financing, if
required, will be available on terms satisfactory to the Company. The Company
may also utilize cash to acquire or invest in complementary businesses or
products or to obtain the right to use complementary technologies. From time to
time, in the ordinary course of business, the Company evaluates potential
acquisitions of such businesses, products or technologies. However, the Company
has no present understandings, commitments or agreements with respect to any
material acquisition of other businesses, products or technologies, other than
the Xionics acquisition noted above.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Most of the Company's foreign sales are 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
30
<PAGE>
of operations. Many of the Company's non-functional currency receivables and
payables are hedged through managing net asset positions, product pricing and
other means. The Company's strategy is to minimize its non-functional currency
net assets or net liabilities in its foreign subsidiaries. The Company's policy
is not to speculate in financial instruments for profit on the exchange rate
price fluctuations, trade in currencies for which there are not underlying
exposures, or enter into trades for any currency to intentionally increase the
underlying exposure. As of December 31, 1999 and June 30, 1999, the Company had
foreign currency exchange contracts to exchange Yen for approximately $1,500,000
and $1,030,000, respectively. The Company uses financial instruments, including
local currency debt arrangements, to offset the gains or losses of the financial
instruments against gains or losses on the underlying operations cash flows or
investments. If foreign currency rates fluctuate by 10% from rates at
December 31, 1999 and 1998, the effect on the company's consolidated financial
statements would not be material. However, there can be no assurance that there
will not be a material impact in the future.
The Company's cash equivalents and short-term investments ("investments")
are exposed to financial market risk due to fluctuation in interest rates, which
may affect its interest income and the fair values of its investments. The
Company manages the exposure to financial market risk by performing ongoing
evaluation of its investment portfolio and investing in short-term investment
grade corporate securities and U.S. government and other agencies' obligations
which mature within the next 24 months. In addition, the Company does not use
investments for trading or other speculative purposes. Due to the short
maturities of its investments, the carrying value approximates the fair value.
If market rates were to increase immediately and uniformly by 10% from levels as
of December 31, 1999 and 1998, the decline in the fair value of the portfolio
would not be material. Further, the Company has the ability to hold its fixed
income investments until maturity and, therefore, the Company would not expect
to recognize such an adverse impact in income or cash flows.
31
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and various of its current and former officers and Directors are
parties to several class action lawsuits filed on behalf of all persons who
purchased or acquired the Company's common stock (excluding the defendants and
parties related to them) for the period July 27, 1995 through May 22, 1996. The
first, a state court proceeding designated IN RE OAK TECHNOLOGY SECURITIES
LITIGATION, Master File No. CV758510 pending in Santa Clara County Superior
Court in Santa Clara, California, consolidates five class actions. This lawsuit
originally named as defendants several of the Company's venture capital fund
investors, two of its investment bankers and two securities analysts. The
plaintiffs alleged violations of California securities laws and statutory deceit
provisions as well as breaches of fiduciary duty and abuse of control. After
several rounds of demurrers, the only remaining claim is the California
Corporations Code Sections 25400/25500 cause of action against the Company, four
officers and the Company's investment bankers and securities analysts. On
July 16, 1998, the state court provisionally certified a national class of all
persons who purchased the Company's stock during the class period. The class was
provisionally certified with the order held in abeyance pending resolution of
the question of whether a nationwide class may bring a California Corporations
Code Sections 25400/25500 claim. This issue was resolved in favor of allowing
such nationwide class actions by the California Supreme Court, Case
No. 5058723, on January 4, 1999, in the DIAMOND MULTIMEDIA SECURITIES LITIGATION
appeal by the California Supreme Court. Discovery has commenced in this action.
The defendants and certain third parties have produced documents and a number of
depositions have been taken, including the depositions of those officers of the
Company who were officers during the class period. This action is set for trial
on July 5, 2000. Based on its current information, the Company believes this
suit to be without merit and will defend its position vigorously. Although it is
reasonably possible the Company may incur a loss upon conclusion of these
claims, an estimate of any loss or range of loss cannot be made. No provision
for any liability that may result upon adjudication has been made in the
Company's Consolidated Financial Statements.
The Company and several of its current and former officers and Directors
were also parties to four putative class action lawsuits pending in the U.S.
District Court for the Northern District of California. These actions were
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 based upon the same allegations as the state court securities
litigation. This action also named as a defendant one of the Company's
investment bankers. On July 29, 1997, the federal court judge granted the Oak
defendants Motion to Dismiss the plaintiffs' First Amended Consolidated
Complaint, but granted the plaintiffs leave to amend most claims. The
plaintiffs' Second Amended Consolidated Complaint was filed on September 4,
1997. The defendants' Motion to Dismiss was heard on December 17, 1997. The
court took the matter under submission. Prior to the issuance of the court's
ruling on the motion to dismiss, the plaintiffs moved to voluntarily dismiss
this action without prejudice. Defendants requested that the action be dismissed
with prejudice. On November 22, 1999, the court dismissed the action without
prejudice.
Additionally, various of the Company's current and former officers and
Directors are defendants in three consolidated derivative actions pending in
Santa Clara County Superior Court in Santa Clara, California, entitled IN
RE OAK TECHNOLOGY DERIVATIVE ACTION, Master File No. CV758510. This lawsuit,
which asserts a claim for breach of fiduciary duty and a claim under California
securities law based upon the officers' and Directors' trading in securities of
the Company, has been stayed pending resolution of the above described class
actions.
In all of the class actions, the plaintiffs are seeking monetary damages and
equitable relief. In the derivative action, the plaintiffs are also seeking an
accounting for the defendants' sales of shares of the Company's common stock and
the payment of monetary damages to the Company. Based on its current
information, the Company believes all the suits described above to be without
merit and will defend its
32
<PAGE>
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.
If any of the above pending actions are decided adversely to the Company, it
would likely have a material adverse affect on the Company's financial condition
and results of operations.
On July 21, 1997, the Company filed a complaint with the ITC based on the
Company's belief that certain Asian companies were violating U.S. trade laws by
the unlicensed importing or selling of certain CD-ROM controllers that infringed
one or more of the Company's United States patents. The complaint seeks a ban on
the importation into the United States of any infringing CD-ROM controller or
product containing such infringing CD-ROM controller. A formal investigative
proceeding was instituted by the ITC (Investigation No. 337-TA-401) on
August 19, 1997, naming as respondents: Winbond Electronics Corporation
(Winbond); Winbond Electronics North America Corporation; Wearnes Technology
(Private) Ltd.; Wearnes Electronics Malaysia Sendirian Berhad; and Wearnes
Peripheal International (Pte.).
On March 16, 1998, the Company and Winbond entered into a settlement
agreement pursuant to which Winbond obtained a nonexclusive, royalty-bearing
license to the Company's U.S. patents No.'s 5 535,327 and 5,581,715 and the
Company obtained a nonexclusive, royalty-free license to several Winbond
patents. The settlement agreement provided that the parties would jointly seek
termination and dismissal of investigation No. 337-TA-401 as to Winbond and its
four affiliated companies: Winbond Electronics North America Corporation;
Wearnes Technology (Private) Ltd.; Wearnes Electronics Malaysia Sendirian
Berhad; and Wearnes Peripheal International (Pte.). On April 15, 1998,
Investigation No. 337-TA-401 was ordered terminated as to all parties.
As originally filed with the ITC, the Company's complaint also identified as
proposed respondents: United Microelectronics Corporation (UMC); Lite-On Group;
Lite-On Technology Corp.; Behavior Tech Computer Corp. and Behavior Tech
Computer (USA) Corp. Prior to the ITC's institution of the formal investigation
proceeding, the Company and UMC entered into a settlement agreement, effective
July 31, 1997, pursuant to which UMC agreed to cease and desist the manufacture
and/or importation into the United States of its specified CD-ROM controllers,
except under certain limited conditions which expired on January 31, 1998. The
settlement agreement additionally provided for the withdrawal of the Company's
ITC complaint against UMC and the above-named Lite-On and Behavior Tech
companies. In September 1997, October 1997, February 1998 and April 1998, the
Company received $2.6 million, $4.7 million, $0.7 million and $2.6 million,
respectively, pursuant to this settlement. Proceeds from the settlement were
recorded as miscellaneous income and included in nonoperating income for the
periods ended September 30, 1997, December 31, 1997, March 31, 1998 and
June 30, 1998, respectively.
On October 27, 1997, the Company filed a complaint in the United States
District Court, Northern District of California against UMC for breach of
contract, breach of the covenant of good faith and fair dealing and fraud based
on UMC's breach of the settlement agreement arising out of the ITC action, Case
No. C-97-20959. Together with the filing of the complaint, the Company filed a
motion for a preliminary injunction against UMC, seeking to enjoin UMC from
selling the CD-ROM controllers that were the subject of the ITC action and
related settlement agreement, through or to a UMC-affiliated, Taiwanese entity
called MediaTek. On February 23, 1998, the federal court judge denied the
Company's request for a preliminary injunction based on the court's findings
that there was no evidence that UMC was presently engaged in the manufacture of
CD-ROM controllers or other products covered by the settlement agreement. On
December 24, 1997, UMC answered the Company's complaint and counterclaimed
asserting causes of action for recission, restitution, fraudulent concealment,
mistake, lack of mutuality, interference and declaratory judgment of
non-infringement, invalidity and unenforceability of the Oak patent that was the
subject of the original ITC action filed against UMC. The Company believes these
counterclaims to be without merit and will vigorously defend its patent. Both
the Company and UMC seek
33
<PAGE>
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 was to be lifted
upon final resolution of Investigation No. 337-TA-409; however, the judge has
ordered that the consolidated action continue stayed pending the resolution of
the parties appeal of the ITC ruling to the Federal Circuit Court of Appeals
(described below.)
In a related action to the lawsuit that was commenced by the Company against
UMC (described above), on December 19, 1997, MediaTek, a UMC affiliated,
Taiwanese entity, filed a complaint in the United States District Court,
Northern District of California, against the Company for declaratory judgment of
non-infringement, invalidity and unenforceability of the Oak patent that was the
subject of the original ITC action against UMC, and intentional interference
with prospective economic advantage, Case No. C-97-21126. MediaTek seeks
compensatory damages of not less than $10 million and punitive damages. The
Company filed its answer on January 8, 1998, denying all the allegations. The
Company believes the suit to be without merit and will vigorously defend its
patent. On June 11, 1998, this case was consolidated for all purposes with a
related case brought by the Company against UMC (described above) under Case
No. C-97-20959. On the same date, pursuant to UMC's request, the federal court
judge ordered the consolidated action stayed under 28 U.S.C. Section1659, based
on the judge's conclusion that the civil action involves the same issues
involved in Investigation No. 337-TA-409 before the International Trade
Commission, initiated by Oak (described below). The stay was to be lifted upon
final resolution of Investigation No. 337-TA-409; however, the judge has ordered
that the consolidated action continue stayed pending the resolution of the
parties appeal of the ITC ruling to the Federal Circuit Court of Appeals
(described below.)
On April 7, 1998, the Company filed a new complaint with the ITC alleging
that five Asian companies are violating U.S. trade laws by the unlicensed
importing or selling of CD-ROM drive controllers that infringe a United States
patent owned by the Company. The Company's complaint is asserted against United
Microelectronics Corp., MediaTek, Inc., Lite-On Group, Lite-On Technology Corp.
and AOpen, Inc. In its complaint, the Company requests the ITC to investigate
the five above-named companies and to enter an order barring imports into the
United States of their allegedly infringing products and products containing
them, including CD-ROM drives and personal computers. A formal investigative
proceeding was instituted by the ITC (Investigation No. 337-TA-409) on May 8,
1998 naming as respondents United Microelectronics Corp., MediaTek, Inc.,
Lite-On Technology Corp. and AOpen, Inc. The following respondents, all
Taiwanese drive manufacturers, were later added to the proceeding pursuant to an
Initial Determination by the Administrative Law Judge (ALJ) supervising the
Investigation following a motion brought by the Company on August 6, 1998 to add
these respondents: Actima Technology Corp., ASUSTek Computer, Inc., Behavior
Tech Computer Corp., Delta Electronics, Inc. Momitsu Multi Media Technologies,
Pan-International Industrial Corp. and Ultima Electronics Corp. On August 28,
1998, the ALJ entered an Initial Determination that the investigation be
terminated as to respondent UMC. On September 4, 1998, the Company filed a
petition with the Commission for review of the Initial Determination. On
October 7, 1998, the Commission reversed the Initial Determination of the ALJ as
the Commission determined that the Company's complaint against UMC does state an
unfair trade practices claim under Section 337 of the Tariff Act. On
December 23, 1998, the ALJ issued another Initial Determination terminating the
investigation as to respondent UMC for a second time. On December 31, 1998, the
Company filed a petition with the Commission for review of the Initial
Determination. On February 3, 1999, the Commission reversed the Initial
Determination of the ALJ for a second time on the grounds that the Company's
complaint against UMC does state an unfair trade practices claim under
Section 337 of the Tariff Act. On May 10, 1999, the ALJ issued another Initial
Determination terminating the investigation as to respondent UMC for a third
time, finding that UMC's
34
<PAGE>
activities were licensed. On May 17, 1999, the Company filed a petition with the
Commission for review of the Initial Determination and on June 28, 1999, the
Commission determined to review the Initial Determination.
Trial before the ALJ as to all respondents except UMC commenced on
January 11, 1999 and concluded on January 28, 1999. On May 14, 1999, the ALJ
entered an Initial Determination that no unfair trade practices were committed
by Mediatek under Section 337 of the Tariff Act. On May 24, 1999, the Company
filed a petition requesting the Commission to review the Initial Determination
and on June 28, 1999 the Commission determined to review it. On September 27,
1999, the Commission affirmed the ALJ's finding that there were no unfair trade
practices committed by MediaTek under Section 337 of the Tariff Act as the
Commission determined that there was no infringement of the Company's US Patent
No. 5,581,715. On this same date, the Commission also reversed the ALJ's
findings that the Company's patent was invalid and unenforceable and held that
the Company's US Patent No. 5,581,715 was valid and enforceable. The Commission
took no position on the ALJ's Initial Determination terminating UMC from the
investigation.
The Company intends to appeal the Commission's ruling that no unfair trade
practices were committed by MediaTek under Section 337 of the Tariff Act to the
Federal Circuit Court of Appeals.
It is expected that MediaTek will cross-appeal the Commission's ruling on
the validity and enforceability of the Company's US patent. No decision is
expected to be rendered by the Federal Circuit of Appeals for twelve to eighteen
months from the time of appeal. In connection with this proceeding, the Company
will continue to incur legal fees and other expenses.
If any of the above pending actions with respect to UMC and MediaTek are
decided adversely to the Company, it would likely have a material adverse affect
on the Company's financial condition and results of operations.
On February 26, 1999, the Lemelson Medical, Education & Research Foundation,
Limited Partnership (the "Lemelson Partnership") filed a complaint for patent
infringement, naming eighty-eight defendants, including the Company. The
Lemelson Partnership alleges to be the owner of certain patents issued to Jerome
Lemelson (now deceased). The suit is entitled LEMELSON MEDICAL, EDUCATION &
RESEARCH FOUNDATION, LIMITED PARTNERSHIP V. LUCENT TECHNOLOGIES INC., ET AL.,
No. CIV 99-0377-PHX-RGS, and was filed in the United States District Court in
Phoenix, Arizona. In this lawsuit, the Lemelson Partnership claims that the
Company uses certain methods, or imports, sells, or offers to sell certain
devices made using certain methods, claimed in some of the Lemelson
patents-in-suit. Specifically, the suit alleges that Oak infringes certain
claims of U.S. Patents Nos. 4,338,626; 4,390,586; 4,511,918; 4,969,038;
4,979,029; 4,984,073; 5,023,714; 5,023,714; 5,039,836; 5,067,012; 5,119,190;
5,119,205; 5,128,753; 5,144,421; 5,249,045; 5,283,641; and 5,351,078. The
complaint seeks judgment that the Lemelson patents-in-suit are not invalid and
have been willfully and deliberately infringed; unspecified compensatory
damages, together with interest and costs; treble damages; reasonable attorneys'
fees; as well as injunctive relief against further infringement of the Lemelson
patents-in-suit. The Company filed an answer and declaratory relief
counterclaims on August 12, 1999. The Lemelson Partnership responded to the
Company's declaratory relief claims on September 7, 1999. Effective as of
November 10, 1999, the Company entered into a written settlement agreement with
the Lemelson Partnership. The action against the Company was ordered dismissed
with prejudice by the court on November 26, 1999. The settlement does not have a
material effect on the Company's consolidated financial statements.
On September 1, 1999 David D. Tsang and certain of his relatives entered
into a consent decree with the Securities and Exchange Commission in connection
with an insider trading investigation. Pursuant to the terms of the settlement,
Mr. Tsang neither admits nor denies the allegation that he provided nonpublic
information to certain relatives. He did not profit personally from any
transaction in question. The Company cooperated fully with the SEC in the
investigation and was not the subject of the investigation.
35
<PAGE>
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
(a) The following exhibits are filed as part of this report:
EXHIBIT
NUMBER EXHIBIT TITLE
------------ ------------------------------------------------------------
Exhibit 27.1.. Financial Data Schedule
<S> <C> <C>
(b) Reports on Form 8-K:
The Company filed no reports on Form 8-K during the quarter ended December 31, 1999
</TABLE>
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.
<TABLE>
<S> <C> <C>
OAK TECHNOLOGY, INC.
(Registrant)
Date: January 18, 2000 By: /s/ ROBERT O. HERSH
------------------------------------------
Robert O. Hersh
VICE-PRESIDENT FINANCE
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
</TABLE>
37
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
38
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 13,437
<SECURITIES> 106,685
<RECEIVABLES> 6,793
<ALLOWANCES> 386
<INVENTORY> 2,637
<CURRENT-ASSETS> 149,569
<PP&E> 44,945
<DEPRECIATION> 25,279
<TOTAL-ASSETS> 176,490
<CURRENT-LIABILITIES> 16,535
<BONDS> 0
0
0
<COMMON> 43
<OTHER-SE> 154,547
<TOTAL-LIABILITY-AND-EQUITY> 176,490
<SALES> 21,717
<TOTAL-REVENUES> 21,717
<CGS> 11,682
<TOTAL-COSTS> 11,682
<OTHER-EXPENSES> 53,583
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> (30,478)
<INCOME-TAX> 0
<INCOME-CONTINUING> (30,478)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (30,478)
<EPS-BASIC> (0.74)
<EPS-DILUTED> (0.74)
</TABLE>
