<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from to .
---------- ----------
Commission File No. 0-25298
OAK TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0161486
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
139 Kifer Court
Sunnyvale, California 94086
(Address of principal executive offices, including zip code)
(408) 737-0888
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES X NO .
As of November 9, 2000, there were outstanding 54,654,075 shares of the
Registrant's Common Stock, par value $0.001 per share.
<PAGE> 2
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
For the Quarter Ended September 30, 2000
<TABLE>
<CAPTION>
Part I - Financial Information Page
------------------------------ ----
<S> <C> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30,
2000 and June 30, 2000...................................... 3
Condensed Consolidated Statements of Operations for the Three
Months Ended September 30, 2000 and 1999.................... 4
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended September 30, 2000 and 1999.................... 5
Notes to Condensed Consolidated Financial Statements.......... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 24
Part II - Other Information
---------------------------
Item 1. Legal Proceedings............................................. 26
Item 6. Exhibits and Reports on Form 8-K.............................. 29
Signatures............................................................. 30
----------
Exhibit Index.......................................................... 31
-------------
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
September 30, June 30,
2000 2000
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 25,731 $ 19,100
Short-term investments 102,003 101,704
Accounts receivable, net of allowance for
doubtful accounts of $979 and $671,
respectively 25,497 18,294
Inventories 25,280 20,137
Prepaid expenses and other current assets 6,478 11,658
-------- --------
Total current assets 184,989 170,893
Property and equipment, net 20,427 19,738
Intangible assets, net 40,374 44,053
Other assets 1,974 1,716
-------- --------
Total assets $247,764 $236,400
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of
long-term debt $ 2 $ 7
Accounts payable 25,387 20,062
Accrued expenses 14,414 11,357
Deferred revenue 1,146 2,857
-------- --------
Total current liabilities 40,949 34,283
Deferred income taxes 440 697
Other long-term liabilities 97 110
-------- --------
Total liabilities 41,486 35,090
-------- --------
Stockholders' equity:
Preferred stock, $0.001 par value; 2,000,000
shares authorized; None issued and outstanding
as of September 30, 2000 and June 30, 2000 -- --
Common stock, $0.001 par value; 130,000,000
shares authorized; 56,586,743 shares issued
and 54,204,263 shares outstanding as of
September 30, 2000 and 55,059,984 shares issued
and 52,677,504 outstanding as of June 30, 2000 57 55
Additional paid-in capital 222,644 217,357
Treasury stock (11,257) (11,257)
Retained earnings 2,455 1,171
Accumulated other comprehensive loss (7,621) (6,016)
-------- --------
Total stockholders' equity 206,278 201,310
-------- --------
Total liabilities and stockholders' equity $247,764 $236,400
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------------
2000 1999
---- ----
<S> <C> <C>
Revenues:
Product revenues $ 40,184 $ 8,804
Software and other revenues 10,804 1,338
--------- ---------
Total revenues 50,988 10,142
--------- ---------
Cost of revenues:
Cost of product revenues 22,494 4,551
Cost of software and other revenues 2,531 520
--------- ---------
Total cost of revenues 25,025 5,071
--------- ---------
Gross profit 25,963 5,071
Research and development expenses 13,541 11,180
Selling, general and administrative expenses 9,683 7,463
Amortization of intangibles 3,679 959
--------- ---------
Operating loss (940) (14,531)
--------- ---------
Non-operating income, net 2,469 2,345
--------- ---------
Income (loss) before income taxes 1,529 (12,186)
Income taxes 245 --
--------- ---------
Net income (loss) $ 1,284 $ (12,186)
========= =========
Net income (loss) per basic share: $ 0.02 $ (0.30)
========= =========
Net income (loss) per diluted share: $ 0.02 $ (0.30)
========= =========
Shares used in computing basic net income
(loss) per share: 53,472 41,086
========= =========
Shares used in computing diluted net income
(loss) per share: 63,130 41,086
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,284 $ (12,186)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization 5,531 2,942
Loss on disposal of property and equipment -- 378
Changes in operating assets and liabilities:
Accounts receivable (7,203) 2,830
Inventories (5,143) 261
Foundry deposits -- 4,480
Prepaid expenses and other current assets 5,180 (1,343)
Other assets (258) 552
Accounts payable and accrued expenses 8,382 (775)
Deferred income taxes, deferred revenue and
other liabilities (1,981) (870)
-------- --------
Net cash provided by (used in) operating
activities 5,792 (3,731)
Cash flows from investing activities:
Purchases of short-term investments (8,413) (17,629)
Proceeds from matured short-term investments 6,509 17,622
Additions to property and equipment, net (2,541) (2,038)
-------- --------
Net cash used in investing activities (4,445) (2,045)
-------- --------
Cash flows from financing activities:
Repayment of debt (5) (4)
Issuance of common stock, net 5,289 877
Treasury stock acquisitions -- (1,034)
-------- --------
Net cash provided by (used in) financing
activities 5,284 (161)
-------- --------
Net increase (decrease) in cash and cash
equivalents 6,631 (5,937)
Cash and cash equivalents, beginning of period 19,100 19,500
-------- --------
Cash and cash equivalents, end of period $ 25,731 $ 13,563
======== ========
Supplemental information:
Cash paid (refunded) during the period:
Interest $ 10 $ 1
======== ========
Income taxes refunded, net $ (3,269) $ (213)
======== ========
Net unrealized losses on available-for-sale
securities $ 1,605 $ 390
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Preparation
-----------------------
The accompanying unaudited consolidated financial statements of Oak
Technology, Inc. and Subsidiaries ("Oak" or "The Company") have been prepared
in conformity with generally accepted accounting principles. However, certain
information or footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the Securities
and Exchange Commission (the "Commission"). In the opinion of management, the
consolidated financial statements reflect all adjustments considered necessary
for a fair presentation of the consolidated financial position, operating
results and cash flows for those periods presented. The results of operations
for the interim periods presented are not necessarily indicative of the results
that may be expected for the full fiscal year or in any future period. This
quarterly report on Form 10-Q should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended June 30,
2000, included in the Oak Technology, Inc. (the "Company") 2000 Annual Report
on Form 10-K filed with the Commission.
Recently Issued Accounting Standards
------------------------------------
Effective July 1, 2000, the Company adopted Financial Accounting Standards
Board Statement No. 133 "Accounting for Derivative Instruments and Hedging
Activities," ("FAS 133") which requires that all derivative instruments be
recorded on the balance sheet at fair value. The adoption of FAS 133 did not
have a material effect as of the adoption date of July 1, 2000 nor for the
period ended September 30, 2000. On the date derivative contracts are entered
into, the Company designates the derivative as either (a) a hedge of the fair
value of a recognized asset or liability or of an unrecognized firm commitment
(fair value hedge), (b) a hedge of a forecasted transaction or of the
variability of cash flows to be received or paid related to a recognized asset
or liability (cash flow hedge), (c) a hedge of a net investment in a foreign
operation (net investment hedge) or (d) designates as a non-accounting hedge.
Changes in the fair value of derivatives are recorded each period in
current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is,
depending on the type of hedge transaction. For fair value hedge transactions,
changes in fair value of the derivative instrument are generally offset in the
income statement by changes in the fair value of the item being hedged. For
cash-flow hedge transactions, changes in the fair value of the derivative
instrument are reported in other comprehensive income to the extent of
effectiveness. For net investment hedge transactions, changes in the fair
value are recorded as a component of the foreign currency translation account
that is also included in other comprehensive income. The gains and losses on
cash flow hedge transactions that are reported in other comprehensive income
are reclassified to earnings in the periods in which earnings are affected by
the variability of the cash flows of the hedged item. The ineffective portions
of all hedges are recognized in current period earnings.
The Company periodically enters into economic hedges by purchasing foreign
exchange contracts as a hedge against foreign denominated accounts receivables
or fixed sales commitments. As of September 30, 2000, the Company had foreign
exchange contracts with face values of approximately $1.2 million and $6.0
million, respectively, for accounts receivables in foreign currency and fixed
purchase commitments. The impact of recording the fair values of the forward
contracts and unrealized gains or losses in the accounts receivable was not
material for the periods presented.
6
<PAGE> 7
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
2. Inventories
--------------
Inventories are stated at the lower of cost (first in, first out) or
market and consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, June 30,
2000 2000
---- ----
<S> <C> <C>
Purchased parts and work in process $ 20,425 $ 16,193
Finished goods 4,855 3,944
-------- --------
$ 25,280 $ 20,137
======== ========
</TABLE>
3. Net Income (Loss) Per Share
------------------------------
Basic and diluted net income (loss) per share have been computed using the
weighted average number of shares of common stock and dilutive common
equivalent shares from stock options and warrants outstanding in accordance
with Statement of Financial Accounting Standards No. 128, "Earnings per Share."
The following table provides a reconciliation of the components of the basic
and diluted income (loss) per share computations:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------------
2000 1999
---- ----
<S> <C> <C>
Net earnings (loss) from continuing operations $ 1,284 $(12,186)
Basic common shares 53,472 41,086
Effect of dilutive securities:
Common stock options 9,658 --
-------- --------
Dilutive weighted average shares 63,130 41,086
-------- --------
Net earnings (loss) per share from continuing
operations:
Basic $ 0.02 $ (0.30)
======== ========
Diluted $ 0.02 $ (0.30)
======== ========
</TABLE>
For the three month period ended September 30, 2000, there were no
antidilutive common shares excluded from the calculation. For the three month
period ended September 30, 1999, approximately 775,000 potentially dilutive
common shares were not included in the calculation of net diluted loss per
share as they are considered antidilutive.
4. Acquisitions
---------------
Acquisitions - Xionics Document Technologies, Inc.
--------------------------------------------------
On January 11, 2000, the shareholders of both the Company and Xionics
Document Technologies, Inc. (Xionics) approved a definitive acquisition
agreement. Xionics designs, develops and markets innovative software and
silicon solutions for printing, scanning, copying, processing and transmitting
digital documents to computer peripheral devices that perform document imaging
functions. Such devices include printers, copiers, scanners and multifunction
peripherals that perform a combination of these imaging functions.
Under the terms of the acquisition agreement, Oak issued approximately 9.5
million shares of its common stock and paid approximately $34.7 million in cash
to acquire all of the common stock of Xionics. The Company
7
<PAGE> 8
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
recorded a charge of approximately $9.9 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.
At the acquisition date, Xionics had several in-process research and
development projects in each of its product groups: languages, drivers, MFP's
and its new complementary product for a Tandem copy/print engine. In each
product group there were projects that had not yet achieved technological
feasibility. As image processing represents a very specialized market, it is
unlikely that Xionics' in process technology could be successfully deployed in
alternative market applications. Further, it was determined that there was
significant technological risk and substantial development expenses relating to
each of the products under development. As a result, the Company took a $9.9
million charge against earnings in fiscal 2000 in order to reflect an
allocation of the purchase price associated with the value of the in process
research and development which, due to it's uncertain future value at the date
of acquisition, could not be considered an investment in an asset.
The valuation of the acquired in-process research and development used by
the Company was supported by independent fair valuation studies. The estimated
value of in-process research and development was derived using the "Income
Approach", which values an asset based on future cash flows that could
potentially be generated by the asset over its estimated useful life. The
future cash flows were discounted to their present value utilizing a discount
rate of 14%. The amounts of the purchase price technology assigned to the fair
values of in-process research and development and purchased technology
represent management's best estimate and are considered to be valid as of
September 30, 2000. As of September 30, 2000, there have been no material
changes from the historical pricing, margins and expense levels used in the
valuation assumptions.
5. Contingencies
----------------
The Company and various of its current and former officers and directors
are parties to a consolidated class action lawsuit 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 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 action 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. The
Company is also a party to various other legal proceedings, including a number
of patent-related matters, and counterclaims filed by the named defendands in
the pending patent suits. In connection with these lawsuits, 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. See "Legal
Proceedings" in Part II - Item I.
6. Segment Information
----------------------
SFAS No. 131 establishes standards for the reporting by public business
enterprises of information about operating segments, products and services,
geographic areas, and major customers. The method for determining what
information to report is based on the way that management organizes the
operating segments within the Company for making operational decisions and
assessments of financial performance. The Company's chief operating decision-
maker is considered to be the chief executive officer (CEO).
For fiscal year 2001, Oak Technology has two reportable segments which
offer different product lines to each of its target markets: Optical Storage
Group and Imaging Group. The Consumer Group product line did not exist during
the quarter ended September 30, 2000 as it was divested during the third
quarter of fiscal year 2000. 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. Fiscal year 2001 results for
the Imaging Group includes the operations of the Xionics business which was not
acquired nor included in the operations of the Company until January 11, 2000.
No segments have been aggregated. The Company does not allocate assets to its
individual operating segments.
8
<PAGE> 9
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Information about reported segment income or loss is as follows for the
three months ended September 30, 2000 and 1999 (in thousands):
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Net Revenues
Optical Storage $ 33,813 $ 1,624
Imaging 17,175 6,854
Consumer -- 1,664
-------- --------
$ 50,988 $ 10,142
======== ========
Cost of Goods Sold and Direct Operating Expenses:
Optical Storage $ 27,550 $ 5,831
Imaging 11,891 5,155
Consumer -- 4,722
-------- --------
$ 39,441 $ 15,708
======== ========
Contribution Margin:
Optical Storage $ 6,263 $ (4,207)
Imaging 5,284 1,699
Consumer -- (3,058)
-------- --------
$ 11,547 $ (5,566)
======== ========
</TABLE>
A reconciliation of the totals reported for the operating segments to the
applicable line items in the consolidated condensed financial statements for
the three months ended September 30, 2000 and 1999, is as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------
2000 1999
<S> <C> <C>
Contribution margin from operating segments $ 11,547 $ (5,566)
Indirect operating expenses 8,808 8,006
Amortization of intangibles 3,679 959
-------- --------
Total operating loss (940) (14,531)
Other income 2,469 2,345
-------- --------
Income (loss) before income taxes $ 1,529 $(12,186)
======== ========
</TABLE>
Indirect operating expenses includes all costs and expenses not
specifically charged to the operating segments in the financial information
reviewed by the Company's chief executive officer. These include various
overhead and indirect sales expenses as well as corporate marketing and 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.
9
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
The distribution of net revenues for the three months ended September 30,
2000 and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Revenue from unaffiliated customers
originating from:
North America $ 7,926 $ 2,875
Japan 18,429 4,284
Korea 22,627 1,357
Taiwan 766 318
Other Asia 547 774
Europe 693 534
------- --------
$50,988 $ 10,142
======= ========
</TABLE>
For the year ended June 30, 2000, two customers, LG Electronics and
Hewlett-Packard Corporation, accounted for 26% and 16% of total revenues,
respectively. For the quarter ended September 30, 2000, LG Electronics and
Hewlett-Packard Corporation accounted for 36% and 10% of total revenues,
respectively. Revenues from LGE Electronics are attributable to the Optical
Storage Group while revenues from Hewlett-Packard Corporation are attributable
to the Imaging Group.
7. Comprehensive Loss
---------------------
The following table presents the calculation of comprehensive loss as
required by SFAS 130. The components of comprehensive loss, net of tax, are as
follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------------
2000 1999
---- ----
<S> <C> <C>
Net income (loss): $ 1,284 $ (12,186)
Other comprehensive income (loss):
Change in unrealized loss on investments, net (1,605) (390)
--------- ---------
Total comprehensive loss $ (321) $ (12,576)
========= =========
</TABLE>
8. Income Taxes
---------------
For the quarter ended September 30, 2000, the Comapany recorded a tax
expense of 16% of net income. The amount was computed based on projected
fiscal year 2000 operating results as well as estimated AMT and NOL
limitations.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for the historical information contained herein, the matters discussed
in this Report on Form 10-Q may be considered "forward-looking" statements
within the meaning of Section 27a of the Securities Act of 1933, as amended,
and Section 21e of the Securities Act of 1934, as amended. Such statements
include declarations regarding the intent, belief or current expectations of
the Company and its management. Such forward-looking statements are not
guarantees of future performance and involve a number of risks and
uncertainties. Actual results could differ materially from those indicated by
such forward-looking statements. The Company undertakes no obligation to
publicly release the results of any revision to these forward-looking
statements which may be made to reflect events or circumstances after the dates
hereof or to reflect the occurrence of unanticipated events. Among the
important factors that could cause actual results to differ materially from
those indicated by such forward-looking statements are: (i) that the
information is of a preliminary nature and may be subject to further
adjustment, (ii) variability in the Company's quarterly operating results,
(iii) general conditions in the semiconductor industry, (iv) risks related to
pending legal proceedings, (v) development by competitors of new or superior
products or the entry of new competitors into the Company's markets, (vi) the
Company's ability to diversify its product and market base by developing and
introducing new products within designated market windows at competitive price
and performance levels, (vii) willingness of prospective customers to design
the Company's products into their products, (viii) availability of adequate
foundry capacity and access to process technologies, (ix) the Company's ability
to protect its proprietary information and obtain adequate access to third
party technology on acceptable terms, (x) risks related to use of independent
manufacturers and third party assembly and test vendors, (xi) dependence on key
personnel, (xii) reliance on a limited number of large customers, (xiii)
dependence on sales of CD-ROM and CD-RW controller products and the PC market,
(xv) risks related to international business operations, (xvi) ability of the
Company to maintain adequate price levels and margins with respect to its
products, (xvii) risks related to acquisitions, (xviii) the ability to attract
and retain qualified management and technical personnel and (xix) other risks
identified from time to time in the Company's reports and registration
statements filed with the Securities and Exchange Commission. Actual results
could differ materially from those indicated by such forward-looking statements
as a result of certain factors, including those set forth in this Item 2, those
described elsewhere in this Quarterly Report and those described in the
Company's Annual Report on Form 10-K for the year ended June 30, 2000, other
Quarterly Reports on Form 10-Q and other reports filed under the Exchange Act.
General
-------
The Company designs, develops and markets high performance embedded
software and integrated semiconductor solutions to original equipment
manufacturers worldwide that serve the optical storage and imaging markets.
The Company's products consist primarily of embedded software, 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.
During fiscal 2000, the Company restructured its operations along its two
re-organized market-focused groups: the Optical Storage Group and the Imaging
Group. The Imaging Group comprises the Company's recent acquisition, Xionics
and its Pixel Magic subsidiary, serving the digital imaging equipment market.
The Company also disbanded its Consumer Group selling its broadband business
during fiscal 2000 to Conexant.
In its press release regarding the results of operations for the first
quarter of fiscal 2001, the Company reported net income of $1.3 million. The
increase in first quarter revenues is primarily due to increased customer
acceptance of the Company's optical product line. Oak continues to develop its
next generation CD-RW product with five of the top ten CD-RW manufacturers.
However, the Company cannot predict the future level of customer acceptance of
the product and the product's impact on operating results.
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,
11
<PAGE> 12
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. To
date, Oak has not experienced any material delays in its wafer deliveries from
its primary manufacturers. However, there can be no assurance that delays will
not occur in the future.
In addition, the Company's operating results are subject to fluctuations
in the markets for its customers' products, particularly the consumer
electronics and personal computer markets, which have been extremely volatile
in the past. The Company has devoted a substantial portion of its research and
development efforts in recent quarters to developing chips used in 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 increased 403% to $51.0 million for the three
------------
months ended September 30, 2000 from $10.1 million in the comparable period of
fiscal 2000. Net revenues in the Optical Storage business segment were $33.8
million for the first quarter of fiscal 2001, representing a 1,982% increase
from the segment's net revenues of $1.6 million reported in the first quarter
of fiscal 2000. This increase is primarily the result of the Company's
continued success with its CD-RW product line. The Company continued shipping
the 8X 9790 product and began to ship the 16X 9795 product in volume. The
Company was also able to bring four additional large OEM's into mass production
in the September 2000 quarter. This quarter's initial shipments of products to
all of these customers contributed to the unusually large sequential increase
in revenues in the Optical Storage segment.
Net revenues for the Imaging business segment were $17.2 million for the
three months ended September 30, 2000, representing a 151% increase over the
$6.9 million reported in the first quarter of fiscal 2000. This increase was
primarily due to the acquisition of the Xionics business during the third
quarter of the prior year. In addition, the increased revenues from the
segment's compression codec and resolution enhancement products contributed to
the increase. There were no net revenues for the Consumer business segment
compared to $1.7 million for the first quarter of fiscal 2000. The decrease is
a result of the divestiture of the business during fiscal year 2000.
Gross Margin. Cost of revenues includes the cost of wafer fabrication,
------------
assembly, and testing performed by third-party vendors and direct and indirect
costs associated with the procurement, scheduling and quality assurance
functions performed by the Company. The Company's gross margin increased to
51% for the three month period ended September 30, 2000, as compared to 50%
during the comparable period in the prior year. Gross margin for the Optical
Storage business segment was 41% for the first quarter of fiscal 2001 compared
to 53% for the comparable quarter of the prior year. The decrease is
primarily due to a decrease in higher margin royalty income relative to an
increase in lower margin product revenues in the quarter ended September 30,
2000. Gross margin for the Imaging business segment was 71% for the first
quarter of fiscal year 2001, representing a 6% increase from the 67% reported
in the first quarter of fiscal 2000. This increase was primarily due to the
acquisition and integration of the Xionics business during the third quarter of
the prior year which resulted in the inclusion of Xionics software with higher
gross margins for the first quarter of fiscal 2001. Gross margin for the
Consumer business segment was 34% for the first quarter of fiscal year 2000, a
segment which no longer exists as it was divested during the third quarter of
fiscal 2000.
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 for its existing products will continue to decline over
time and that the average selling prices for each new product will decline
significantly over the life of the product. The Company continues to
experience severe price pressure on its CD-ROM controller products and expects
such price erosion to continue. The Company does not believe it can achieve
cost reductions or sales of new products with higher gross margins which fully
offset the expected price declines of its CD-ROM products and therefore, it
expects gross margin percentages to decline. In addition, given the extremely
competitive nature of the optical storage and consumer market, the Company
believes that gross margins for new products in its optical storage market and
consumer market will be lower than historical levels and, as a result, gross
margins in general will decline in the future.
12
<PAGE> 13
Research and Development Expenses. Research and development costs are
---------------------------------
expensed as incurred. Research and development expenses of $13.5 million for
the three months ended September 30, 2000 increased $2.3 million, or 21%, from
$11.2 million in the comparable period of the previous fiscal year. This
increase was primarily due to increased engineering salaries and employee
benefits resulting from higher headcount. Research and development expenses
decreased significantly as a percentage of net revenues for the current fiscal
period over the comparable period in the prior year due primarily to the
significant increase in the Company's net revenues in the current period
compared to the comparable period of fiscal 2000. 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 office equipment.
Selling, General and Administrative Expenses. Selling, general and
--------------------------------------------
administrative (S,G&A) expenses increased by 30% to $9.7 million for the three
months ended September 30, 2000 from $7.5 million in the comparable period of
the prior year. This increase is primarily due to increase in headcount
compared to the first fiscal quarter of the prior year as well as an increase
in sales commissions as a result of the increased revenues. S,G&A expenses
decreased significantly as a percentage of net revenues for the current fiscal
period over the comparable period in the prior year due primarily to a
significant increase in the Company's net revenues in the current year.
Amortization of Intangibles. Amortization of intangible assets was $3.7
---------------------------
million for the three months ended September 30, 2000, an increase of $2.7
million or 284% from the same period of the prior fiscal year. The increase is
a result of the additions to intangible assets as a result of the acquisition
of Xionics in the third quarter of fiscal 2000.
Non-operating Income. During the first quarter of fiscal 2001, non-
--------------------
operating income increased to $2.5 million from $2.3 million during first
quarter of fiscal 2000. This increase is primarily due to interest received in
conjunction with an income tax refund offset by a decrease in foreign currency
translation gains recognized during the quarter.
Income Taxes. Management does not believe it is more likely than not that
------------
sufficient future taxable income will be generated to realize all of the
Company's deferred tax assets. Accordingly, during fiscal 1999 a full
valuation allowance against deferred tax assets was established. Given this,
no income tax benefit was recognized with respect to operating losses incurred
in the first quarter of fiscal 2000. For the first quarter of fiscal 2001, a
tax expense of 16% of net income was recorded based on estimated fiscal 2000
results.
Factors That May Affect Future Results
--------------------------------------
The following factors should be carefully considered in evaluating the
Company and its business.
Expected Benefits of the Merger with Xionics 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 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 provider for the growing digital office
market, 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.
13
<PAGE> 14
The market price of the Company's common stock could decline as a result
of the merger if:
o The integration is unsuccessful or proves to be more expensive or time-
consuming than expected;
o The Company does not achieve the perceived benefits of the merger as
rapidly or to the extent anticipated by third party and other financial
analysts; or
o The effect of the merger on the Company's financial results are not
consistent with the expectations of third party and other financial
analysts.
The Company Has Experienced and Expects to Continue to Experience Significant
-----------------------------------------------------------------------------
Period-to-Period Fluctuations in its Revenues and Operating Results, Which May
------------------------------------------------------------------------------
Result in Volatility in the Price of the Company's Stock
--------------------------------------------------------
The Company's quarterly revenues and operating results have varied
significantly in the past and are likely to vary substantially from quarter to
quarter in the future. Accordingly, you should not rely on period-to-period
comparisons as an indication of future performance. In addition, these
variations may cause the Company's stock price to fluctuate. If quarterly
results fail to meet public expectations, the price of the Company's stock may
decline.
The Company's revenues and operating results are affected by a wide
variety of factors, including factors that generally affect everyone in its
industry and factors that are more specific to its business and product lines.
The principal risk the Company faces in its business and one which has had, and
is expected to continue to have, a significant effect on its revenues and
operating results, is its dependence on the optical storage market. Other
factors specific to its business and product lines include the following:
o The Company's ability to diversify its product offerings and the markets
for its products;
o The current market for its products;
o The loss or gain of important customers;
o The timing of significant orders and order cancellations or
reschedulings;
o Pricing policy changes by the Company and its competitors and suppliers;
o The potential for significant inventory obsolescence exposure;
o The timing of the development and introduction of new products or
enhanced versions of existing products;
o Market acceptance of new products;
o Increased competition in product lines;
o Barriers to entry into new product lines;
o The competitiveness of the Company's customers; and
o 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 embedded
software and platform solutions. However, a significant portion of the
Company's revenue 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 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 continue to be profitable in the future. While the
Company had net income of $5.9 million in fiscal 1998, it had a loss trend in
which an operating loss of $9.1 million for fiscal 1998, an operating loss of
$61.9 million for fiscal 1999, and an operating loss of $61.1 million for
fiscal 2000 (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 continued to
decline in both unit sales volume and average sales price in each successive
quarter. In the third quarter of fiscal 2000, the Company achieved volume
production with its next generation CD-RW product. However, given certain
evolving dynamics in the CD-RW market, including the rate of adoption of this
technology, competition and selling prices, the Company cannot accurately
predict the product's impact on operating results nor can any assurance be
given that revenue from this product will enable the Company to maintain
profitability. The Company expects that the average sales prices for its
optical storage products will continue to decline over time and that average
sales prices 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 additional planned
software and solution product offerings from the Company's Optical and Imaging
Groups, gross margins in general will continue to increase in the future.
If the Company incurs losses or fails to continue 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 Company's past failure to timely
develop new products for the optical storage market in fiscal 1998 and 1999.
The failure to timely and successfully introduce next generation and new
products that achieve market acceptance in the future could seriously damage
the Company's business, financial condition and results of operations.
Specifically, the Company's performance is highly dependent upon the successful
development and timely introduction of its next generation CD-RW controller,
combination DVD and CD-RW controller, MPEG-2 decoder for the DVD player market,
and embedded imaging processing solutions for the digital office market, in
particular, embedded digital color copier technology and image processing chips
for multifunction peripherals.
In the optical storage market, particularly DVD, a variety of
standards and formats are being proposed, making it difficult to develop
product to market requirements, and making it even more difficult for the
market to develop. 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
15
<PAGE> 16
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 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 developing
products that will require greater color and image complexity capability
including web-based documents, and to work with higher performing devices in
networked environments. Any significant inability to meet these challenges 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
previously experienced delays in completing development and introduction of new
products for the optical storage and the digital office 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 its
recently introduced and next generation CD-RW product as well as its
combination DVD and CD-RW product. 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 previous
discontinuation of sales of its CD-ROM controllers. In fiscal 2000, revenue
generated from the Company's optical storage CD-ROM business declined 94%
primarily due to the lack of a next-generation integrated CD-ROM device and
revenue generated from the Company's optical storage CD-RW business increased
by 90%, compared to the previous year, primarily due to the introduction of a
new CD-RW product. 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.
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 production with
its next generation CD-RW product with a few customers, no assurance can be
given this product or its successor will be competitive in the marketplace or
carried into production 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 both the PC and consumer segments. 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
16
<PAGE> 17
Company's revenues and gross margins from its optical storage controller
products will be dependent on the Company's ability to introduce integrated
products for 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 and next generation
products to the optical storage 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 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 2001 and
possibly fiscal 2002. 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:
the rate at which OEMS serving the digital office market outsource their
technology needs, 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 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 average unit sales
prices and rapid product obsolescence. If the Company cannot successfully
respond to the technological advances of others or if its new products or
product enhancements do not achieve market acceptance, the Company's business,
operating results and financial condition could be seriously harmed. The
Company expects competition to increase in the future from existing competitors
and from other companies that may enter the Company's existing or future
markets with solutions that may be less costly or provide higher performance or
additional features. The Company's 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, and digital office 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 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, 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 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
17
<PAGE> 18
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 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 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, in addition to those referenced herein (see Item 1, Note 5
"Contingencies"), 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
18
<PAGE> 19
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 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 infringement 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 the Company's products with products of others or where
infringement arises based on modifications made by the customer to the
Company's products. 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.
19
<PAGE> 20
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:
o The loss of any foundry as a supplier;
o Inability to expand foundry capacity in a period of increased demand for
the Company's products;
o Inability to obtain timely and adequate deliveries from current or
future suppliers;
o Delays in shipments of the Company's products;
o Disruption of operations at any of the Company's manufacturing
facilities;
o Product defects and the difficulty of detecting and remedying product
defects;
o The unavailability of, or interruption in access to, certain process
technologies; and
o 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. Although the Company believes
it has sufficient capacity to meet its needs through calendar 2000, the Company
has no firm commitments in place, and therefore, there is no assurance that the
Company will be able to secure capacity for its manufacturing needs and/or not
experience delays in the future.
The Company's Failure to Accurately Forecast Demand for Its Products Could
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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, or fails to foresee a technology change that could render a
product obsolete, 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. The Company has experienced inventory
write-offs of its optical storage products in the past primarily due to
unforeseen and rapid changes in its customers' demand, in particular speed
changes, and consequently experienced rapid product obsolescence.
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.
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The Company Derives A Large Portion of Its Revenues from International Sales,
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Depends on Foreign Subcontractors and Is Subject to the Risks of Doing Business
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in Foreign Countries
--------------------
A large portion of the Company's revenues are derived from international
sales. International sales, principally to Korea, Japan, Singapore and Europe,
accounted for approximately 75%, 86% and 92%, of the Company's net revenues for
fiscal 2000, 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:
o Unexpected changes in, or impositions of, foreign legislative or
regulatory requirements;
o Delays resulting from difficulty in obtaining export licenses for
certain technology;
o Tariffs, quotas and other trade barriers and restrictions;
o Longer payment cycles;
o Greater difficulty in collecting accounts receivable;
o Potentially adverse taxes and adverse tax consequences;
o The burdens of complying with a variety of foreign laws;
o Political, social and economic instability;
o Potential hostilities;
o Changes in diplomatic and trade relationships; and
o 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.
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 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
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Of Its Revenues, and a Loss Of, Or A Significant Reduction in Purchases By,
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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 2000, 1999 and 1998 sales to the Company's top ten customers accounted
for approximately 78%, 70% and 81% of the Company's net revenues, respectively.
In addition, the Company has experienced significant changes from year to year
in the composition of its major customer base and the Company believes this
pattern of significant change may continue. Customers generally purchase the
Company's
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<PAGE> 22
products pursuant to short-term purchase orders, and the Company has no long
term purchase agreements with any of its customers. The loss of, or significant
reduction in purchases by, current major customers of the Company would
significantly reduce its revenues.
The Company Is A Defendant in Several Lawsuits
----------------------------------------------
The Company and various of its current and former officers and directors
are parties to a consolidated class action lawsuit 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 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 action 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, and
counterclaims filed by the named defendands in the pending patent suits. In
connection with these lawsuits, 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
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Inability to Raise the Additional Capital Necessary to Fund These Investments
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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
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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:
o Difficulties in integration of the operations, technologies, and
products of the acquired companies;
o Diverting management's attention from normal daily operations of the
business;
o Entering markets in which there is limited direct prior experience and
where competitors have stronger market positions;
o Coordination of sales, marketing and research and development;
o Potential loss of key employees; and
o 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 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
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<PAGE> 23
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
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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 financial, technical and
operational 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 technical or operational personnel.
Moreover, none of the key technical or senior management personnel of the
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
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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 2.0
million 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.
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.
Pricing Issues
--------------
The willingness of prospective customers to design the Company's
products into their products depends, to a significant extent, upon the ability
of the Company to have product available at the appropriate market window and
to price its products at a level that is cost effective for such customers. The
markets for most of the applications for the Company's products, especially in
the consumer electronics market and the optical storage market, are
characterized by intense price competition. As the markets for the Company's
products mature and competition increases, as has been the trend for the
optical storage and digital video disk segment of the consumer electronics
market, the Company anticipates that average sales prices ("ASPs") on its
products will decline. The Company continually attempts to pursue cost
reductions, including process enhancements, in order to maintain acceptable
gross profit margins. Gross profit margins also vary reflecting the impact of
changes in the general condition of the economy, capacity utilization levels in
the semiconductor industry, customer acceptance of new technologies and
products, product functionality and capabilities, shifts in product mix,
manufacturing yields and the effect of ongoing manufacturing cost reduction
activities. If the Company is unable to reduce its costs sufficiently to offset
declines in ASPs or is unable to successfully introduce new higher performance
products with higher ASPs, the Company's operating results will be materially
adversely affected. In addition, if the Company experiences yield or other
production problems or shortages of supply that increase its manufacturing
costs, fails to reduce its manufacturing
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<PAGE> 24
costs, or fails to utilize its prepaid deposits with the TSMC and Chartered
foundries, the result would be a material adverse effect on the Company's
business, financial condition and operating results.
Limited Customer Base
---------------------
The Company has derived a substantial portion of its net revenues from a
limited number of customers and expects this concentration to continue. These
customers were all purchasers of the Company's CD-ROM and CD-RW products.
(Please see the discussion above under the heading "Dependence on CD-ROM and
CD-RW Controller Product" for a description of the decline in revenues the
Company has experienced in connection with sales of our CD-ROM product.) At
September 30, 2000, three customers accounted for approximately 20%, 18% and
12% of accounts receivable, respectively. At June 30, 2000, three customers
accounted for approximately 17%, 11% and 11% of accounts receivable,
respectively. In addition, the Company has experienced significant changes from
year to year in the composition of its major customer base. The Company
believes this pattern may continue. Customers generally purchase the Company's
products pursuant to short-term purchase orders, and the Company has no long
term purchase agreements with any of its customers. The loss of or significant
reduction in purchases by, current major customers of the Company would have a
material adverse effect on the Company's business, financial condition and
operating results.
Liquidity and Capital Resources
-------------------------------
Since its inception, the Company has financed its cash requirements from
cash generated from operations, the sale of equity securities, bank lines of
credit and long-term and short-term debt. The Company's principal sources of
liquidity as of September 30, 2000 consisted of approximately $127.7 million in
cash, cash equivalents and short-term investments. The Company also has
approximately $8.3 million in lines of letters of credit with Taiwanese
financial institutions, all of which were available at September 30, 2000.
In the three months ended September 30, 2000, operating activities
generated cash of approximately $5.8 million. The Company's net income of
approximately $1.3 million was offset by increases in accounts receivable and
inventories during the quarter totaling $12.3 million and increases in accounts
payable and accrued expenses of $8.4 million primarily as a result of increased
product revenues and an associated ramp in inventory during the September 2000
quarter. Decreases in prepaid expenses and other current assets of $5.2
million resulting from the receipt of tax refunds and litigation settlements
helped increase cash generated from operating actvities. The non-cash effect
of depreciation and amortization totaling $5.5 million also helped increase the
cash effect of the net income for the period. Investing activities utilized
cash of approximately $4.4 million primarily due to additions to property,
plant and equipment of $2.5 million. Financing activities generated cash
proceeds of $5.3 million as a result of an increase in exercises of stock
options.
The Company believes that its existing cash, cash equivalents, short-term
investments and credit facilities will be sufficient to provide adequate
working capital and to fund necessary purchases of property and equipment and
any other investments it may make through at least the next twelve months. If,
however, during the next twelve to eighteen month period the Company fails to
continue its increase in revenue or is unable to maintain 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Most of the Company's foreign sales are negotiated in US dollars; however,
invoicing is often done in local currency. As a result, the Company may be
subject to the risks of currency fluctuations. Assets and liabilities which
are denominated in non-functional currencies are remeasured into the functional
currency on a monthly basis and the resulting gain or loss is recorded within
non-operating income in the statement of operations. Many of the Company's non-
functional currency receivables and payables are hedged through managing net
asset positions, product pricing and other means. The Company's strategy is to
minimize its non-functional currency net assets
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<PAGE> 25
or net liabilities in its foreign subsidiaries. The Company's policy is not to
speculate in financial instruments for profit on the exchange rate price
fluctuations, trade in currencies for which there are not underlying exposures,
or enter into trades for any currency to intentionally increase the underlying
exposure. As of September 30, 2000 and June 30, 2000, the Company had foreign
currency exchange contracts to exchange Yen for approximately $7.2 million and
$2.4 million, respectively. If foreign currency rates fluctuate by 10% from
rates at September 30, 2000 and 1999, the effect on the company's consolidated
financial statements would not be material. 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. 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. Not withstanding the
forgoing, due to the divestiture of the Broadband business in January 2000,
the Company is in the unusual position of also holding an investment in 293,794
shares of Conexant Systems, Inc. common stock which had an original book value
of $68.05 per share. This investment is classified as being held as an
available-for-sale security, and accordingly, the reduction in the market value
of the investment at September 30, 2000 of approximately $7.7 million has been
recorded as an item of comprehensive loss. This is a highly volatile equity
security with market valuations in the range of $20.44 to $132.00 since mid
January 2000. The original shares were not registered and available for sale
until early March 2000. The Company intends to convert these shares into cash
over time.
Due to the short term maturities of its investments, the carrying value
approximates the fair value. If market rates were to increase immediately and
uniformly by 10% from levels as of September 30, 2000, 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.
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<PAGE> 26
Part II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
The Company and various of its current and former officers and directors
are parties to a consolidated class action lawsuit 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. This state court proceeding, designated IN RE OAK TECHNOLOGY
SECURITIES LITIGATION, Master File No. CV758510 was filed in Santa Clara County
Superior Court in Santa Clara, California. The 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. The plaintiffs sought
unspecified monetary damages. After several rounds of demurrers, the court
dismissed all claims except 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 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. On August 5, 2000 the court
granted Company's motion for summary judgment and entered judgment in favor of
the Company. The plaintiffs have filed a notice of their intent to appeal the
court's decision. Based on its current information, the Company believes this
suit to be without merit and will defend its position vigorously. Although it
is possible the court's ruling may be overturned on appeal and the Company may
incur a loss upon an adverse conclusion of these claims, an estimate of any
such loss cannot be made.
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 The plaintiffs are seeking monetary damages, equitable relief and an
accounting for the defendants' sales of shares of the Company's common stock.
Based on its current information, the Company believes the suits to be without
merit and will defend its position vigorously. Although it is reasonably
possible the Company may incur a loss upon conclusion of these claims, an
estimate of any such loss cannot be made.
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 the named respondent's
infringing CD-ROM controllers or products containing such infringing CD-ROM
controllers. 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.
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<PAGE> 27
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 non-operating 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 by
asserting causes of action for recission, restitution, fraudulent concealment,
mistake, lack of mutuality, interference and declaratory judgment of non-
infringement, invalidity and unenforceability of the Oak patent that was the
subject of the original ITC action filed against UMC. The Company believes
these counterclaims to be without merit and will vigorously defend its patent.
Both the Company and UMC seek compensatory and punitive damages. In addition,
the Company seeks permanent injunctive relief. On June 11, 1998, this case was
consolidated for all purposes with a related case brought against the Company
by MediaTek (described below) under Case No. C-97-20959. On the same date,
pursuant to UMC's request, the federal court judge ordered the consolidated
action stayed under 28 U.S.C. Section 1659, based on the judge's conclusion
that the civil action involves the same issues involved in Investigation No.
337-TA-409 before the International Trade Commission, initiated by Oak
(described below). The stay 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. 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.)
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 CD-ROM controllers 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
27
<PAGE> 28
motion brought by the Company on August 6, 1998 to add these respondents:
Actima Technology Corp., ASUSTek Computer, Inc., Behavior Tech Computer Corp.,
Delta Electronics, Inc. Momitsu Multi Media Technologies, Pan-International
Industrial Corp. and Ultima Electronics Corp. On August 28, 1998, the ALJ
entered an Initial Determination that the investigation be terminated as to
respondent UMC. On September 4, 1998, the Company filed a petition with the
Commission for review of the Initial Determination. On October 7, 1998, the
Commission reversed the Initial Determination of the ALJ as the Commission
determined that the Company's complaint against UMC does state an unfair trade
practices claim under Section 337 of the Tariff Act. On December 23, 1998, the
ALJ issued another Initial Determination terminating the investigation as to
respondent UMC for a second time. On December 31, 1998, the Company filed a
petition with the Commission for review of the Initial Determination. On
February 3, 1999, the Commission reversed the Initial Determination of the ALJ
for a second time on the grounds that the Company's complaint against UMC does
state an unfair trade practices claim under Section 337 of the Tariff Act. On
May 10, 1999, the ALJ issued another Initial Determination terminating the
investigation as to respondent UMC for a third time, finding that UMC's
activities were licensed. On May 17, 1999, the Company filed a petition with
the Commission for review of the Initial Determination and on June 28, 1999,
the Commission determined to review the Initial Determination.
Trial before the ALJ as to all respondents except UMC commenced on January
11, 1999 and concluded on January 28, 1999. On May 14, 1999, the ALJ entered an
Initial Determination that no unfair trade practices were committed by Mediatek
under Section 337 of the Tariff Act. On May 24, 1999, the Company filed a
petition requesting the Commission to review the Initial Determination and on
June 28, 1999 the Commission determined to review it. 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.
On February 24, 2000, the Company appealed 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. 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.
28
<PAGE> 29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report:
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
----- -------------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
The Company filed no reports on Form 8-K during the quarter ended
September 30, 2000
29
<PAGE> 30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OAK TECHNOLOGY, INC.
--------------------
(Registrant)
Date: November 14, 2000
/s/ JOHN S. EDMUNDS
----------------------------
John S. Edmunds
Vice-President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
30
<PAGE> 31
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
31
<PAGE> 32
