<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
FILED BY THE REGISTRANT [X] FILED BY A PARTY OTHER THAN THE REGISTRANT [ ]
- --------------------------------------------------------------------------------
Check the appropriate box:
[ ] Preliminary Proxy Statement
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
Xerographic Laser Images Corporation
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement)
PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined): one-fiftieth of one
percent (1%) of cash payment of $15,000,000.
4) Proposed maximum aggregate value of transaction: $15,000,000
5) Total fee paid: $3,000
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
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<PAGE> 2
XEROGRAPHIC LASER IMAGES CORPORATION
101 BILLERICA AVENUE
5 BILLERICA PARK
NORTH BILLERICA, MA 01862
(978) 670-5999
July 20, 1998
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders of
Xerographic Laser Images Corporation ("XLI") to be held at 10:00 A.M. on August
11, 1998 at the offices of Warner & Stackpole LLP, 75 State Street, Sixth Floor,
Boston, MA 02109.
At the Special Meeting, the stockholders of XLI (the "XLI Stockholders")
will be asked to consider and vote upon (i) the proposed merger (the "Merger")
of OTI Acquisition Corporation, a Delaware corporation ("OTI Acquisition"), a
newly formed, wholly-owned subsidiary of Pixel Magic, Inc., a Massachusetts
corporation ("Pixel"), with and into XLI, pursuant to which XLI will become a
wholly-owned subsidiary of Pixel; (ii) the adoption of the Plan of
Reorganization and Agreement of Merger, dated as of January 29, 1998 (the
"Merger Agreement"), among XLI, OTI Acquisition, Pixel, Oak Technology, Inc., a
Delaware corporation ("Oak"), of which Pixel is a wholly-owned subsidiary, and
certain stockholders of XLI (the "Party Stockholders"); and (iii) the
appointment of representatives of the holders of the capital stock of XLI (the
"Stockholder Representatives").
The Merger Agreement provides, among other things, that at the effective
time of the Merger, the holders of XLI Common Stock and XLI Preferred Stock will
receive for each of their shares, a payment having a value to be determined in
part on the basis of the total number of shares outstanding on a partially
diluted basis at the effective time of the Merger ("Merger Cash"), and a
conditional right to receive an additional amount per share having a value to be
determined based upon XLI achieving certain milestones during the three-year
period commencing with the quarter ending March 31, 1998, and ending December
31, 2000 ("Contingent Cash"). Merger Cash shall be an amount calculated by
dividing $3,675,000 by the total number of shares of XLI Common Stock
outstanding at the Effective Time of the Merger (which total includes the number
of shares of XLI Common Stock into which the shares of XLI Preferred Stock are
convertible and the number of shares of XLI Common Stock purchasable under any
outstanding XLI Private Warrants). This total number of shares of XLI Common
Stock is currently 4,369,370. Based upon the number of shares of XLI Common
Stock and XLI Preferred Stock currently outstanding (which amount is not
expected to change), holders of XLI Common Stock shall be entitled to receive
approximately $0.84 per share in Merger Cash, and holders of XLI Preferred Stock
shall be entitled to receive approximately $2.09 per share of Preferred Stock in
Merger Cash. If XLI meets the milestones entitling XLI Stockholders to
Contingent Cash, holders of XLI Common Stock will receive a maximum of
approximately $2.59 per share in Contingent Cash, and holders of XLI Preferred
Stock will receive a maximum of approximately $6.37 per share in Contingent
Cash. The Merger Cash payment of approximately $0.84 per share to the holders of
XLI Common Stock, and approximately $2.09 per share to the holders of XLI
Preferred Stock, is the only unconditional consideration to be received by the
XLI Stockholders. The terms of the Merger (including a more detailed description
of the consideration to be received by XLI Stockholders), and the conditions to
its completion, are described in the attached Proxy Statement. The complete text
of the Merger Agreement appears as Appendix A to the Proxy Statement.
Your Board of Directors believes that the Merger being presented to the XLI
Stockholders is in the best interests of the XLI Stockholders and recommends
that you vote in favor of the approval of the Merger, the adoption of the Merger
Agreement, and the appointment of the Stockholder Representatives.
A majority of the outstanding shares of XLI Common Stock and a majority of
the outstanding shares of XLI Preferred Stock, each voting as a separate class,
must vote in favor of the Merger Agreement for the Merger to become effective.
<PAGE> 3
We urge you to read the attached Proxy Statement and to consider your vote
very carefully. REGARDLESS OF THE SIZE OF YOUR HOLDINGS, IT IS IMPORTANT THAT
YOUR SHARES BE VOTED AT THE SPECIAL MEETING. Whether or not you are personally
able to attend the Special Meeting, please be certain to complete, sign, date
and return the enclosed Proxy Card promptly. If you do attend the Special
Meeting, you may still revoke your proxy and vote in person. Your prompt
cooperation will be greatly appreciated.
Sincerely,
Anthony D. D'Amelio
<PAGE> 4
XEROGRAPHIC LASER IMAGES CORPORATION
101 BILLERICA AVENUE
5 BILLERICA PARK
NORTH BILLERICA, MA 01862
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD AUGUST 11, 1998
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "Special
Meeting") of Xerographic Laser Images Corporation ("XLI") will be held at 10:00
A.M. on August 11, 1998 at the offices of Warner & Stackpole LLP, 75 State
Street, Sixth Floor, Boston, MA 02109, for the purpose of considering and acting
upon the following matters as set forth in the accompanying Proxy Statement:
1. To consider and vote upon the proposed merger (the "Merger") of OTI
Acquisition Corporation, a Delaware corporation ("OTI Acquisition"), a
newly formed, wholly-owned subsidiary of Pixel Magic, Inc., a Massachusetts
corporation ("Pixel"), with and into XLI, pursuant to which XLI will become
a wholly-owned subsidiary of Pixel.
2. To ratify and approve the Plan of Reorganization and Agreement of
Merger, dated as of January 29, 1998 (the "Merger Agreement"), among XLI,
OTI Acquisition, Pixel, Oak Technology, Inc., a Delaware corporation
("Oak"), of which Pixel is a wholly-owned subsidiary, and certain
stockholders of XLI (the "Party Stockholders").
3. To appoint Daniel J. Allen, Adam L. Carley, Anthony D. D'Amelio,
Joseph L. Katz and Vincent J. Spoto as representatives of the holders of
the capital stock of XLI (the "Stockholder Representatives") to act as
attorneys-in-fact of the stockholders of XLI with authority to make all
decisions on behalf of the XLI Stockholders with respect to any matters
upon which the Stockholder Representatives are authorized to act under the
Merger Agreement.
4. The transaction of such other business as may properly come before
the Special Meeting or any adjournments or postponements thereof.
In accordance with the By-Laws, the Board of Directors fixed the close of
business on June 15, 1998, as the date for the determination of shareholders
entitled to notice of, and to vote at, the Special Meeting and any adjournment
thereof. A certified list of XLI Stockholders entitled to vote at the Special
Meeting will be available at the offices of XLI, 101 Billerica Avenue, 5
Billerica Park, North Billerica, MA 01862, for examination, during business
hours, by any stockholder for any purpose germane to the Special Meeting for a
period of not less than ten days immediately preceding the Special Meeting.
XLI Stockholders may dissent from the merger transaction and obtain payment
for their shares as provided by Delaware law as described in the accompanying
Proxy Statement.
By Order of the Board of Directors,
/s/ JAMES L. SALERNO
James L. Salerno, Secretary
July 20, 1998
<PAGE> 5
XEROGRAPHIC LASER IMAGES CORPORATION
101 BILLERICA AVENUE
5 BILLERICA PARK
NORTH BILLERICA, MA 01862
PROXY STATEMENT
This Proxy Statement is being furnished to the stockholders (the "XLI
Stockholders") of Xerographic Laser Images Corporation, a Delaware corporation
("XLI"), in connection with the Special Meeting of Stockholders of XLI (the
"Special Meeting") to be held at 10:00 A.M. on August 11, 1998 at the offices of
Warner & Stackpole LLP, 75 State Street, Sixth Floor, Boston, MA 02109. The
accompanying proxy is being solicited by XLI's Board of Directors (the "Board of
Directors") to be voted at the Special Meeting and any adjournments or
postponements thereof.
The approximate date on which this Proxy Statement and the accompanying
proxy is intended to be mailed to XLI Stockholders is on or about July 20, 1998.
At the Special Meeting, the XLI Stockholders will be asked to consider and
vote upon (i) the proposed merger of OTI Acquisition Corporation, a Delaware
corporation, ("OTI Acquisition"), a newly formed, wholly-owned subsidiary of
Pixel Magic, Inc., a Massachusetts corporation ("Pixel"), with and into XLI,
pursuant to which XLI will become a wholly-owned subsidiary of Pixel; (ii) the
adoption of the Plan of Reorganization and Agreement of Merger, dated as of
January 29, 1998 (the "Merger Agreement"), among XLI, OTI Acquisition, Pixel,
Oak Technology, Inc., a Delaware corporation ("Oak"), of which Pixel is a
wholly-owned subsidiary, and certain stockholders of XLI (the "Party
Stockholders"); and (iii) the appointment of representatives of the holders of
the capital stock of XLI (the "Stockholder Representatives"). A copy of the
Merger Agreement is attached to this Proxy Statement as Appendix A.
The aggregate amount of consideration to be paid to the holders of XLI
Common Stock and its equivalents, ranges from a minimum amount of $3,675,000 to
be paid upon effectiveness of the transaction ("Merger Cash"), to a maximum
amount of $15,000,000, with any amounts in excess of the Merger Cash to be paid
during the period commencing with the quarter ending March 31, 1999 and ending
December 31, 2000. Any amount payable in excess of the Merger Cash, but not to
exceed $15,000,000, is contingent upon XLI achieving certain milestones for the
three (3) year period commencing January 1, 1998 and ending December 31, 2000
("Contingent Cash").
The Merger Agreement provides for the merger (the "Merger") of OTI
Acquisition with and into XLI, pursuant to which each outstanding share of XLI
Common Stock and each outstanding share of XLI Preferred Stock (each share of
XLI Preferred Stock shall be convertible into 2.4884 shares of XLI Common Stock)
(collectively, the "XLI Stock"), will be converted into Merger Cash in
accordance with the formula set forth in Section 2.4.3 of the Merger Agreement.
Any XLI warrants that shall not have been exercised prior to the Effective Time
of the Merger and by their terms do not expire at or prior to the Effective Time
will be converted into the right to receive Merger Cash upon the exercise of the
XLI warrant by the holder thereof and delivery of the exercise price therefor.
Section 2.4.3 of the Merger Agreement provides that Merger Cash shall be an
amount calculated by dividing $3,675,000 by the total number of shares of XLI
Common Stock outstanding at the Effective Time of the merger (which total
includes the number of shares of XLI Common Stock into which the shares of XLI
Preferred Stock are convertible and the number of shares of XLI Common Stock
purchasable under any outstanding XLI Private Warrants). This total number of
shares of XLI Common Stock is currently 4,369,370. Based upon the number of
shares of XLI Common Stock and XLI Preferred Stock currently outstanding (which
amount is not expected to change, based upon the assumption that any XLI
Warrants currently outstanding will not be exercised, and will be fixed at the
time of the shareholder vote), and based upon the fact that there are no XLI
Private Warrants outstanding and XLI has no intention of issuing any additional
Private Warrants, holders of XLI Common Stock shall be entitled to receive
approximately $0.84 per share in Merger Cash, and holders of XLI Preferred Stock
shall be entitled to receive approximately $2.09 per share of Preferred Stock in
Merger Cash.
<PAGE> 6
In addition to Merger Cash, XLI Stockholders may receive Contingent Cash,
the amount of which is contingent upon XLI achieving certain milestones during
the three-year period commencing January 1, 1998 and ending December 31, 2000.
There will be no Contingent Cash payments unless and until the sum of (i) 56% of
XLI's Gross Product Revenue, (ii) $1.00 for each Digital Modulator Feature IC
sold and (iii) $2.00 for each Multiple Feature IC sold, exceeds $3,675,000 plus
any post-closing audit adjustments (which adjustment amount, based upon XLI's
balance sheet as of June 30, 1998, is approximately $675,000, and is expected to
increase prior to closing) and indemnification amounts owed to Oak, if any.
Thereafter, any Contingent Cash payments will be dependent on XLI's financial
performance and will be subject to set-off for any indemnification claims for
breach of the Merger Agreement, if any. If XLI meets the financial milestones
specified in the Merger Agreement, holders of XLI Common Stock will receive a
maximum of approximately $2.59 per share in Contingent Cash, and holders of XLI
Preferred Stock will receive a maximum of approximately $6.37 per share in
Contingent Cash. Payments of Contingent Cash amounts, if any, shall be made
within 45 days after the end of each calendar quarter commencing with the
quarter ending March 31, 1999, and ending with the quarter ending December 31,
2000. Upon the exercise of the XLI Warrants, in addition to any applicable
Merger Cash, each warrant will be converted into the right to receive Contingent
Cash. THE PAYMENT OF CONTINGENT CASH TO XLI STOCKHOLDERS IS CONTINGENT UPON
XLI'S FUTURE FINANCIAL PERFORMANCE, AND IS NOT GUARANTEED. SEE "RISK FACTORS."
IN DECIDING WHETHER TO VOTE IN FAVOR OF THE MERGER, PLEASE BE ADVISED THAT
THE MERGER CASH PAYMENT OF APPROXIMATELY $0.84 PER SHARE TO THE HOLDERS OF XLI
COMMON STOCK, AND APPROXIMATELY $2.09 PER SHARE TO THE HOLDERS OF XLI PREFERRED
STOCK, IS THE ONLY UNCONDITIONAL CONSIDERATION TO BE RECEIVED BY THE XLI
STOCKHOLDERS.
Accompanying this Proxy Statement is a notice of the Special Meeting and a
form of proxy, attached to this Proxy Statement as Appendix E, solicited by the
Board of Directors. Proxies in the accompanying form which are properly executed
and duly returned to XLI and not revoked prior to the voting at the Special
Meeting will be voted as specified. If no contrary specification is made and if
not designated as broker non-votes, the shares represented by the enclosed proxy
will be voted FOR the approval of the Merger. In addition, the shares
represented by the enclosed proxy will be voted by the persons named therein, in
such persons' discretion, with respect to any other business which may properly
come before the Special Meeting or any adjournments or postponements thereof.
Any XLI Stockholder giving a proxy has the power to revoke it at any time prior
to the voting by filing with the Secretary of XLI written notice of revocation
or a duly executed proxy bearing a later date or by voting in person at the
Special Meeting.
The Board of Directors has fixed the close of business on June 15, 1998 as
the record date for the determination of XLI Stockholders who are entitled to
receive notice of and to vote at the Special Meeting. A majority of the
outstanding shares of XLI Common Stock and a majority of the outstanding shares
of XLI Preferred Stock, each voting as a separate class, must vote in favor of
the Merger Agreement for the Merger to become effective.
On June 15, 1998, the record date for the Special Meeting, XLI had
outstanding 3,574,941 shares of XLI Common Stock and 315,238 shares of XLI
Preferred Stock. Each share of XLI Common Stock is entitled to one vote per
share with respect to the proposed Merger and any other matters to be voted upon
at the Special Meeting. Each share of XLI Preferred Stock is entitled to one
vote per share with respect to the proposed Merger. For other matters, if any,
which may be voted upon at the Special Meeting, the holders of XLI Preferred
Stock shall vote with the holders of XLI Common Stock as a single class, with
each share of XLI Preferred Stock entitled to the number of votes that he or she
would have if such shares were converted into XLI Common Stock.
In accordance with the laws of the State of Delaware, shares represented by
proxies marked as abstentions or designated as broker non-votes will be counted
for purposes of determining a quorum. Shares represented by proxies marked as
abstentions will also be treated as present for purposes of determining the
outcome of a vote on any matter, but will not constitute a vote "for" or
"against" any matter. Shares represented by proxies designated as broker
non-votes, however, will not be treated as present for purposes of determining
the outcome of a vote on any matter.
2
<PAGE> 7
TO THE EXTENT THAT THIS PROXY STATEMENT DISCUSSES EXPECTATIONS ABOUT MARKET
CONDITIONS OR ABOUT MARKET ACCEPTANCE AND FUTURE SALES OF XLI'S, PIXEL'S OR
OAK'S PRODUCTS, OR OTHERWISE MAKES STATEMENTS ABOUT THE FUTURE, SUCH STATEMENTS
ARE FORWARD-LOOKING AND ARE SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE STATEMENTS MADE. THESE
FACTORS INCLUDE THE ABILITY OF XLI TO COMPLETE THE MERGER, THE ABILITY OF XLI TO
MEET THE MILESTONES ENTITLING XLI STOCKHOLDERS TO CONTINGENT CASH, THE CYCLICAL
NATURE OF THE INDUSTRY, RISKS ASSOCIATED WITH THE ACCEPTANCE OF NEW PRODUCTS BY
INDIVIDUAL CUSTOMERS AND BY THE MARKETPLACE, AND OTHER FACTORS DISCUSSED HEREIN
AND IN THE BUSINESS DESCRIPTION AND MANAGEMENT'S DISCUSSION AND ANALYSIS
SECTIONS OF XLI's QUARTERLY REPORT ON FORM 10-QSB FOR THE FISCAL QUARTER ENDED
MARCH 31, 1998, AND XLI's ANNUAL REPORT ON FORM 10-KSB FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1997, AS AMENDED.
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XEROGRAPHIC LASER IMAGES CORPORATION
PROXY STATEMENT
TABLE OF CONTENTS
<TABLE>
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<S> <C>
SUMMARY OF PROXY STATEMENT.................................. 6
RISK FACTORS................................................ 10
GENERAL INFORMATION......................................... 11
Purpose of the Special Meeting............................ 11
Vote Required and Ownership............................... 11
Proxies................................................... 11
Oak, Pixel, and OTI Acquisition Information............... 12
THE MERGER.................................................. 13
Introduction.............................................. 13
Parties to the Merger..................................... 13
Background of and Reasons for the Merger.................. 13
Recommendation of Board of Directors...................... 14
Interest of Certain Persons in the Merger................. 14
Payment of Merger Cash and Contingent Cash by Oak......... 15
Accounting Treatment of the Merger........................ 15
Certain Federal Income Tax Consequences of the Merger..... 16
TERMS OF THE MERGER AGREEMENT............................... 17
Effective Date and Time of the Merger..................... 17
Effect of Merger on Outstanding Securities................ 17
Effect of Merger on XLI Common Stock and XLI Preferred
Stock................................................. 17
Effect of Merger on XLI Warrants....................... 17
Effect of Merger on XLI Common Stock Equivalents....... 17
Calculation of Merger Cash............................. 18
Calculation of Contingent Cash......................... 18
Exchange of Certificates; Payment of Merger Cash.......... 19
Exchange of Merger Cash for XLI Stock.................. 19
Escrow of Merger Cash for Private Warrants............. 19
Exchange Procedures.................................... 20
Payment of Contingent Cash................................ 20
Escrow of Contingent Cash................................. 21
Set-Off and Indemnity Hold Back........................... 22
Audit Rights.............................................. 22
Distributions from Escrow................................. 22
Initial Escrow Distribution............................ 22
Upon Exercise of XLI Warrants.......................... 22
Upon Termination of the Escrow Agreement............... 23
Allocation of XLI Warrant Exercise Amounts............. 23
Representations and Warranties; Covenants................. 24
Conditions to the Merger.................................. 24
Termination; Amendment and Waiver......................... 24
Post-Closing Adjustment................................... 25
Non-Recourse Indemnification.............................. 25
Provisions Relating to the Stockholder Representatives.... 26
</TABLE>
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<TABLE>
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APPRAISAL RIGHTS............................................ 27
OPINION OF FINANCIAL ADVISOR................................ 28
DIVIDENDS................................................... 33
MATERIAL CONTRACTS.......................................... 33
MARKET PRICES............................................... 33
STATEMENT REGARDING ACCOUNTANTS' REPRESENTATIVES............ 33
INFORMATION CONCERNING XLI.................................. 33
Description of Business................................... 33
Products and Product Development.......................... 34
Sales and Marketing....................................... 34
Patents and Proprietary Information....................... 35
The Year 2000 Issue....................................... 35
Personnel................................................. 35
Description of Property................................... 36
Legal Proceedings......................................... 36
Further Information Concerning the Business of XLI........ 36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF XLI FOR THE FISCAL QUARTER
ENDED MARCH 31, 1998...................................... 37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF XLI FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1997......................................... 38
MARKET PRICE FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS................................................... 43
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................. 43
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF XLI......................................... 44
INFORMATION CONCERNING OTI ACQUISITION...................... 45
INFORMATION CONCERNING OAK AND ITS SUBSIDIARIES............. 45
General................................................... 45
Optical Storage Market.................................... 45
Consumer Electronics...................................... 45
Digital Office Equipment Market........................... 45
Further Information Concerning the Business of Oak and its
Subsidiaries........................................... 46
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE........... 47
FINANCIAL STATEMENTS OF XLI................................. F-1
APPENDIX A -- PLAN OF REORGANIZATION AND AGREEMENT OF MERGER..............
-- Form of Escrow Agreement (Exhibit B of the Plan of
Reorganization and Agreement of Merger).....................
-- Form of Exchange Agent Agreement (Exhibit C of the Plan of
Reorganization and Agreement of Merger).....................
APPENDIX B -- SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW.........
APPENDIX C -- XLI's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1997, as amended...............................
-- XLI's Quarterly Report on Form 10-QSB for the fiscal quarter
ended March 31, 1998, as amended............................
</TABLE>
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<TABLE>
<S> <C> <C> <C>
APPENDIX D -- Oak's Annual Report on Form 10-K for the fiscal year ended June 30, 1997.............
-- Oak's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998......
APPENDIX E -- Form of Proxy Card...................................................................
</TABLE>
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<PAGE> 11
SUMMARY OF PROXY STATEMENT
The following is a brief summary of certain information contained elsewhere
in this Proxy Statement. This summary is necessarily incomplete and is qualified
in its entirety by reference to the full text of, and to the documents referred
to in, this Proxy Statement and its appendices. The descriptions in the
following summary and in the full text of this Proxy Statement of the terms and
conditions of the Merger Agreement are qualified in their entirety by reference
to the Merger Agreement attached to this Proxy Statement as Appendix A.
DATE, TIME, AND PLACE OF
SPECIAL MEETING:........... August 11, 1998 at 10:00 A.M. at the offices of
Warner & Stackpole LLP, 75 State Street, Sixth
Floor, Boston, MA 02109.
PURPOSE:................... To consider and vote upon (i) the proposed Merger;
(ii) a proposal to adopt the Merger Agreement; and
(iii) the appointment of the Stockholder
Representatives. See "GENERAL
INFORMATION -- Purpose of the Special Meeting."
THE PARTIES:............... XLI, Oak Technology, Inc., Pixel Magic, Inc., OTI
Acquisition Corporation, and the Party
Stockholders.
RECORD DATE:............... June 15, 1998
VOTE REQUIRED:............. The affirmative vote of a majority of the
outstanding XLI Common Stock and a majority of the
outstanding XLI Preferred Stock, each voting as a
separate class.
RECOMMENDATION:............ XLI's Board of Directors has approved the Merger
Agreement, having determined that the acquisition
of XLI pursuant to the Merger Agreement is fair and
in the best interests of XLI and its shareholders.
The Board recommends a vote in favor of approving
the Merger, adopting the Merger Agreement, and
appointing the Stockholder Representatives. See
"THE MERGER -- Reasons for the Merger;
Recommendation of Board of Directors."
THE MERGER
BACKGROUND OF AND REASONS
FOR THE MERGER:............ On July 22, 1997, XLI received a telephone call
from Peter Besen of Pixel indicating a conditional
interest in a possible merger between Pixel and XLI
in which shares of XLI Common Stock would be
exchanged for cash. On November 5, 1997, XLI
engaged Montgomery Capital Corporation
("Montgomery") to act as its exclusive financial
advisor to assist XLI in evaluating the Pixel
proposal and to advise XLI with respect to possible
alternatives to maximize shareholder value,
including remaining independent, effecting a
corporate restructuring, initiating discussions
with others, or evaluating other plans of business
reorganization. From July until October 15, 1997,
when Pixel and XLI entered into a letter of intent,
XLI had several discussions and meetings with
representatives of Pixel. At a meeting on January
21, 1998, XLI's Board approved the Merger
Agreement, having determined that the acquisition
of XLI pursuant to the Merger Agreement was fair to
and in the best interests of XLI and its
shareholders. In making such determination the
Board considered many factors, including the
factors discussed below with respect to the Merger
Agreement. XLI's Board of Directors' determination
that the acquisition of XLI pursuant to the Merger
Agreement is
7
<PAGE> 12
fair to and in the best interests of XLI and its
shareholders was based upon consideration of many
factors, including: (i) XLI's business, financial
condition, and future prospects and the current
conditions of the industry in which it operates;
(ii) the alternatives available to XLI to maximize
shareholder value; (iii) the price being offered to
XLI's shareholders pursuant to the Merger
Agreement; (iv) the potential interest of other
parties who might be interested in a possible
transaction with XLI; (v) Montgomery's opinion,
based upon certain assumptions described in its
opinion that the consideration proposed to be paid
to XLI Stockholders pursuant to the Merger
Agreement is fair to the shareholders from a
financial point of view; (vi) the terms and
conditions of the Merger Agreement; and (vii) XLI's
continued ability under the Merger Agreement to
provide information to and negotiate with any other
parties interested in acquiring XLI, subject to the
condition that XLI pay to Oak a termination fee of
$450,000 in order to effectuate the termination of
the Merger Agreement and the abandonment of the
Merger. For additional information on the
background of and reasons for the Merger, see "THE
MERGER -- Background of and Reasons for the Merger;
Recommendation of Board of Directors; and Opinion
of Financial Advisor."
EFFECT OF MERGER ON
OUTSTANDING SECURITIES:.... At the Effective Time of the Merger, each
outstanding share of XLI Common Stock and XLI
Preferred Stock shall by virtue of the Merger be
converted into an amount per share calculated as
set forth in the Merger Agreement. Each XLI Warrant
shall be converted into the right to receive an
amount per share purchasable under the XLI Warrant,
upon exercise of the XLI Warrant by the holder
thereof and delivery of the exercise price
therefor. See "TERMS OF THE MERGER
AGREEMENT -- Effect of Merger on Outstanding
Securities."
CONDITIONS TO THE
MERGER:.................... Consummation of the Merger is subject to the
satisfaction of numerous conditions. See "TERMS OF
THE MERGER AGREEMENT -- Conditions to the Merger."
EFFECTIVE TIME AND DATE:... Effective Time means the Delaware local time at
which the Statutory Certificate of Merger is filed
with and is declared effective by the Secretary of
State of the State of Delaware. Effective Date
means the date on which the Statutory Certificate
of Merger is filed with and is declared effective
by the Secretary of State of the State of Delaware.
EXCHANGE OF CERTIFICATES;
PAYMENT OF MERGER
CASH:.................... Promptly after the Effective Date of the Merger,
Oak shall make available to the Exchange Agent,
$3,675,000 to be made available for payment of
Merger Cash. As soon as practicable after the
Effective Time, transmittal letters will be mailed
to all record holders of XLI Common Stock and XLI
Preferred Stock, on such date for use in exchanging
certificates formerly representing such XLI Common
Stock and XLI Preferred Stock. See "TERMS OF THE
MERGER AGREEMENT -- Exchange of Certificates;
Payment of Merger Cash."
PAYMENT OF CONTINGENT
CASH:...................... At such time as the amount of Contingent Cash is a
positive amount, it shall be delivered by Oak to
the Escrow Agent and held in escrow. Following the
quarter ending March 31, 1999, the Escrow Agent
shall deliver to the Exchange Agent certain funds
held in escrow for distribu-
8
<PAGE> 13
tion to the XLI Stockholders. Thereafter, payments
of Contingent Cash shall be delivered to the
Exchange Agent for distribution. See "TERMS OF THE
MERGER AGREEMENT -- Payment of Contingent Cash."
RISK FACTORS:.............. The ability of XLI to meet the milestones entitling
XLI Stockholders to Contingent Cash is subject to
certain risks and uncertainties, including but not
limited to, successful integration of the
businesses of XLI and Pixel, market acceptance of
XLI products, and competition in the enhanced
resolution printing industry. See "RISK FACTORS."
DISTRIBUTIONS FROM
ESCROW:.................... Distributions shall be made from the escrow by the
Escrow Agent in accordance with the Escrow
Agreement. See "TERMS OF THE MERGER
AGREEMENT -- Distributions from Escrow."
FEDERAL TAX
CONSEQUENCES:.............. As a consequence of the Merger, a holder of XLI
Common Stock or XLI Preferred Stock will recognize
taxable gain or loss for federal income tax
purposes equal to the difference between the
shareholder's adjusted tax basis in his or her
shares and the amount of Merger Cash and Contingent
Cash received for such shares in the Merger. Each
XLI Stockholder should consult his or her tax
advisor with respect to individual tax consequences
of the Merger. See "THE MERGER -- Certain Federal
Income Tax Consequences."
APPRAISAL RIGHTS:.......... Record holders of XLI Common Stock or XLI Preferred
Stock are entitled to seek appraisal of their
shares if the Merger is consummated, provided that
certain procedures are followed. Failure to take
the necessary steps will result in a termination of
Appraisal Rights. See "APPRAISAL RIGHTS."
MARKET PRICES:............. The high and low sale prices of XLI Common Stock as
of January 29, 1998, the date preceding public
announcement of the Merger, were $0.53125 and
$0.46875, respectively. The high and low sale
prices of XLI Preferred Stock as of January 29,
1998 were both $0.65625.
TERMINATION:............... The Merger Agreement may be terminated and the
Merger abandoned at any time prior to the Effective
Date (whether before or after approval of the XLI
Stockholders) under certain circumstances,
including, but not limited to, the receipt by XLI
of a transaction proposal from a third party that
is deemed superior to the Merger proposal.
Termination of the Merger by XLI in such instance
would be conditional upon payment of a termination
fee in the amount of $450,000 to Oak. See "TERMS OF
THE MERGER AGREEMENT -- Termination; Amendment and
Waiver."
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<PAGE> 14
RISK FACTORS
In addition to the other information included in this Proxy Statement, the
following risk factors should be considered carefully in evaluating the proposed
Merger, and, in particular, the likelihood that XLI will meet the financial
milestones entitling XLI Stockholders to Contingent Cash.
Risks Associated with Integration. The integration of the businesses of
XLI and Pixel involves numerous risks, including the difficulty of assimilating
their operations, technologies and products, the risks of entering markets in
which XLI has no or limited direct prior experience and must compete with
competitors having stronger market positions, and the potential loss of key
employees of XLI. The integration of the businesses requires, among other
things, integration of product offerings and coordination of sales, marketing,
research and development. There can be no assurance that such integration will
be accomplished efficiently or successfully.
No Obligation to Fund XLI. During the term of the employment of Anthony
D'Amelio pursuant to the employment agreement to be entered into by and between
Pixel and Mr. D'Amelio, Mr. D'Amelio shall submit to Pixel for the review and
approval of Pixel, prior to any funding of XLI operations by Pixel, an operating
budget for XLI. To the extent that XLI is unable to fund its operations from
cash flows, Pixel may provide such funding but is not so obligated under the
terms of the Merger Agreement. If XLI's cash flows from operations are
insufficient and no cash infusions are forthcoming from Pixel, XLI may be forced
to reduce the scope of its operations which may have a negative effect on XLI's
ability to meet the Contingent Cash financial milestones.
Market Acceptance. XLI's target markets are the printer supplier market
and printer controller OEMs. XLI's first ASIC (Application Specific Integrated
Circuit) product, the XLI-2050 ImageChip, was introduced to the market in 1997.
XLI's success is dependent upon its ability to gain market acceptance of its
products, which will depend upon the ability of XLI to demonstrate the
advantages of its products over other technology offered by other companies. The
failure of XLI to penetrate its target markets would have a material adverse
effect upon its operations and prospects.
No Assurance of Successful Future Product Development; Rapid Technological
Change; Technological Obsolescence. There can be no assurance that any of XLI's
future products will be successfully developed or, if developed, will be
successfully marketed. The printer market is characterized by extensive research
and development and rapid technological change. XLI's future success will depend
in large part on its ability to develop and introduce new products that keep
pace with technological developments, achieve market acceptance and respond to
customer requirements that are constantly evolving. Development by others of new
or improved products, processes or technologies may make XLI's products or
proposed products obsolete or less competitive. Any failure by XLI to anticipate
or respond adequately to technological developments and customer requirements or
any significant delays in product development or introduction could result in a
loss of competitiveness or could materially and adversely affect XLI's operating
results.
No Assurance of Significant Revenues or Operating Profit. To date, XLI has
not recognized any profits from product sales and has experienced significant
operating losses since inception. XLI's independent accountants have expressed
substantial doubt about XLI's ability to continue as a going concern. In light
of XLI's operating losses, there can be no assurance that XLI will generate the
product revenues necessary to entitle XLI Stockholders to Contingent Cash
payments. XLI's ability to achieve significant revenue and profitability is
dependent on successful marketing of its existing technology and further
development of the XLI-2050 ImageChip, of which there can be no assurance.
Competition. XLI's competitors can be expected to continue to improve the
design and performance of their products and to introduce new products with
competitive price-to-performance characteristics. Competitive pressures often
necessitate price reduction which may adversely affect operating results. There
can be no assurance that XLI will be able to compete successfully against
existing competitors or new entrants to the marketplace. Significant decreases
in the cost of 1200 dpi printer engines and system memory may adversely affect
the advantages of XLI's technology.
Post-Closing Adjustment. Pursuant to Section 9 of the Merger Agreement,
Oak shall have thirty (30) days following the Effective Date to conduct an audit
of XLI's closing balance sheet. If such audit establishes that the net deficit
of XLI is greater than $825,000, then any Contingent Cash payable shall be
reduced by the amount of any deficit in excess of $825,000. As of June 30, 1998,
XLI had a net deficit of approximately $1,500,000, which is expected to increase
prior to closing.
10
<PAGE> 15
GENERAL INFORMATION
PURPOSE OF THE SPECIAL MEETING
The purpose of the Special Meeting is to consider and vote upon (i) the
proposed Merger pursuant to which OTI Acquisition will be merged with and into
XLI, and XLI will become a wholly-owned subsidiary of Pixel; (ii) a proposal to
adopt the Merger Agreement; and (iii) the appointment of the Stockholder
Representatives. Pursuant and subject to the terms and conditions of the Merger
Agreement, at the Effective Time of the Merger, each share of XLI Common Stock,
except those XLI Stockholders who validly perfect Appraisal Rights (the
"Dissenting Stockholders"), shall be converted into Merger Cash and the right to
receive Contingent Cash. Each share of XLI Preferred Stock, except those of
Dissenting Stockholders, shall be converted into an amount equal to Merger Cash
multiplied by the number of shares of XLI Common Stock into which each share of
XLI Preferred Stock is convertible, and the right to receive an amount equal to
Contingent Cash multiplied by the number of shares of XLI Common Stock into
which each share of XLI Preferred Stock is convertible. Each XLI Warrant shall
be converted into the right to receive Merger Cash and Contingent Cash, upon
exercise by the holder of the XLI Warrant by the holder thereof, and delivery of
the exercise price therefor. Upon the exercise of any XLI Warrant and delivery
of the exercise price therefor, such XLI Warrant shall be converted into an
amount equal to Merger Cash, multiplied by the number of shares of XLI Common
Stock purchasable under the XLI Warrant immediately before the Effective Time,
and the right to receive an amount equal to Contingent Cash multiplied by the
number of shares of XLI Common Stock purchasable under the XLI Warrant
immediately before the Effective Time. See "TERMS OF THE MERGER
AGREEMENT -- Effect of Merger on Outstanding Securities" and "APPRAISAL RIGHTS."
By virtue of the affirmative vote approving the Merger and the Merger
Agreement, the XLI Stockholders shall irrevocably appoint the Stockholder
Representatives to act as attorneys-in-fact of the XLI Stockholders with
authority to make all decisions on behalf of the XLI Stockholders with respect
to any matters upon which the Stockholder Representatives are authorized to act
under the Merger Agreement, including without limitation, any Contingent Cash
payments. See "TERMS OF THE MERGER AGREEMENT -- Provisions Relating to the
Stockholder Representatives."
AS STATED PREVIOUSLY, THE PAYMENT OF CONTINGENT CASH TO XLI STOCKHOLDERS IS
CONTINGENT UPON XLI'S FUTURE FINANCIAL PERFORMANCE, AND IS NOT GUARANTEED. THE
MERGER CASH PAYMENT OF APPROXIMATELY $0.84 PER SHARE TO THE HOLDERS OF XLI
COMMON STOCK, AND APPROXIMATELY $2.09 PER SHARE TO THE HOLDERS OF XLI PREFERRED
STOCK, IS THE ONLY UNCONDITIONAL CONSIDERATION TO BE RECEIVED BY THE XLI
STOCKHOLDERS.
VOTE REQUIRED AND OWNERSHIP
Only record holders of XLI Common Stock or XLI Preferred Stock on June 15,
1998 (the "Record Date") are entitled to notice of and to vote at the Special
Meeting. The affirmative vote, in person or by proxy, of a majority of the
outstanding XLI Common Stock and a majority of the outstanding XLI Preferred
Stock, each voting as a separate class, is required to adopt the Merger
Agreement.
On the Record Date, 3,574,941 shares of XLI Common Stock were issued and
outstanding and entitled to vote at the Special Meeting. Each share of XLI
Common Stock is entitled to one vote on whether to adopt the Merger Agreement.
In addition, 315,238 shares of XLI Preferred Stock were issued and outstanding
on the Record Date. Each share of XLI Preferred Stock is entitled to one vote
per share with respect to the proposed Merger.
PROXIES
The enclosed proxy is being solicited by XLI's Board of Directors to be
voted at the Special Meeting. No such director will receive additional
compensation for such solicitation. In addition, XLI will request banks,
brokers, and other custodians, nominees, and fiduciaries to forward proxy
materials to the beneficial owners of XLI Common Stock. XLI will reimburse those
firms for their reasonable expenses in forwarding proxy materials and obtaining
voting instructions. Shares represented by each properly executed proxy received
by
11
<PAGE> 16
XLI will be voted at the Special Meeting as directed by the shareholder on the
proxy, and will be voted FOR adoption of the Merger Agreement if no direction is
made. Any XLI Stockholder who executes a proxy may revoke it by giving written
notice of revocation or a duly executed proxy bearing a later date than the
proxy being revoked to the Secretary of XLI, at any time before such proxy is
voted, or by appearing at the Special Meeting and voting in person.
The Party Stockholders have executed and delivered to Oak irrevocable
proxies appointing the directors on the board of directors of Oak as their sole
and exclusive proxies, and authorizing said directors of Oak to vote their
shares in favor of the approval of the Merger, the Merger Agreement, and the
appointment of the Stockholder Representatives.
OAK, PIXEL AND OTI ACQUISITION INFORMATION
Oak, Pixel and OTI Acquisition provided all information contained in this
Proxy Statement concerning Oak, Pixel, OTI Acquisition, and their subsidiaries.
12
<PAGE> 17
THE MERGER
INTRODUCTION
The following discussion includes summary information about the Merger
Agreement, a copy of which is attached to this Proxy Statement as Appendix A,
and makes reference to the escrow agreement (the "Escrow Agreement") and the
exchange agent agreement (the "Exchange Agent Agreement"), forms of which are
exhibits to the Merger Agreement and are attached to this Proxy Statement as
Appendix A. The following information summarizing the terms of the Merger
Agreement is expressly qualified by reference to the full Merger Agreement,
Escrow Agreement and Exchange Agent Agreement, set forth in Appendix A. Defined
terms used herein but not otherwise defined herein shall have the meanings
assigned to them in the Merger Agreement. The following summary is not a
substitute for a careful reading of the Merger Agreement.
PARTIES TO THE MERGER
XLI. XLI is a Delaware corporation which was founded in June, 1989 to
develop, manufacture and market a proprietary technology which improves the
quality of output from laser printers. XLI provides high technology products for
printers, digital copiers, scanners, multi-function devices and fax systems.
The executive offices of XLI are located at 101 Billerica Avenue, 5
Billerica Park, North Billerica, MA 01862, and its telephone number is (978)
670-5999.
OAK. Oak is a Delaware corporation which designs, develops and markets
high-performance integrated semiconductors and related software solutions to
original equipment manufacturers worldwide that serve the optical storage,
consumer electronics and digital office equipment markets. Oak has wholly-owned
subsidiaries in Japan (Oak Technology K.K.), Taiwan (Oak Technology Taiwan) and
Andover, Massachusetts (Pixel Magic, Inc.).
The executive offices of Oak are located at 139 Kifer Court, Sunnyvale, CA
94086, and its telephone number is (408) 737-0888.
PIXEL. Pixel is a Massachusetts corporation and wholly-owned subsidiary of
Oak which provides advanced image processing chip technology to original
equipment manufacturers (OEMs) and technology partners in the digital office
equipment market worldwide.
The executive offices of Pixel are located at 300 Brickstone Square,
Andover, MA 01810, and its telephone number is (978) 470-8830.
OTI ACQUISITION. OTI Acquisition is a wholly-owned subsidiary of Pixel
formed for the purposes of effecting the Merger. As the surviving corporation in
the Merger, XLI will become a wholly-owned subsidiary of Pixel.
PARTY STOCKHOLDERS. The Party Stockholders include Anthony D. D'Amelio,
Daniel J. Allen, Adam L. Carley, Joseph L. Katz, Roger F. Salava, James L.
Salerno and Vincent J. Spoto. Anthony D. D'Amelio is a founder of XLI and is the
Chairman of the Board, President and Chief Executive Officer. Daniel J. Allen is
the Vice President of Research and Development of XLI. Adam L. Carley is the
Chief Scientist, a Director and a founder of XLI. Joseph L. Katz is a Director
and the Vice President of Corporate Development of XLI. Roger F. Salava is the
Director of Strategic and Business Planning of XLI. James L. Salerno is the
Chief Financial Officer, Treasurer and Secretary of XLI. Vincent J. Spoto is a
Director and founder of XLI. The Party Stockholders have delivered to Oak
irrevocable proxies to vote in favor of the approval of the Merger, the adoption
of the Merger Agreement, and the appointment of the Stockholder Representatives.
BACKGROUND OF AND REASONS FOR THE MERGER
On July 22, 1997, XLI received a telephone call from Peter Besen at Pixel
indicating a conditional interest in a possible merger between Pixel and XLI in
which shares of XLI Common Stock would be exchanged for cash. On November 5,
1997, XLI engaged Montgomery Capital Corporation ("Montgomery") to act as its
exclusive financial advisor to assist XLI in evaluating the Pixel proposal and
to advise XLI with
13
<PAGE> 18
respect to possible alternatives to maximize shareholder value, including
remaining independent, effecting a corporate restructuring, initiating
discussions with others, or evaluating other plans of business reorganization.
From July until October 15, 1997, when Pixel and XLI entered into the letter of
intent, XLI had several discussions and meetings with representatives of Pixel.
At a meeting on January 21, 1998, XLI's Board approved the Merger Agreement,
having determined that the acquisition of XLI pursuant to the Merger Agreement
was fair to and in the best interests of XLI and its shareholders. In making
such determination the Board considered many factors, including the factors
discussed below with respect to the Merger Agreement. XLI's Board of Directors'
determination that the acquisition of XLI pursuant to the Merger Agreement is
fair to and in the best interests of XLI and its shareholders was based upon
consideration of many factors, including: (i) XLI's business, financial
condition, and future prospects and the current conditions of the industry in
which it operates; (ii) the alternatives available to XLI to maximize
shareholder value; (iii) the price being offered to XLI's shareholders pursuant
to the Merger Agreement; (iv) the potential interest of other parties who might
be interested in a possible transaction with XLI; (v) Montgomery's opinion,
based upon certain assumptions described in its opinion that the consideration
proposed to be paid to XLI Stockholders pursuant to the Merger Agreement is fair
to the shareholders from a financial point of view; (vi) the terms and
conditions of the Merger Agreement; and (vii) XLI's continued ability under the
Merger Agreement to provide information to and negotiate with any other parties
interested in acquiring XLI, subject to the condition that XLI pay to Oak a
termination fee of $450,000 in order to effectuate the termination of the Merger
Agreement and the abandonment of the Merger. For additional information on the
background of and reasons for the Merger, see "THE MERGER -- Background of and
Reasons for the Merger; Recommendation of Board of Directors; and Opinion of
Financial Advisor."
RECOMMENDATION OF BOARD OF DIRECTORS
THE XLI BOARD OF DIRECTORS HAS CONCLUDED THAT THE MERGER IS IN THE BEST
INTERESTS OF THE XLI STOCKHOLDERS AND RECOMMENDS THAT XLI STOCKHOLDERS VOTE IN
FAVOR OF THE APPROVAL OF THE MERGER, THE ADOPTION OF THE MERGER AGREEMENT, AND
THE APPOINTMENT OF THE STOCKHOLDER REPRESENTATIVES AT THE SPECIAL MEETING.
INTEREST OF CERTAIN PERSONS IN THE MERGER
Anthony D. D'Amelio ("D'Amelio") is the Chief Executive Officer and a
Director of XLI and owns 17.7% of XLI Common Stock. Under the terms and
conditions set forth in the Merger Agreement, it is a condition to the parties'
obligations under the Merger Agreement that D'Amelio and Pixel shall have
executed an employment agreement (the "D'Amelio Employment Agreement") pursuant
to which D'Amelio shall be employed by Pixel to perform services in the capacity
of General Manager of XLI, until the earlier of December 31, 2000 or payment in
full by Oak of the amount of Contingent Cash due to the XLI Stockholders.
D'Amelio has agreed to maintain his current base salary of $95,000 per year
without benefits, salary increases or incentive pay, and without stock options
or any other compensation over and above the base salary until the XLI
Stockholders begin receiving the Contingent Cash payment. At that time, D'Amelio
shall be eligible for salary reviews and other benefits generally available to
executives of Pixel.
Adam L. Carley ("Carley"), a Director of XLI and owner of 2.9% of XLI
Common Stock, and Leonard Weisberg, a former director of XLI, are the
shareholders of Carley Corporation, a corporation which is a party to an
Agreement with XLI dated January 15, 1990, as amended by the First, Second,
Third, Fourth and Fifth Agreement Amendments thereto. Contemporaneously with the
execution of the Merger Agreement, Pixel and Carley Corporation entered into a
Technology License and Assignment Agreement (the "License Agreement") pursuant
to which Carley Corporation will grant to Pixel exclusive and non-exclusive
rights under the rights of Carley (the "Carley Rights") to certain technology
owned, developed or acquired by Carley (the "Carley Technology"). Under the
terms and conditions of the License Agreement, Pixel shall pay Carley $500,000
upon effectiveness of the Merger, a further payment of $217,000 for amounts due
and owing to Carley under the prior Agreement with XLI, and royalties of 11% of
net revenues received by Pixel for sale of products incorporating or relating to
the Carley Rights and Carley Technology.
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<PAGE> 19
Daniel J. Allen ("Allen") owns 6.0% of XLI Common Stock. Under the terms
and conditions set forth in the Merger Agreement, it is a condition to the
parties' obligations under the Merger Agreement that Allen and Pixel shall have
executed an employment agreement (the "Allen Employment Agreement") pursuant to
which Allen shall be employed by Pixel to perform services in the capacity of
Director, Research and Development of XLI, until the earlier of December 31,
2000 or payment in full by Oak of the amount of Contingent Cash due to the XLI
Stockholders. Allen has agreed to an initial salary of $100,000 per year and
shall be entitled to and shall receive annual merit reviews, benefits and
conditions of employment which are available generally to employees and
executives of Pixel.
PAYMENT OF MERGER CASH AND CONTINGENT CASH BY OAK
It is anticipated that Oak will satisfy its Merger Cash and any Contingent
Cash payment obligations from existing cash and cash equivalents, and, if
necessary, from cash flow from operations. Oak has paid no cash dividends on its
common stock since its incorporation and anticipates that for the foreseeable
future it will continue to retain any earnings for use in its business. In
addition, Oak's bank arrangements currently prohibit Oak from issuing cash
dividends. The selected financial data for Oak and its subsidiaries for each of
the last five fiscal years and for the nine months ended March 31, 1998 is set
forth below.
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
MARCH 31, YEAR ENDED JUNE 30,
----------- --------------------------------------------------
1998 1997 1996 1995 1994 1993
----------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues......................... $128,196 $167,395 $247,984 $110,982 $42,562 $30,058
Gross profit......................... 63,063 94,181 109,485 54,616 16,572 4,524
Operating income (loss).............. 2,927 32,848 57,147 29,440 4,200 (5,324)
Net income (loss).................... $ 10,791 $ 23,719 $ 37,133 $ 21,222 $ 3,823 $(5,425)
Net income (loss) per diluted
share.............................. $ 0.25 $ 0.55 $ 0.87 $ 0.67 $ 0.15 $ (0.55)
Shares used in per share
calculations....................... 42,644 42,757 42,614 31,474 25,756 9,940
</TABLE>
<TABLE>
<CAPTION>
AS OF
MARCH 31, AS OF JUNE 30,
--------- --------------------------------------------------
1998 1997 1996 1995 1994 1993
--------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments......................... $129,262 $145,269 $113,284 $150,943 $ 3,738 $ 2,606
Working capital....................... 158,322 168,168 134,686 156,258 7,723 1,224
Total assets.......................... 277,879 287,595 256,308 193,953 27,413 15,864
Long-term debt, excluding current
portion............................. 49 2,496 2,858 2,227 1,950 2,106
Total stockholders' equity............ $250,619 $238,697 $210,827 $162,643 $11,736 $ 3,449
</TABLE>
ACCOUNTING TREATMENT OF THE MERGER
It is anticipated that the Merger will be accounted for as a purchase
transaction.
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<PAGE> 20
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
Cash payments to XLI Stockholders upon consummation of the Merger and
pursuant to the exercise of Appraisal Rights, if applicable, will be taxable
transactions to such shareholders for federal income tax purposes and may also
be taxable transactions under applicable state, local, and foreign tax laws. The
federal income tax consequences, under currently applicable law, to a
stockholder who is a citizen or resident of the United States will generally be
as follows: a stockholder will recognize gain or loss on the cash paid to the
stockholder pursuant to the Merger Agreement equal to the difference, if any,
between (i) the amount of cash received and (ii) the tax basis of the shares
converted. However, due to the contingent payments, the transaction is eligible
for the installment method of tax treatment. Therefore, the calculation of
immediate gain or loss must be distinguished from the calculation of deferred
gain or loss. The tax basis of the shares that may be used to calculate
immediate gain or loss may be all or less than a Stockholder's total basis, and
the total potential gain may be calculated using the $15,000,000 maximum. In
addition, if the amount of the aggregate installment payments due at the close
of a taxable year exceeds $5,000,000, Section 453A(c) of the Internal Revenue
Code imposes a deferred interest charge on the amount of the tax liability that
is deferred by operation of the installment method. The additional charge is
payable annually so long as the installment payment is unsatisfied and is based
upon the applicable interest rate for underpayments of tax. In view of the
individual nature of tax consequences (particularly as applicable to
shareholders who acquired their XLI Common Stock by exercising stock options or
otherwise as compensation), and uncertainties as to the computations when
contingent payments are involved, stockholders are urged to consult their own
tax advisors with respect to the Merger's specific tax consequences to them,
including the applicability and effect of federal, state, local, and foreign tax
laws.
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<PAGE> 21
TERMS OF THE MERGER AGREEMENT
EFFECTIVE DATE AND TIME OF THE MERGER
The Merger Agreement provides that upon compliance with all applicable laws
and upon receipt of any required approval of the outstanding shares of each
party, a copy of the statutory Certificate of Merger as required by Section
251(c) of the Delaware General Corporation Law shall be filed in the office of
the Secretary of State of the State of Delaware. The Merger shall become
effective when the statutory Certificate of Merger is filed with and declared
effective by the Secretary of State of the State of Delaware. The Merger
Agreement provides that the Effective Time means the Delaware local time at
which the statutory Certificate of Merger is filed with and declared effective
by the Secretary of State of the State of Delaware.
EFFECT OF MERGER ON OUTSTANDING SECURITIES
Effect of Merger on XLI Common Stock and XLI Preferred Stock
Pursuant and subject to the terms and conditions of the Merger Agreement,
at the Effective Time of the Merger, each share of XLI Common Stock shall be
converted into Merger Cash and the right to receive Contingent Cash. Each share
of XLI Preferred Stock shall be converted into an amount equal to Merger Cash
multiplied by the number of shares of XLI Common Stock into which each share of
XLI Preferred Stock is convertible, and the right to receive an amount equal to
Contingent Cash multiplied by the number of shares of XLI Common Stock into
which each share of XLI Preferred Stock is convertible.
Effect of Merger on XLI Warrants
Pursuant to the terms of the Merger Agreement, the term "XLI Warrants" is
defined as any IPO Warrant, Representative's Warrant, Class A Warrant,
Underwriter's Warrant, Private 1995 Warrant or Private 1996 Warrant that shall
not have been exercised prior to the Effective Time and by its terms does not
terminate at or prior to the Effective Time. As of the date of this Proxy
Statement, all of the warrants falling within that definition, with the
exception of the Class A Warrants and the Underwriter's Warrant, have expired or
been exercised.
Each XLI Warrant shall be converted into the right to receive Merger Cash
and Contingent Cash upon exercise of the XLI Warrant by the holder thereof and
delivery to the Exchange Agent of the exercise price therefor. Upon the exercise
of any XLI Warrant and delivery to the Exchange Agent of the exercise price,
such XLI Warrant shall be converted into an amount equal to Merger Cash
multiplied by the number of shares of XLI Common Stock (on an as converted basis
in the case of any exercise of an XLI Warrant for shares of XLI Preferred Stock)
for which the exercise price has been paid to the Exchange Agent under the XLI
Warrant, and the right to receive an amount equal to Contingent Cash multiplied
by the number of shares of XLI Common Stock (on an as converted basis in the
case of any exercise of an XLI Warrant for shares of XLI Preferred Stock) for
which the exercise price has been paid to the Exchange Agent under such XLI
Warrant.
No XLI Warrant shall be exercisable for shares of the capital stock of XLI
or of Oak or any Oak subsidiary subsequent to the Effective Time, and no
adjustments in the number of shares of XLI Stock originally purchasable under
the XLI Warrant or in the exercise price of such XLI Warrant shall be made
subsequent to the Effective Time. Notwithstanding anything to the contrary
contained in the Merger Agreement, any XLI Warrant that is not exercised in
accordance with the provisions of the Merger Agreement, and prior to the date of
termination or other expiration of such XLI Warrant, shall terminate and be of
no further force and effect.
Effect of Merger on XLI Common Stock Equivalents
Any warrant (other than an XLI Warrant), option, convertible note,
convertible security or other right to acquire shares of XLI Common Stock that
is not exercised immediately prior to or in connection with the Merger shall
terminate and be of no further force and effect, effective as of the Effective
Time.
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<PAGE> 22
Calculation of Merger Cash
The amount of Merger Cash shall be an amount calculated by dividing
$3,675,000 by the sum of (a) the total number of shares of XLI Common Stock
outstanding at the Effective Time; (b) the total number of shares of XLI Common
Stock into which the issued and outstanding shares of XLI Preferred Stock are
convertible at the Effective Time; and (c) the total number of shares of the XLI
Common Stock purchasable under any Private Warrants outstanding at the Effective
Time. In the event that the conversion of XLI Preferred Stock results in
fractional shares, the converting stockholders of such fractional shares will be
paid a proportionate amount of cash for such fractional shares. See Section
2.4.3 of the Merger Agreement contained in Appendix A for a more complete
description of the method by which the amount of Merger Cash will be computed.
Calculation of Contingent Cash
The amount of Contingent Cash shall be an amount calculated by dividing the
Base Amount (determined as set forth below) less (a) $3,675,000 and (b) any
set-off amounts due to Oak or Pixel under the terms of the Merger Agreement, by
the sum of (i) the total number of shares of XLI Common Stock issued and
outstanding at the Effective Time, plus the total number of shares of XLI Common
Stock issued and outstanding as a result of the exercise of XLI Warrants after
the Effective Time (including any shares of XLI Common Stock into which shares
of XLI Preferred Stock were converted in connection with any such XLI Warrant
exercise); (ii) the total number of shares of XLI Common Stock into which the
issued and outstanding shares of XLI Preferred Stock are convertible at the
Effective Time; and (iii) the total number of shares of XLI Common Stock
(including any shares of XLI Common Stock into which shares of XLI Preferred
Stock, that are issuable upon exercise of the Underwriter's Warrant, are
convertible) purchasable under the XLI Warrants outstanding at the Effective
Time, less the total number of shares of XLI Common Stock covered by XLI
Warrants exercised after the Effective Time (including any shares of XLI Common
Stock into which shares of XLI Preferred Stock were converted in connection with
any such XLI Warrant exercise), and less the total number of shares of XLI
Common Stock covered by XLI Warrants that lapsed unexercised after the Effective
Time and prior to any calculation pursuant to Section 2.6.1 of the Merger
Agreement.
The Base Amount will be determined in the manner described in Section 2.4.5
of the Merger Agreement. In general, until such time as the Base Amount in the
aggregate equals $3,675,000 (the "Threshold Amount"), the Base Amount shall be
equal to the sum of: (i) 56% of gross revenue from the sale or license of XLI
products, less any product returns and less any delivery costs and sales or
transfer taxes incurred but not otherwise payable by an End User or OEM, plus
gross revenue from nonrecurring engineering fees, calibration fees and fees for
any other services performed by XLI ("Gross XLI Product Revenue"); and (ii)
$1.00 for each Digital Modular Feature IC sold by Oak or Pixel or their related
parties, agents or distributors to an end user or OEM (net of product returns);
and (iii) $2.00 for each Multiple Feature IC sold by Oak or Pixel or their
related parties, agents or distributors to an end user or OEM (net of product
returns). If Oak or Pixel sells XLI Products bundled with other products, for
purposes of calculating Base Amount, Base Amount, until such time as Base Amount
is equal to the Threshold Amount, shall include fifty-six percent (56%) of an
amount equal to Pixel's standard sales price for the XLI product included in the
bundled product at similar volumes.
At such time as Base Amount in the aggregate is equal to the Threshold
Amount, then Base Amount thereafter shall be equal to the Threshold Amount plus
the sum of (i) thirty-two percent (32%) of Gross XLI Product Revenue; and (ii)
One Dollar ($1.00) for each Digital Modulator Feature IC sold by Oak or Pixel or
their related parties, agents or distributors to an end user or an OEM; and
(iii) Two Dollars ($2.00) for each Multiple Feature IC sold by Oak or Pixel or
their Related Parties, agents or distributors to an end user or an OEM; in the
case of each of clauses (ii) and (iii) above, net of product returns. If Oak or
Pixel sells XLI Products bundled with other products, for purposes of
calculating Base Amount, at such time as Base Amount is equal to the Threshold
Amount, then Base Amount thereafter shall include thirty-two percent (32%) of an
amount equal to Pixel's standard sales price for the XLI product included in the
bundled product at similar volumes. Gross XLI Product Revenue shall be as
determined for financial reporting purposes using generally
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accepted accounting principles, consistently applied. Base Amount shall be
calculated for each calendar quarter during the period commencing January 1,
1998 and ending December 31, 2000. The maximum aggregate amount of Base Amount
shall be $15,000,000. At such time as Base Amount in the amount of $15,000,000
is accrued, no further Contingent Cash shall be accrued or payable.
Based upon the formulas for calculating Merger Cash and Contingent Cash,
the minimum consideration to be received by XLI Stockholders is $3,675,000 and
the maximum is $15,000,000. If XLI does not generate sufficient revenues, the
Base Amount will not exceed the Threshold Amount, and there will be no
Contingent Cash paid to the XLI Stockholders. In that event, the aggregate
consideration that will be received by the XLI Stockholders is the Merger Cash
payment of $3,675,000, or approximately $.84 per share of XLI Common Stock, and
approximately $2.09 per share of XLI Preferred Stock. If XLI generates
sufficient product revenues to meet the financial milestones, holders of XLI
Common Stock will receive a maximum of approximately $2.59 per share in
Contingent Cash, and holders of XLI Preferred Stock will receive a maximum of
approximately $6.37 per share in Contingent Cash.
The amount of Contingent Cash shall be subject to adjustment under certain
circumstances set forth in Sections 9 and 10 of the Merger Agreement. In
general, the amount of Contingent Cash shall be reduced by the amount, if any,
by which the net deficit of XLI on its Closing Balance Sheet is greater than
Eight Hundred Twenty-Five Thousand Dollars. See "TERMS OF THE MERGER
AGREEMENT -- Post Closing Adjustment". The amount of Contingent Cash will also
be reduced to the extent that XLI becomes obligated to indemnify Oak and Pixel
under the terms and conditions of the Merger Agreement. In such event, Oak and
Pixel shall be entitled solely to a right of set-off against otherwise payable
Contingent Cash payments. See "TERMS OF THE MERGER AGREEMENT -- Non-Recourse
Indemnification."
At the Effective Time, each then outstanding share of OTI Acquisition Stock
shall by virtue of the Merger be converted into one share of XLI Common Stock.
EXCHANGE OF CERTIFICATES; PAYMENT OF MERGER CASH
Oak has selected State Street Bank and Trust Company to act as the exchange
agent (the "Exchange Agent") in the Merger.
Promptly after the Effective Date of the Merger (but in no event later than
one business day thereafter), Oak shall make available to the Exchange Agent for
exchange in accordance with the Merger Agreement, through such reasonable
procedures as Oak may adopt, $3,675,000, less amounts held in reserve as set
forth below, to be made available for payment of Merger Cash in accordance with
Section 2.5 of the Merger Agreement.
Exchange of Merger Cash for XLI Stock
The Merger Agreement provides that an amount equal to Merger Cash
multiplied by the sum of (i) the total number of shares of XLI Common Stock
outstanding at the Effective Time, plus (ii) the total number of shares of XLI
Common Stock into which outstanding shares of XLI Preferred Stock are
convertible at the Effective Time, shall be made available in exchange for
outstanding shares of XLI Stock in accordance with the terms of the Merger
Agreement. Oak shall deduct from such amount, an amount equal to Merger Cash
multiplied by the total number of shares of XLI Stock (on an as converted basis)
held by Dissenting Stockholders, such amount to be retained by Oak. Any
Dissenting Stockholder that does not perfect its rights to dissent shall be paid
its allowable Merger Cash directly by Oak.
Escrow of Merger Cash for Private Warrants
The Merger Agreement further provides that an amount equal to Merger Cash
multiplied by the total number of shares of XLI Common Stock purchasable under
the Private Warrants outstanding at the Effective Time shall be delivered by Oak
to State Street Bank and Trust Company, the escrow agent (the "Escrow Agent"),
to be held in escrow by the Escrow Agent and disbursed by the Escrow Agent in
accordance with Section 2.7 of the Merger Agreement and the terms of the Escrow
Agreement. Pursuant to the terms and
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conditions of the Escrow Agreement, Oak shall deliver to the Escrow Agent
amounts equal to Merger Cash and any Contingent Cash, which amounts together
with interest earned thereon (collectively, the "Escrowed Funds"), are to be
held by the Escrow Agent and released in accordance with the provisions of the
Escrow Agreement. The Escrow Agent shall open an account and, pending
disposition of the Escrowed Funds in accordance with the Escrow Agreement, the
Escrow Agent shall invest the Escrowed Funds as the Stockholder Representatives
shall direct. The Escrowed Funds may, at the direction of the Stockholder
Representatives, be invested by the Escrow Agent in certain investment vehicles
such as U.S. backed obligations, certificates of deposit and money market
accounts, as set forth in the Escrow Agreement. Any action required to be taken,
or notice or instructions required to be given under the Escrow Agreement may be
taken or given by a majority of the Stockholder Representatives. A form of the
Escrow Agreement is attached to this Proxy Statement and is a part of Appendix
A.
Exchange Procedures
As soon as practicable after the Effective Time of the Merger, the Exchange
Agent shall mail to each holder of record of a certificate or certificates which
immediately prior to the Effective Time of the Merger represented outstanding
shares of XLI Common Stock and XLI Preferred Stock (the "Certificates") whose
shares are being converted into Merger Cash and Contingent Cash, (i) a letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent and shall be in such form and have such other
provisions as Oak may reasonably specify) and (ii) instructions for use in
effecting the surrender of the Certificates in exchange for Merger Cash and
Contingent Cash. Upon surrender of a Certificate for cancellation to the
Exchange Agent or to such other agent or agents as may be appointed by Oak,
together with such letter of transmittal, duly executed, the holder of such
Certificate shall be entitled to receive in exchange therefor the Merger Cash
and Contingent Cash which the holder of XLI Stock is entitled pursuant to
Section 2.4 of the Merger Agreement and are represented by the Certificates so
surrendered. The Certificates so surrendered shall forthwith be canceled. In the
event of a transfer of ownership of XLI Common Stock or XLI Preferred Stock
which is not registered in the transfer records of XLI, the appropriate amount
of Merger Cash and Contingent Cash may be delivered to a transferee if the
Certificate representing such XLI Common Stock or XLI Preferred Stock is
presented to the Exchange Agent and accompanied by all documents required to
evidence and effect such transfer and to evidence that any applicable stock
transfer taxes have been paid. Until surrendered as contemplated, each
Certificate shall be deemed at any time after the Effective Time of the Merger
to represent the right to receive upon such surrender the amount of Merger Cash
and Contingent Cash as provided under the Merger Agreement and the provisions of
the Delaware General Corporation Law.
All XLI Common Stock and XLI Preferred Stock delivered upon the surrender
for exchange into Merger Cash and Contingent Cash in accordance with the terms
of the Merger Agreement shall be deemed to have been delivered in full
satisfaction of all rights pertaining to such shares of XLI Common Stock and XLI
Preferred Stock. There shall be no further registration of transfers on the
stock transfer books of XLI of the shares of XLI Common Stock and XLI Preferred
Stock which were outstanding immediately prior to the Effective Time of the
Merger. If, after the Effective Time of the Merger, Certificates are presented
to XLI for any reason, they shall be canceled and exchanged as provided in the
Merger Agreement.
PAYMENT OF CONTINGENT CASH
The Merger Agreement provides that within forty-five (45) days after the
end of each calendar quarter commencing with the quarter ending March 31, 1998
and ending with the quarter ending December 31, 2000, Pixel shall prepare and
deliver to the Stockholder Representatives a certificate calculating the Base
Amount as set forth in Section 2.4.5 of the Merger Agreement and the amount of
Contingent Cash as set forth in Section 2.4.4 of the Merger Agreement. Subject
to Sections 2.4 and 2.6 of the Merger Agreement, at such time as the amount of
Contingent Cash is a positive amount, it shall be delivered by Oak to either the
Escrow Agent or the Exchange Agent as provided in the Merger Agreement.
The amount, if any, of Contingent Cash payable by Oak for any calendar
quarter ending prior to June 30, 1999 shall be delivered by Oak to the Escrow
Agent as provided in Section 2.6.1.2 of the Merger Agreement.
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Commencing with the calendar quarter ending June 30, 1999, until such time as
the Escrow Agreement shall terminate, the amount, if any, of Contingent Cash
payable by Oak for a calendar quarter shall be delivered by Oak to the Exchange
Agent in accordance with the terms of the Merger Agreement, less any amount
required to be delivered by Oak to the Escrow Agent in connection with the
escrow of Contingent Cash for XLI Warrants, as set forth below, and less any
amount representing shares formerly held by Dissenting Stockholders, which
amount shall be retained by Oak. Quarterly amounts, if any, payable by Oak to
the Exchange Agent pursuant to Section 2.6.1.1. of the Merger Agreement shall be
delivered by Oak to the Exchange Agent at least five (5) business days prior to
any distribution required to be made to the XLI Stockholders by the Exchange
Agent under Section 2.6.1.1., together with written instructions regarding
calculation of the amount payable by Oak thereunder for any calendar quarter.
Any such amount delivered to the Exchange Agent by Oak thereunder or to the
Exchange Agent by the Escrow Agent pursuant to Section 2.7 of the Merger
Agreement and the terms of the Escrow Agreement, shall be allocated by the
Exchange Agent pro rata to (a) all outstanding shares of XLI Common Stock held
by XLI Stockholders at the Effective Time (excluding any shares of XLI Common
Stock into which shares of XLI Preferred Stock were convertible at the Effective
Time), (b) all shares of XLI Preferred Stock held by XLI Stockholders at the
Effective Time, on an as converted basis, and (c) all shares of XLI Common Stock
(including shares of XLI Common Stock into which shares of XLI Preferred Stock,
that were issued upon exercise of the Underwriter's Warrant, were converted),
attributable to XLI Warrants exercised after the Effective Time and prior to the
end of the calendar quarter for which such payment is being made. Any such
amount due to the XLI Stockholders as described in the immediately preceding
sentence, including, without limitation, the Initial Distribution Amount (set
forth below), shall be deposited by the Exchange Agent in the United States
mail, not later than forty-five (45) days after the close of the calendar
quarter to which the distribution relates, first class postage prepaid, to the
addresses as set forth in the stock and warrants records of XLI, provided that
the amount allocated to shares formerly held by Dissenting Stockholders shall be
paid to Oak.
The Stockholder Representatives shall deliver, or cause to be delivered, to
the Exchange Agent and the Escrow Agent, not later than one business day
following the Effective Date, and from time to time thereafter, such information
as is requested by the Exchange Agent or the Escrow Agent to effect such
distributions, including, without limitation, that information which XLI is
delivering to Oak pursuant to Section 7.2.11 of the Merger Agreement. Any
Dissenting Stockholder that does not perfect its rights to dissent shall be paid
its allowable Contingent Cash directly by Oak.
ESCROW OF CONTINGENT CASH
Commencing with the calendar quarter ending March 31, 1998 and terminating
with the calendar quarter ending March 31, 1999, the amount, if any, of
Contingent Cash payable by Oak for a calendar quarter shall be delivered by Oak
to the Escrow Agent. Thereafter, until such time as the Escrow Agreement
terminates in accordance with its terms, Oak shall deliver to the Escrow Agent
an amount equal to the amount of Contingent Cash due by Oak for any calendar
quarter, multiplied by the total number of shares of XLI Common Stock
purchasable under the Private Warrants outstanding at the end of such calendar
quarter. The Contingent Cash amount for any calendar quarter shall be delivered
by Oak to the Escrow Agent within forty-five (45) days after the end of such
calendar quarter, provided, however, that the Contingent Cash amount, if any,
due for the calendar quarter ended March 31, 1999 shall be delivered by Oak to
the Escrow Agent within thirty (30) days after the end of such calendar quarter.
All such Contingent Cash amounts shall be held in escrow by the Escrow Agent and
disbursed by the Escrow Agent in accordance with Section 2.7 of the Merger
Agreement and the terms of the Escrow Agreement. Written instructions regarding
calculation of the amount, if any, payable by Oak for any calendar quarter shall
be delivered to the Escrow Agent concurrent with payment to the Escrow Agent of
any amount due. As soon as practicable after the Effective Time of the Merger,
the Exchange Agent shall mail to each holder of an XLI Warrant instructions for
use in effecting the exercise of any XLI Warrant.
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SET-OFF AND INDEMNITY HOLD BACK
The Merger Agreement provides that in the event of any Contingent Cash
Adjustment, the Contingent Cash payment shall be reduced by the amount of the
Contingent Cash Adjustment until such time as the amount of the Contingent Cash
Adjustment shall have been satisfied in full. See "TERMS OF THE MERGER
AGREEMENT -- Post-Closing Adjustment."
The Merger Agreement also provides that in the event Oak or Pixel has made
an indemnity claim under Section 10 of the Merger Agreement which has not been
liquidated or has not been agreed to by the Stockholder Representatives, then
Oak shall hold back from amounts otherwise payable as Contingent Cash the amount
of such claim as specified in the notice to the Stockholder Representatives
delivered by Oak or Pixel pursuant to Section 10 of the Merger Agreement until
such time as the Oak or Pixel claim is resolved. Immediately after such
resolution, any amounts payable by Oak shall be paid by Oak within thirty (30)
days of such resolution together with interest at the rate of eight percent (8%)
per annum from the date payment was otherwise due. See "TERMS OF THE MERGER
AGREEMENT -- Non-Recourse Indemnification."
AUDIT RIGHTS
Under the terms and conditions set forth in the Merger Agreement, the
Stockholder Representatives shall have the right, at their sole cost and
expense, to have an independent certified public accountant conduct during
normal business hours and not more frequently than quarterly, an audit of the
calculation of Base Amount and Contingent Cash. If such amounts are found to be
different than those reported by Pixel, any additional Contingent Cash shall be
payable, together with an eight percent (8%) per annum late payment charge,
within thirty (30) days of notice of such discrepancy from the Stockholder
Representatives. If the discrepancy in Contingent Cash to date reported by the
Stockholder Representatives is greater than five percent (5%) of the Contingent
Cash reported to date by Pixel, then Oak will pay the reasonable expenses
associated with such audit.
DISTRIBUTIONS FROM ESCROW
The Merger Agreement provides that distributions from escrow shall be made
by the Escrow Agent in accordance with the Escrow Agreement.
Initial Escrow Distribution
Not later than fifteen (15) calendar days following delivery to the Escrow
Agent of the amount, if any, of Contingent Cash payable by Oak for the calendar
quarter ended March 31, 1999, the Escrow Agent shall deliver to the Exchange
Agent, for distribution to the XLI Stockholders, all funds, if any, held in
escrow by the Escrow Agent, less the sum of (i) Merger Cash paid into escrow by
Oak pursuant to Section 2.5.2.2 of the Merger Agreement with respect to any
Private Warrant that has not been exercised and has not otherwise terminated
("Unexpired Private Warrant"), (ii) Contingent Cash paid into escrow by Oak
pursuant to Section 2.6.1.2 of the Merger Agreement with respect to any
Unexpired Private Warrant, and (iii) the net exercise price, if any, paid into
escrow with respect to any XLI Warrant exercised after the Effective Time (the
"Initial Distribution Amount"). The Initial Distribution Amount shall be
allocated pro rata to all shares of XLI Stock outstanding prior to March 31,
1999, including shares of XLI Stock attributable to XLI Warrant exercises
occurring prior to March 31, 1999, subject to and in accordance with the
provisions of Section 2.6.1.1 of the Merger Agreement. The net exercise price,
if any, paid into escrow with respect to any XLI Warrant exercised after the
Effective Time, to the extent not previously delivered to Oak, shall be
delivered to Oak, subject to and in accordance with Section 2.7.4 of the Merger
Agreement.
Upon Exercise of XLI Warrants
Upon the exercise of any XLI Warrant in accordance with the provisions of
the Merger Agreement and the Escrow Agreement, and delivery to the Exchange
Agent of the exercise price per share therefor, such XLI Warrant shall be
converted into Merger Cash and a right to receive Contingent Cash, subject to
and in accordance with Section 2.4.2.2 and Section 2.7 including, without
limitation, Section 2.7.1 of the Merger
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Agreement, and the terms of the Escrow Agreement. There shall be no adjustment
in the exercise price of the XLI Warrants as a result of this transaction.
Promptly following delivery to the Exchange Agent of documentation evidencing
exercise of any XLI Warrant, and receipt by the Exchange Agent of the exercise
price per share, the Exchange Agent shall deliver to the former holder of such
XLI Warrant the sum of Merger Cash and Contingent Cash per share of XLI Common
Stock for which the exercise price amount has been paid to the Exchange Agent.
Merger Cash payable to the holder of any Private Warrant under Section 2.7.2 of
the Merger Agreement shall be paid by the Escrow Agent to the holder of such
Private Warrant from the escrow proceeds delivered by Oak to the Escrow Agent
pursuant to Section 2.5.2.2 of the Merger Agreement. Merger Cash payable to the
holder of any XLI Warrant, other than a Private Warrant, under Section 2.7.2 of
the Merger Agreement shall be paid by the Exchange Agent to the holder of such
XLI Warrant from the proceeds received by the Exchange Agent upon delivery to
the Exchange Agent by the holder of such XLI Warrant of the exercise price per
share due upon exercise of the XLI Warrant. Contingent Cash payable to the
holder of any XLI Warrant (including any Private Warrant) under Section 2.7.2 of
the Merger Agreement for the period commencing on January 1, 1998 and ending on
March 31, 1999, shall be paid to the holder of such XLI Warrant in accordance
with the provisions of Section 2.7.1 of the Merger Agreement. Contingent Cash
payable to the holder of any Private Warrant under Section 2.7.2 of the Merger
Agreement, who exercises such Private Warrant subsequent to March 31, 1999,
shall be paid by the Escrow Agent to the holder of such Private Warrant from the
escrow proceeds delivered by Oak to the Escrow Agent with respect to such
Private Warrant pursuant to Section 2.6.1.2 of the Merger Agreement. Following
exercise of such Private Warrant, any Contingent Cash amount payable to the
holder of such Private Warrant thereafter shall be paid to such Private Warrant
holder by the Exchange Agent pursuant to Section 2.6.1.1 of the Merger
Agreement.
Upon Termination of the Escrow Agreement
Upon termination of the Escrow Agreement (which shall occur upon expiration
or exercise of all rights to purchase XLI Common Stock under the XLI Warrants)
all funds, if any, remaining in escrow upon termination of the Escrow Agreement,
less any exercise price amounts required to be delivered to Oak pursuant to
Section 2.7.4 of the Merger Agreement, shall be distributed. Such amount shall
be promptly delivered by the Escrow Agent to the Exchange Agent for distribution
to the XLI Stockholders, and shall be allocated and distributed by the Exchange
Agent subject to and in accordance with Section 2.6.1.1 of the Merger Agreement;
provided, however, that such amount shall be paid out within fifteen (15)
business days following delivery of the amount to the Exchange Agent.
Allocation of XLI Warrant Exercise Amounts
All amounts received by the Escrow Agent or the Exchange Agent in
connection with the exercise of any XLI Warrants, net of the Merger Cash amounts
payable under the terms of the Escrow Agreement from the proceeds of any XLI
Warrant exercises other than Private Warrant exercises, shall be delivered to
Oak pursuant to the provisions of the Merger Agreement and the Escrow Agreement.
If, upon expiration of the Escrow Agreement, the aggregate exercise price paid
to Oak in connection with any exercise of XLI Warrants, net of amounts, if any,
of Merger Cash payable with respect to any XLI Warrant (other than a Private
Warrant) upon exercise of such XLI Warrant, exceeds the aggregate costs and
expenses incurred by Oak in connection with the Escrow Agreement and the
Exchange Agent Agreement, including all costs and expenses that Oak reasonably
expects to incur prior to and in connection with termination of the Exchange
Agent Agreement, then the amount representing such difference shall be promptly
delivered by Oak to the Exchange Agent for distribution to the XLI Stockholders
(including any XLI Stockholders who exercised their XLI Warrants prior to
termination of the Escrow Agreement). Any such amount due to the XLI
Stockholders shall be allocated and distributed to the XLI Stockholders subject
to and in accordance with Section 2.6.1.1 of the Merger Agreement; provided,
however, that such amount shall be paid out within thirty (30) business days
following delivery of the amount to the Exchange Agent.
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REPRESENTATIONS AND WARRANTIES; COVENANTS
Except as otherwise disclosed in the Merger Agreement, Oak, Pixel, XLI and
OTI Acquisition each made certain representations and warranties in the Merger
Agreement with respect to, among other things, their organization and good
standing, authorization and authority to enter into and perform their respective
obligations under the Merger Agreement, their compliance with other instruments,
and the acquisition of necessary government consents, and, in the case of Oak
and XLI, the accuracy of their filings with the SEC and their financial
statements. Each Party Stockholder represents and warrants to Oak, Pixel and OTI
Acquisition that it has the capacity and authority to enter into the Merger
Agreement and to execute and deliver to Oak its Irrevocable Proxy to vote in
favor of the adoption of the Merger Agreement, the approval of the Merger and
the appointment of the Stockholder Representatives. The parties' representations
and warranties are contained in Sections 3 and 4 of the Merger Agreement.
In addition, Oak, Pixel, OTI Acquisition and XLI each made certain
covenants in the Merger Agreement as an inducement to the other parties to enter
into the Merger Agreement. The parties' covenants are contained in Section 6 of
the Merger Agreement. The covenants made by Oak, Pixel and OTI Acquisition,
include but are not limited to, a covenant as to the maintenance of XLI
operations. Subject to the provisions of the Merger Agreement and the terms of
the Employment Agreement to be entered into by and between Pixel and D'Amelio,
until the earlier of December 31, 2000 or payment in full by Oak of the amount
of Contingent Cash due to the XLI Stockholders, XLI shall be maintained as a
subsidiary or separate division of Pixel; and D'Amelio shall submit to the
President of Pixel for the review and approval of Pixel, prior to any funding of
XLI operations by Pixel, an operating budget for XLI for each calendar quarter
of XLI. In addition, Oak covenants to pay within thirty (30) days following the
Effective Date certain accounts payable of XLI, set forth in the Merger
Agreement.
CONDITIONS TO THE MERGER
The obligations of each of Oak, Pixel, OTI Acquisition and XLI to effect
the Merger are subject to the satisfaction of certain conditions, including, but
not limited to, the condition that all necessary government approvals shall have
been filed, occurred, or obtained; the condition that no preliminary or
permanent injunction or other order by any court having jurisdiction over the
matter or other legal restraint or prohibition that prevents consummation of the
Merger is in effect; and the condition that no statute, rule or regulation shall
have been enacted which would make the consummation of the Merger illegal.
Each party's obligation to effect the Merger is also subject to the
condition that the Merger Agreement be adopted and approved by the requisite
vote of the XLI and OTI Acquisition shareholders, and the condition that the
parties have agreed on a mutually acceptable satisfaction of XLI's obligations
to the Carley Corporation. With respect to the agreement between XLI and the
Carley Corporation, and all amendments thereto, Pixel covenants to pay $500,000
of XLI's obligations to Carley Corporation provided that the royalty rates are
reduced from 15% to 11% as of the Effective Time.
The obligations of Oak, Pixel and OTI Acquisition under the Merger
Agreement are subject to additional conditions, including, but not limited to,
the condition that each of D'Amelio and Allen shall have executed and delivered
to Pixel his Employment Agreement with Pixel; the condition that all Private
Warrants shall have been exercised on or prior to the Effective Date; the
condition that each Party Stockholder and any employee of XLI who holds or will
hold immediately prior to the Effective Time, any shares of the capital stock of
XLI, shall have executed and delivered to Oak and Pixel non-compete agreements;
the condition that there shall not have occurred any material adverse change
since September 30, 1997 in the business, properties, results of operations or
business or financial condition or prospects of XLI; and the condition that the
holders of no more than 2% of all shares of the capital stock of XLI shall have
requested appraisal of their shares.
TERMINATION; AMENDMENT AND WAIVER
The Merger Agreement may be terminated and the Merger abandoned before the
Effective Date, by the mutual consent of the respective Boards of Directors of
Oak, Pixel and XLI, or by any of the parties if one of
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the parties has not fulfilled its obligations under the Merger Agreement on or
prior to the date specified for fulfillment thereof, or if such conditions shall
have become incapable of fulfillment, and shall not have been waived on or
before March 31, 1998.
XLI may also terminate the Merger Agreement under the terms and conditions
set forth in Section 8.1.7 of the Merger Agreement if XLI receives an offer
which is deemed superior by its Board of Directors.
In the event that the Merger Agreement is terminated and the Merger
abandoned, the Merger Agreement, except as otherwise set forth therein, shall
become void and of no force and effect, without any liability on the part of any
of the parties to the Merger Agreement. Under the terms and circumstances set
forth in the Merger Agreement, a termination fee in the amount of $450,000 may
be payable by XLI or Oak to the non-terminating party.
POST-CLOSING ADJUSTMENT
The Merger Agreement provides that Oak shall have thirty (30) days
following the Effective Date to conduct an audit ("Post Closing Audit") of the
closing balance sheet of XLI in accordance with generally accepted accounting
principles consistently applied as of the date of XLI's closing balance sheet.
If the Post Closing Audit establishes that the net deficit of XLI as of the
date of the closing balance sheet is greater than Eight Hundred Twenty-Five
Thousand Dollars ($825,000), then the payments of Contingent Cash shall be
reduced by the amount of such shortfall. Written notice of any reduction in
payments of Contingent Cash shall be provided to the Stockholder Representatives
promptly following Oak's receipt of the Post Closing Audit.
NON-RECOURSE INDEMNIFICATION
The Merger Agreement provides that effective as of the Effective Date, all
XLI Stockholders, and, in the case of any holders of XLI Warrants who become XLI
Stockholders, effective as of the date such holders of XLI Warrants become XLI
Stockholders (collectively, the "Indemnifying Stockholders"), shall jointly and
severally indemnify and hold Oak and Pixel harmless against all claims, losses,
liabilities, damages, deficiencies, costs, interest, penalties and expenses,
including reasonable attorneys' fees and expenses of investigation (individually
a "Loss" and collectively "Losses") incurred by Pixel or Oak as a result of (i)
any inaccuracy of a representation or breach of any warranty contained in the
Merger Agreement, (ii) any failure of XLI or the Stockholder Representatives to
perform or comply with any covenant contained in the Merger Agreement, or (iii)
any inaccuracy in any certificate or other information delivered by XLI or the
Stockholder Representatives pursuant to Section 7.2.11 of the Merger Agreement,
Section 4.2.2 of the Escrow Agreement or Section 4 of the Exchange Agent
Agreement. In addition, the Indemnifying Stockholders agree, jointly and
severally, to indemnify and hold Oak and Pixel harmless against all losses which
may be sustained by Pixel, its subsidiaries, affiliates, sublicensees or
customers as a result of any claims that any Carley Technology, and
documentation, any product (to the extent of the Carley Technology or
documentation contained therein or practiced thereby) or any Carley Right
infringes or violates any patent, copyright, trade secret or other proprietary
right of any third party. Payments with respect to XLI Stockholders who perfect
appraisal rights shall not constitute a "Loss" under the Merger Agreement. The
term "Loss" does not include any changes to XLI Financial Statements (including
balance sheet valuations) caused by a change in accounting methods used after
the Effective Time of the Merger as opposed to those used by XLI before the
Effective Time of the Merger. The limitation of the definition of Loss does not
apply to Losses caused as a result of XLI's failure to prepare the XLI Financial
Statements in accordance with generally accepted accounting principles
consistently applied.
Notwithstanding anything in the Merger Agreement to the contrary, the
Indemnifying Stockholders shall be liable and shall be obligated with respect to
the indemnity provided in the Merger Agreement only to the extent that claims
individually or in the aggregate exceed $50,000, provided that once such claims
exceed $50,000 the Indemnifying Stockholders shall be responsible for the first
$50,000 of such claims.
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<PAGE> 30
The indemnity obligations of the Indemnifying Stockholders shall survive
the Effective Date and shall remain in effect until the later of March 31, 2001
or the date on which the final payment of any Contingent Cash is payable.
With respect to any amounts that may become due under the indemnity
provision of the Merger Agreement, Oak and Pixel shall have no recourse against
the XLI Stockholders personally and Oak and Pixel shall be entitled solely to a
right of setoff against amounts otherwise payable as Contingent Cash. The sole
recourse of Oak and Pixel with respect to any amounts that may become due under
the indemnity provision of the Merger Agreement shall be to withhold payments
otherwise due to the XLI Stockholders as part of the Contingent Cash payments.
Oak and Pixel shall not have recourse to amounts already paid to XLI
Stockholders as Contingent Cash.
PROVISIONS RELATING TO THE STOCKHOLDER REPRESENTATIVES
By virtue of the affirmative vote approving the Merger and the Merger
Agreement, the XLI Stockholders shall irrevocably appoint Stockholder
Representatives to act as attorneys-in-fact of the XLI Stockholders with
authority to make all decisions on behalf of the XLI Stockholders with respect
to any matters upon which the Stockholder Representatives are authorized to act
under the Merger Agreement, including without limitation, any Contingent Cash
payments. The following is a summary of the principal occupations during the
past five years of each of the nominee Stockholder Representatives:
Anthony D'Amelio is a founder of the Company and has served as Chairman of
the Board, President and Chief Executive Officer since July 1994. From March
1993 to July of 1994, Mr. D'Amelio served as a consultant to the Company and
from June 1989 to March 1993, Mr. D'Amelio was Treasurer, Chief Financial
Officer, and Director of the Company. From July 1988 to July 1990, Mr. D'Amelio
served as senior consultant to Alcan Corp., an aluminum and chemicals producer
in the areas of business development and joint ventures. Previously, Mr.
D'Amelio was Vice President, Computer Operations for Honeywell, Inc. and held
several executive positions at General Electric and Cie Bull.
Daniel Allen, Vice President of Research and Development. Mr. Allen joined
the Company in May 1991. Prior to joining the Company, Mr. Allen was Chief
Engineer at Cirrus Technology, Inc., responsible for the design and
manufacturing of high resolution color laser film recorders and Senior Engineer
at Analogic Corp. Mr. Allen graduated from Penn State University and holds a
B.S. degree in Mathematics with a minor in Computer Science.
Joseph L. Katz was appointed Vice President, Corporate Development, in
November 1996 and has been a Director since September 30, 1996. From 1977 to
1996 Dr. Katz has held the positions of Group Leader, Department Head, Senior
Principal Engineer of Network and Systems Management at Mitre Corp. Dr. Katz
holds Ph.D. and M.S. degrees in Electrical Engineering from Purdue University.
Vincent J. Spoto, a founder of the Company; previously served as President,
Chief Executive Officer and Chairman of the Board of Directors from June 1989 to
November 10, 1993. Mr. Spoto was a consultant to the Company from November 1994
to 1996. Presently, Mr. Spoto is President of ImageLabs, Inc. On January 6,
1997, Mr. Spoto was appointed to fill a vacancy on the Board of Directors. Mr.
Spoto holds an Associates Degree in Electrical Engineering from the Wentworth
Institute of Technology.
Adam Carley, Chief Scientist, Director and founder of the Company. Dr.
Carley invented the laser printing technology that forms the basis of XLI's
imaging enhancement technology. For the past five years, Dr. Carley has been a
consultant to the Company and President of Carley Corporation, a developer of
advanced electronic circuitry for high quality laser image printing. Dr. Carley
received his Ph.D. in Electrical Engineering from the Massachusetts Institute of
Technology.
Any action required to be taken, or notice or instructions required to be
given, to Oak, the Escrow Agent or the Exchange Agent under the Merger
Agreement, the Escrow Agreement or the Exchange Agent Agreement may be taken or
given by a majority of the Stockholder Representatives; however, less than a
majority may take such action or give such notice or instructions upon written
consent signed by a majority of the Stockholder Representatives and delivered to
Oak, the Escrow Agent or the Exchange Agent, as the case
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<PAGE> 31
may be. The XLI Stockholders may reject one or more of the Stockholder
Representatives when voting whether to approve the Merger.
APPRAISAL RIGHTS
If the Merger is consummated, a holder of record of shares of XLI Common
Stock or XLI Preferred Stock (together referred to as "XLI Stock") who objects
to the terms of the Merger may seek an appraisal under Section 262 of the
Delaware General Corporation law of the "fair value" of such holder's shares.
The following is a summary of the principal provisions of Section 262 and does
not purport to be a complete description. A copy of Section 262 is attached to
this Proxy Statement as Appendix B. Failure to take any action required by
Section 262 will result in a termination or waiver of a shareholder's rights
under Section 262.
1. A shareholder electing to exercise Appraisal Rights must (a) deliver to
XLI, before XLI Stockholders vote on the Merger Agreement, a written demand for
appraisal that is made by or on behalf of the person who is the holder of record
of the XLI Stock for which appraisal is demanded and (b) not vote in favor of
adopting the Merger Agreement. The demand must be delivered to XLI at 101
Billerica Avenue, 5 Billerica Park, North Billerica, MA 01862, Attention: James
L. Salerno, Chief Financial Officer. A proxy or vote against adopting the Merger
Agreement does not constitute a demand. A shareholder electing to take such
action must do so by a separate written demand that reasonably informs XLI of
the identity of the holder of record and of such shareholder's intention to
demand appraisal of such holder's XLI Stock. Because a proxy left blank will,
unless revoked, be voted FOR adoption of the Merger Agreement, a shareholder
electing to exercise Appraisal Rights who votes by proxy must not leave the
proxy blank but must vote AGAINST adoption of the Merger Agreement or ABSTAIN
from voting for or against adoption of the Merger Agreement.
2. Only the holder of record of XLI Stock is entitled to demand Appraisal
Rights for the XLI Stock registered in that holder's name. The demand must be
executed by or for the holder of record, fully and correctly, as the holder's
name appears on the holder's stock certificates. If the XLI Stock is owned of
record in a fiduciary capacity, such as by a trustee, guardian, or custodian,
the demand should be executed in that capacity. If the XLI Stock is owned of
record by more than one person, as in a joint tenancy or tenancy in common, the
demand should be executed by or for all owners. An authorized agent, including
one of two or more joint owners, may execute the demand for appraisal for a
holder of record; however, the agent must identify the owner or owners of record
and expressly disclose the fact that, in executing the demand, the agent is
acting as agent for the owner or owners of record.
A holder of record, such as a broker, who holds XLI Stock as nominee for
beneficial owners may exercise a holder's right of appraisal with respect to the
XLI Stock held for all or less than all of such beneficial owners. In such case,
the written demand should set forth the number of XLI Stock covered by the
demand. Where no number of shares of XLI Stock is expressly mentioned, the
demand will be presumed to cover all XLI Stock standing in the name of the
holder of record.
3. Within 10 days after the Effective Date, XLI will send notice of the
effectiveness of the Merger to each person who prior to the Effective Date
satisfied the foregoing conditions.
4. Within 120 days after the Effective Date, XLI or any shareholder who has
satisfied the foregoing conditions may file a petition in the Delaware Court of
Chancery demanding a determination of the fair value of the XLI Stock.
Shareholders seeking to exercise Appraisal Rights should not assume that XLI
will file a petition to appraise the value of their XLI Stock or that XLI will
initiate any negotiations with respect to the "fair value" of such XLI Stock.
Accordingly, XLI Stockholders should initiate all necessary action to perfect
their Appraisal Rights within the time periods prescribed in Section 262.
5. Within 120 days after the Effective Date, any shareholder who has
complied with the requirements for exercise of Appraisal Rights, as discussed
above, is entitled, upon written request, to receive from XLI a statement
setting forth the aggregate number of shares of XLI Stock not voted in favor of
the Merger and with respect to which demands for appraisal have been made and
the aggregate number of holders of such XLI Stock. XLI is required to mail such
statement within 10 days after it receives a written request to do so.
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<PAGE> 32
6. If a petition for an appraisal is timely filed, after a hearing on the
petition, the Delaware Court of Chancery will determine the shareholders
entitled to Appraisal Rights and will appraise the XLI Stock owned by such
shareholders, determining its "fair value" exclusive of any element of value
arising from the accomplishment or expectation of the Merger and will determine
the amount of interest, if any, to be paid upon the value of the XLI Stock of
the shareholders entitled to appraisal. Any such judicial determination of the
"fair value" of the XLI Stock could be based upon considerations other than or
in addition to the price paid in the Merger and the market value of the XLI
Stock, including asset values, the investment value of the XLI Stock and any
other valuation considerations generally accepted in the investment community.
The value so determined for XLI Stock could be more, less than, or the same as
the consideration paid pursuant to the Merger Agreement. The Court may also
order that all or a portion of any shareholder's expenses incurred in connection
with an appraisal proceeding, including, without limitation, reasonable
attorneys' fees and fees and expenses of experts utilized in the appraisal
proceeding, be charged pro rata against the value of all the XLI Stock entitled
to appraisal.
7. Any shareholder who has duly demanded an appraisal in compliance with
Section 262 will not, after the Effective Date, be entitled to vote the shares
subject to such demand for any purpose or be entitled to dividends or other
distributions on that XLI Stock (other than those payable or deemed to be
payable to shareholders of record as of a date prior to the Effective Date).
8. Holders of XLI Stock lose the right to appraisal if no petition for
appraisal is filed within 120 days after the Effective Date, or if a shareholder
delivers to XLI a written withdrawal of such shareholder's demand for an
appraisal and an acceptance of the Merger, except that any such attempt to
withdraw made more than 60 days after the Effective Date requires XLI's written
approval. If Appraisal Rights are not perfected or a demand for Appraisal Rights
is withdrawn, a shareholder will be entitled to receive the consideration
otherwise payable pursuant to the Merger Agreement.
9. If an appraisal proceeding is timely instituted, such proceeding may not
be dismissed as to any shareholder who has perfected a right of appraisal
without the approval of the Delaware Court of Chancery.
OPINION OF FINANCIAL ADVISOR
At the request of XLI, a financial advisory opinion with respect to the
fairness of the consideration to be received by the XLI Stockholders in the
Merger, has been received from Montgomery Capital Corporation ("Montgomery"), a
summary of which follows.
On November 21, 1997, in connection with the evaluation of the Merger
Agreement by the Board of Directors of XLI, Montgomery made a presentation to
the Board of Directors with respect to the consideration to be received by XLI
Stockholders and rendered its opinion, for the reasons set forth below, that the
Merger Cash and Contingent Cash to be received by the XLI Stockholders as
consideration in the Merger, is fair, solely from a financial point of view.
Montgomery has not acted as financial advisor to XLI in connection with the
initiation, solicitation of, or negotiation of any of the terms of the Merger.
As set forth below, Montgomery will receive a fee for its services in the
rendering of its opinion. Montgomery will not receive any additional fees from
any of the parties related to the Merger and Montgomery has not, nor does it
expect to, perform any investment banking services for XLI, Oak, Pixel or OTI
Acquisition. Montgomery does not now, nor has it ever, maintained either a long
or short position in any of the securities of either XLI, Oak or Pixel.
No limitations were imposed by XLI on the scope of Montgomery's
investigation or the procedures to be followed by Montgomery in rendering its
opinion. Montgomery's opinion is directed to the Board of Directors of XLI and
does not constitute a recommendation to an XLI Stockholder as to how such
stockholder should vote at the Special Meeting. Montgomery was not requested to
opine as to, and does not address, XLI's underlying business decision to proceed
with or effect the Merger Agreement.
In arriving at its opinion, Montgomery reviewed and analyzed (i) the Merger
Agreement as first proposed on November 5, 1997, and as further proposed in the
Merger Agreement dated January 6, 1998; (ii) publicly
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<PAGE> 33
available information concerning XLI that Montgomery believed to be relevant to
its inquiry; (iii) financial and operating information with respect to the
business, operations and prospects of XLI furnished to Montgomery by the
management of XLI, and discussions held with various members of the senior
management of XLI concerning the historical and current operations, financial
condition, and future prospects of XLI; (iv) the prices and trading histories of
XLI Common Stock and XLI Preferred Stock and a comparison with the stock prices
of other companies that Montgomery deemed relevant; (v) a comparison of the
historical financial results and present financial condition of XLI with those
of other companies which Montgomery deemed relevant; (vi) the actual Merger Cash
and Contingent Cash to be received by each stockholder; and (vii) such other
financial studies, analyses, investigations and other factors as Montgomery
deemed relevant or appropriate.
In connection with its review, Montgomery assumed and relied upon the
accuracy and completeness of the financial and other information provided to it
or discussed with it by XLI or otherwise used by it in arriving at its opinion,
without independent verification. Montgomery further relied upon the assurances
of the management of XLI that such management was not aware of any facts that
would make such information inaccurate or misleading with respect to the
financial plan of XLI. With respect to the financial plan provided to Montgomery
by XLI, Montgomery assumed that such plan was reasonably prepared and reflects
the best currently available estimates and judgments of the management of XLI.
In arriving at its opinion, Montgomery did not conduct physical inspections of
the properties, or inventories at the facility of XLI with the goal of arriving
at a valuation of XLI based upon an analysis of its tangible assets.
Montgomery's opinion was necessarily based upon market, economic and other
conditions as they existed on, and could be evaluated as of, the date of its
review and analysis.
In connection with its presentation to the XLI Board of Directors advising
the Board of its opinion on November 21, 1997, and subsequent discussions with
the Directors pertaining to the amended terms of the Merger Agreement as of
January 6, 1998, Montgomery performed a variety of financial and comparative
analyses, including those described below. The preparation of a fairness opinion
involves various determinations as to the most appropriate and relevant methods
of financial analysis and the application of those methods to the particular
circumstances, and therefore such an opinion is not readily susceptible to
summary description. Montgomery has used several methods to arrive at a fair
value for XLI Common Stock and common equivalent stock on a fully diluted basis,
with each method requiring different assumptions and calculations and, therefore
resulting in different values. Furthermore, in arriving at its fairness opinion,
Montgomery did not attribute any particular weight to any analysis or factor
considered by it, but rather made qualitative judgments as to the significance
and relevance of each analysis and factor. Accordingly, Montgomery believes that
its analysis must be considered as a whole and that considering any portions of
such analyses and of the factors considered, without considering all the
analyses and factors, could create misleading or incomplete view of the process
underlying the opinion. In its analyses, Montgomery reviewed and analyzed the
issued, outstanding and reserved for issuance amounts of both XLI Common Stock
and XLI Preferred Stock. However, at the time of the review by Montgomery, there
existed some uncertainty with regard to the exact amount of fully diluted shares
assuming conversion of all of the outstanding warrants and options. Therefore,
for the purpose of its analysis, Montgomery used the amount as provided by both
the legal and accounting firms engaged by XLI. In its analysis, Montgomery made
numerous assumptions with respect to industry performance, general business and
economic conditions and other matters, many of which are beyond the control of
XLI. Any estimates contained in these analyses are not necessarily indicative of
actual values or predictive of future results or values, which may be
significantly more or less favorable than as set forth therein. In addition,
analyses relating to the value of the business do not purport to be an appraisal
or to reflect the price at which XLI's business may actually be sold.
The opinion of Montgomery was rendered initially on November 21, 1997, and
updated on January 22, 1998. The opinion of Montgomery is limited to the date
upon which it was updated, and there have been no material changes in the
results of operations or financial condition of XLI which have occurred since
the date of the updated opinion that XLI believes would cause Montgomery to no
longer stand by its fairness opinion. Montgomery has no duty to further update
its opinion.
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<PAGE> 34
PURCHASE PRICE ANALYSIS.
The acquisition of XLI by a newly formed subsidiary of Pixel was announced
by letter of intent and a distributed press announcement on November 17, 1997.
At the time of the announcement, XLI Common Stock was bid at approximately $0.51
per share. However, the NASDAQ Bulletin Board was quoting a bid of $0.531 and an
asking price of $0.781 for a share of XLI Common Stock. XLI Common Stock had
traded quite sporadically during the 12 months prior to the announcement of the
letter of intent of November 17, 1997. During that period of time, XLI Common
Stock had traded as low as $0.09 and as high as $0.65. Since the time of the
announcement of the proposed transaction, XLI Common Stock had traded
infrequently and the last trade recorded by the NASDAQ Bulletin Board while
Montgomery was preparing its opinion of value letter occurred on January 15,
1998 at a price of $0.562 per share. Therefore, the proposed transaction has not
had a meaningful impact upon the enterprise value of XLI. For the purpose of its
analysis, Montgomery did limited review of the historical trading activity of
the outstanding XLI Preferred Stock on the premise that each share of XLI
Preferred Stock was convertible into XLI Common Stock as per the Prospectus
dated February 11, 1994. Therefore, Montgomery considered XLI Preferred Stock to
be a common stock equivalent to its conversion ratio at the same trading value
as XLI Common Stock as quoted on the NASDAQ Bulletin Board under the symbol
XLCC.
For the purposes of its assessment of the present value of XLI as of the
time of the announcement of the letter of intent, Montgomery considered the
total enterprise value of XLI to be the aggregate of the present full market
value of all the fully converted and diluted outstanding shares of XLI
multiplied by the most recent bid price of $0.562 per share. Additionally, a
purchase of all the outstanding shares of XLI would also assume the total
outstanding liabilities of the corporation since the acquirer would now be the
sole owner of the corporation. The total enterprise value is a measurement often
used by financial analysts to assess a company's worth. In this case, for XLI,
the total enterprise value determined by Montgomery may reflect a value in
excess of the current total enterprise value given that the most recent bid
price for XLI Common Stock was $.40625 per share on July 8, 1998.
The aggregate enterprise value of XLI as of the date of Montgomery report
would approximate the following:
<TABLE>
<S> <C>
Total Equity Value
4,369,370 Common Equivalent at $0.562 per share........... $2,455,585
Total Liabilities as of 9/30/97............................. $ 913,021
----------
Total Enterprise Value...................................... $3,368,606
==========
</TABLE>
Alternatively, the acquisition as proposed by Pixel on January 6, 1998 sets
a minimum purchase amount equivalent to $3,675,000. The aggregate minimum value
of the acquisition, without adjustment for Set-Off Amounts, as per the proposed
agreement would be as follows:
<TABLE>
<S> <C>
Merger Cash................................................. $3,675,000.00
TOTAL....................................................... $3,675,000.00
=============
</TABLE>
The incremental enterprise value of the proposed transaction would consist
of the excess minimum and maximum values from the transaction with Pixel in the
amount of $306,394 Minimum Excess Enterprise Value and $11,631,394 Maximum
Excess Enterprise Value.
The aggregate minimum value of the proposed transaction to the holders of
XLI Common Stock and common equivalent shareholders of XLI would equal the
following:
<TABLE>
<CAPTION>
MAXIMUM MERGER
ENTERPRISE MINIMUM MERGER CASH PLUS
PURCHASE VALUE CASH CONTINGENT CASH
-------------- -------------- ---------------
<S> <C> <C> <C>
Total........................................ $3,368,606.00 $3,675,000.00 $15,000,000.00
Shares Outstanding........................... 4,369,370.00 4,369,370.00 4,369,370.00
Per Share Value.............................. $ 0.77 $ 0.84 $ 3.43
------------- ------------- --------------
</TABLE>
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ANALYSIS OF SELECTED PUBLICLY TRADED COMPARABLE COMPANIES.
Using publicly available information, Montgomery compared selected
financial data of XLI with similar data of seven publicly traded companies
involved in businesses considered to be generally comparable to the business of
XLI. The following companies were included in the selected companies for
analysis: Number Nine Visual Technology Corporation, Technology 80, Inc., Tseng
Laboratories, Inc., Xionics Document Technology, Inc., Video Display
Corporation, Metatec Corporation, and Electronic Designs, Inc.
In the process of its analysis, Montgomery screened and reviewed 146
companies to attempt to find a sample universe of comparability. However, given
XLI's transition from a low-volume niche market supplier to a supplier of mass
market integrated circuit technology for printer and printer controller OEMs,
Montgomery found it to be extremely difficult to identify a clear degree of
comparability of these companies to XLI. Therefore, Montgomery elected to employ
a Principal Peer Group definition of comparable companies, within the Standard
Industrial Classification 3577, Computer Peripherals and Components, as defined
by Standard and Poors (S & P). Within the designated S & P Peer Group,
Montgomery then chose the seven companies based upon a number of factors: OEM
distribution strategy, performance improvement based technology, as-on
integration component, historical performance, market segmentation, revenue size
and stage of business development.
Using this framework and the available data on each company, Montgomery
then constructed an analysis of each of the companies using the following
valuation indicators: Market Value to Total Revenue, Market Value to Total
Assets, Market Value to Net Income, and Market Value to Gross Cash Flow. The
multiples were derived among the comparable companies based upon the most recent
twelve months financials. A mean and median of each of these valuation multiples
was derived and compared against the same multiples for XLI at present. In each
instance, when applying the median multiple to XLI, the aggregate enterprise
value was significantly lower than the minimum and maximum enterprise value of
the proposed transaction.
DISCOUNTED CASH FLOW ANALYSIS.
As part of its analysis and investigation, Montgomery calculated the future
earnings of XLI based upon the financial projections included in XLI's Business
Plan Summary for the years 1998, 1999 and 2000, as prepared by the management
team. Additionally, Montgomery analyzed the projected results of the current
year as well as the results of the previous four years to gauge the
reasonableness of the management projections.
The management projections anticipate a significant level of growth in
revenues (1998-310%, 1999-184%, and 2000-46%) and a similarly aggressive growth
in net income. For 1997, total revenues grew at a rate of 170%, as compared to
management's projected growth rate of 144%, while net loss for 1997 was
approximately 61% greater than the net loss projected by XLI's management. Using
the management projections through the fiscal year end, December 31, 2000,
Montgomery then generated a range of present values of the future cash flows and
a terminal value based upon the operating results in the year 2000. Montgomery
applied valuation multiples to both Revenue and Net Income as derived from the
Comparison of Selected Public Companies. The aggregate cash flow plus the
terminal value were then discounted to a present value using a stepped range of
discount rates, to arrive at a value of approximately of $7.8 million, as
compared to approximately $15.5 million using management's projections of
revenue and net income.
Additionally, Montgomery performed the same analysis on a cash flow stream
reflecting a low growth scenario versus the aggressive growth in the management
case. The low growth case is based on the management projections for years 1997
and 1998, then reduces the rate of growth in revenue, with appropriate
adjustments to operating expenses, for the years 1999 and 2000.
The analysis of both of these scenarios reflected the application of four
multiples of net income, revenues, and discount rates all of which were
analyzed. Further analysis for reasonableness and comparative purposes was done
taking each of those present value data points and calculating the value as
multiples of Sales, Operating Income, EBITDA and Unlevered Net Income.
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<PAGE> 36
Finally, Montgomery chose the four midpoint values within each 16 value
scenario to construct a range of values for XLI. Montgomery then used the range
of values based upon the discounted cash flow analysis, determined to be
$5,700,000 to $10,600,000, as compared to the minimum and maximum values of the
proposed transaction with Pixel, of $3,675,000 to $15,000,000, to further
support its opinion.
Montgomery is a private, regional independent investment banking firm
located in Boston, Massachusetts. As part of its business activities, the firm
provides investment banking services, including the evaluation of businesses and
their securities in connection with mergers and acquisitions, competitive bids,
private placements of both debt and equity securities, secured debt financings
with institutional and bank lenders, and valuations for corporate and other
purposes. The Board of Directors of XLI selected Montgomery because of its
expertise and the experience of its principals gained through numerous similar
engagements over a number of years.
Pursuant to a letter agreement dated November 5, 1997, XLI has paid
Montgomery a fee of twenty three thousand ($23,000.00) dollars for Montgomery's
review of the Merger Agreement as first proposed on November 5, 1997 and as
further proposed on January 6, 1998, which form of Merger Agreement was not
materially different from the executed Merger Agreement.
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DIVIDENDS
No dividends on XLI Preferred Stock have accrued or become payable because
XLI has never been profitable and has never had sufficient net worth to be able
to declare dividends.
MATERIAL CONTRACTS
XLI and Pixel entered into a Technology License and Supply Agreement on
October 15, 1997, pursuant to which XLI granted to Pixel a non-exclusive,
worldwide right and license under certain XLI technology in consideration for a
license fee and a prepaid royalty fee.
In connection with the Merger Agreement, XLI and Oak entered into a
Promissory Note and Agreement on April 24, 1998 (the "Note and Agreement"), as
amended, pursuant to which Oak agrees to advance to XLI such amounts as XLI may
request for working capital purposes, up to $800,000. XLI promises to pay to Oak
the principal sum of $800,000, or such lesser principal amount, as the case may
be, at an interest rate equal to the Prime Rate plus one-half percent. All
principal and accrued interest shall be due on August 31, 1998. If the Merger
has closed on or before August 31, 1998, then the principal and accrued interest
shall become an intercompany debt and be eliminated, and the Note and Agreement
shall terminate. If the Merger has not closed on or before August 31, 1998, then
the principal and accrued interest shall at the option of Oak either convert to
a prepaid royalty under the above-referenced Technology License and Supply
Agreement between XLI and Pixel, or be immediately due and payable. As of July
8, 1998, XLI had borrowed $685,000 under the Note and Agreement, all of which
has been used for working capital purposes.
MARKET PRICES
The high and low sales prices of XLI Common Stock as of January 29, 1998,
the date preceding public announcement of the Merger, were $0.53125 and
$0.46875, respectively. The high and low sales prices of XLI Preferred Stock as
of January 29, 1998 were both $0.65625.
STATEMENT REGARDING ACCOUNTANTS' REPRESENTATIVES
Representatives of the principal accountants for the current year and for
the most recently completed fiscal year: (i) are expected to be present at the
Special Meeting; (ii) will have the opportunity to make a statement if they
desire to do so; and (iii) are expected to be available to respond to
appropriate questions.
INFORMATION CONCERNING XLI
The information contained herein regarding the business of XLI is qualified
by reference to the documents filed by XLI with the SEC and incorporated herein
by reference. See "INCORPORATION OF CERTAIN INFORMATION BY REFERENCE."
DESCRIPTION OF BUSINESS
Founded in 1989, XLI designs, develops and markets high-performance
hardware and software products primarily for laser printing applications. XLI is
a provider of high technology enhancement products for printers, digital
copiers, multi-function devices, and fax systems.
XLI's proprietary precision dot positioning technology enables high-quality
text, line-art graphics and photographic images to be generated at low costs and
high speeds using standard and inexpensive printing devices.
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XLI's technology is used in the following applications:
- High quality text and line art edge enhancement
- Life-like photographs with gray scale rendition
- Digital copier functions
- Hi-Definition Fax
- High Quality Color Images on inexpensive color laser printers
- High performance image enhancement and modulation for demand printing
applications
- Application Specific Integrated Circuits (ASIC) and Core Modules to meet
customer requirements and costs
PRODUCTS AND PRODUCT DEVELOPMENT
During the past two years XLI has changed its focus from a low-volume niche
market supplier of enhancement board products for VARs and end users toward a
supplier of mass-market integrated circuit technology for printer and printer
controller OEMs. During 1997, the sales of all board products were discontinued
due to diminishing sales caused by the introduction of higher resolution
printers, some with enhancement technology such as the new XLI integrated
circuit chip designed directly into the printer controller. XLI's first ASIC
(Application Specific Integrated Circuit) product, the XLI-2050 ImageChip, was
introduced to the market in 1997. This ASIC is a highly integrated laser printer
enhancement chip with fax, text and line-art edge enhancement plus single-bit
grayscale enhancement. Additional features in the chip are multi-bit modes for
digital copy functions. XLI is also selling the ImageChip technology used in the
XLI-2050 to customers in the form of VHDL Core Modules (design modules that can
be used by XLI customers to develop their own ASICs that incorporate multiple
applications, including XLI's). The ASICs developed using the XLI Core Modules
are incorporated by customers into printer controller boards that are imbedded
into the printing device as an integral component. Engineering samples of the
XLI-2050 ImageChip, with limited functionality (bugs in the first chip
fabrication), are now being sampled to developers with full functionality chips
planned for the second half of 1998. XLI believes that the XLI-2050 ImageChip
will be available in commercial quantities during the second half of fiscal
1998. To date the company has entered into six license agreements for its
ImageChip technology, including the recent licensing by Pixel Magic. Licenses
have been signed with both major printer controller suppliers and printer OEMs.
XLI also has in development (funded through a licensee non-recurring
engineering development project) a scaling/enhancement ASIC for flat-panel
displays. Although this is an extension of XLI's technology outside the printer
market, there are no current plans to market such a product and, if done so,
there is no assurance that this product would have market acceptance.
Although the new product developments around the ImageChip technology look
promising at this time, XLI is just beginning to enter the product life cycle
where significant technical and sales support will be necessary to succeed in
this highly competitive market. XLI will require additional funding and
resources in order to maximize the potential of its new products. XLI also
expects to continue development of subsequent generations of its ImageChip
products to incorporate additional features and functions and also to reduce
costs. No assurance can be given that these products will be developed or, if
developed, will be successfully marketed. See "RISK FACTORS."
SALES AND MARKETING
In the fall of 1997, XLI added a full-time Vice President of Sales and
Marketing in charge of worldwide sales and marketing of its ASIC and VHDL
product offerings. This individual manages the sales and marketing efforts in
the US market and XLI currently has a sales agent in Japan to aid in covering
the Japanese market. To assist in the sales cycle, an evaluation test board with
the XLI-2050 ASIC is now
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available to customers. The XLI-2050 ImageChip is expected to be the major
source of income (through licensing, chip sales and royalties) for the
foreseeable future.
PATENTS AND PROPRIETARY INFORMATION
XLI relies on a variety of methods to protect its products and technology,
including patent, trademark, copyright and trade secret protection. Three
patents have been awarded (2 US patents and 1 Korean patent) which cover an
innovative method of modulating the laser devices found in laser printers for
the desktop as well as network printers. Additional patents have been filed on
edge enhancement technology applicable for both text and line graphics, a unique
all digital implementation of the modulator used in the XLI enhancement
technology capable of being implemented in integrated circuits and a single pass
color engine method. An additional patent application is in process for an
innovative grayscale enhancement method. This technology is applicable for both
monochrome and color laser printers. XLI protects its technical innovations both
domestically and internationally (Europe, Korea and Japan) through these patent
filings. To protect its trade secrets, proprietary software and know-how, XLI
requires that all employees, key resellers, consultants and licensees sign
nondisclosure agreements.
Although XLI believes that patent protection for its products is important
to its ultimate success, no assurance can be given that any patents granted will
be enforceable or provide XLI with meaningful protection from competitors. In
light of XLI's goal of expanding into foreign markets, and given that most of
Oak's revenues are derived from foreign source sales, the Merger is likely to
increase significantly the exposure of XLI products in foreign countries that
offer less protection of intellectual property than comparable United States
laws. In addition, there can be no assurance that XLI proposed products will not
infringe the patent rights of others. XLI may be forced to expend substantial
resources if XLI is required to defend against any such infringement claims.
Furthermore, there can be no assurance that XLI will be able to maintain the
secrecy of any of its proprietary technology, know-how or trade secrets or that
others will not independently develop substantially equivalent technology.
The core technology for XLI was invented by Dr. Adam L. Carley (the "Carley
Core Technology"), a founder, stockholder and director of XLI. Dr. Carley and
the Carley Corporation, a company controlled by Dr. Carley, have assigned to XLI
all printing rights to the Carley Core Technology held by him and the Carley
Corporation in return for XLI Common Stock and certain royalties based upon
revenues derived by XLI from the Carley Core Technology.
THE YEAR 2000 ISSUE
Certain computer programs and microprocessors use two digits rather than
four to define the applicable year. Any computer program that has date-sensitive
software and microprocessors may recognize a date using "00" as the year 1900
rather than 2000. This phenomenon could cause a disruption of the Company's
operations, including, among other things, a temporary inability to send
invoices, or engage in similar normal business activities. Management believes
the Company is substantially year 2000 compliant with respect to its selling,
administration and general operations. Prior to purchasing any new equipment or
software, it is Company policy to ensure that the specifications include year
2000 compliance. However, there can be no guarantee that the systems of other
companies on which the Company's system will rely will be converted on a timely
basis, or that a failure to convert by another company, or a conversion that is
incompatible with the Company's systems, would not have a material impact on the
Company. Based on its current assessment, management believes that year 2000
compliance will not have a material adverse impact on the future operations of
the Company.
PERSONNEL
As of June 30, 1998, XLI employed 14 people, 8 of whom were in research and
development, 2 in marketing and sales, 1 in manufacturing and product service,
and 3 in finance and administration. XLI uses part-time technical contractors,
as needed, to augment its full-time staff. Due to XLI's limited cash flow,
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<PAGE> 40
certain key personnel have been receiving reduced cash compensation and have
been issued stock options and shares of Common Stock of XLI in lieu of cash
compensation.
DESCRIPTION OF PROPERTY
XLI's administrative, sales, marketing, research and development, and
product testing facility is located in North Billerica, Massachusetts. The
facility consists of approximately 4,850 square feet and is leased by XLI from
an unaffiliated party for $3,293 per month under a lease that expires in April
1999.
LEGAL PROCEEDINGS
XLI is not presently involved in any legal proceedings.
FURTHER INFORMATION CONCERNING THE BUSINESS OF XLI
For further information on the business and financials of XLI, see the
following documents filed by XLI with the SEC, which documents are incorporated
by reference in and made a part of this Proxy Statement as of their respective
dates:
1. XLI's Annual Report on Form 10-KSB for the fiscal year ended December
31, 1997, as amended, a copy of which is attached as Appendix C.
2. XLI's Quarterly Report on Form 10-QSB for the fiscal quarter ended March
31, 1998, as amended, a copy of which is attached as Appendix C.
3. XLI's Form 8-K dated July 10, 1998.
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<PAGE> 41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF XLI FOR THE FISCAL QUARTER ENDED MARCH 31, 1998
GENERAL
In the first quarter of 1998, the Company continued to focus on the design
and development of ASIC and VHDL (Virtual Hardware Description Language)
enhancement product offerings for the OEM printer and printer controller market.
During 1997 the Company delivered VHDL modules to OEMs and introduced the
XLI-2050 ImageChip ASIC (Application Specific Integrated Circuit) that
incorporates all of the Company's current enhancement technology into one chip
design. The Company hopes to increase revenue through additional licensing of
the ImageChip technology and through sales of its ImageChip ASICs to OEMs. The
Company's strategy is to become the primary distributor of its ImageChip ASICs
rather than solely a licensor of the ImageChip technology. The Company believes
that its revenues and gross margins will ultimately be greater from chip sales
than from royalties earned pursuant to technology licenses. Production
quantities of the ImageChip are planned for the second half of 1998. The Company
also plans to add additional engineering resources in 1998 in order to meet the
demands from existing and anticipated OEM agreements. This will result in
increased research and development costs that may negatively affect cash flow.
On January 29, 1998 the Company entered into a Plan of Reorganization and
Agreement of Merger by and among Oak Technology, Inc., Pixel Magic, Inc., and
OTI Acquisition Corporation ("OTI") pursuant to which OTI will be merged with
and into the Company and the Company will become a wholly-owned subsidiary of
Pixel Magic, Inc., which is a wholly-owned subsidiary of Oak Technology, Inc.
The ASIC products of Pixel Magic and XLI are complementary to each other and are
targeted to the same printer/digital copier market. The Company believes that
the merger should enhance XLI's ability to bring its products to the OEM market.
The merger is subject to the approval of the Company's shareholders.
RESULTS OF OPERATIONS
The Company's strategy is to develop core ideas derived from XLI's current
technology, then design products incorporating such ideas for production in
collaboration with strategic partners.
Revenues for the first quarter of 1998, which ended March 31, 1998, were
$144,341, a decrease of approximately 45% from 1997's first quarter revenues of
$261,721. Product revenues were $2,739 and contract and license revenues were
$141,603 for the first quarter of 1998, as compared to product revenues of
$20,054 and contract and license revenues of $241,667 for the same period in
1997. The decrease in product revenues of $17,315 or approximately 86% was
attributable to a reduction in revenues from sales of board products. XLI ceased
the production and promotion of its board products in the second half of 1996,
and is in the process of selling off its remaining board inventory. XLI expects
its board product revenues to continue to decrease in the future.
The decrease in contract and license revenues of $100,064 or approximately
41% was attributable to a reduction in license fees as the Company pursues its
strategy to become the primary distributor of its ImageChip ASICs rather than
solely a licensor of its technology.
Cost of product revenues for the quarter ended March 31, 1998 was $2,052 as
compared to $10,795 for the quarter ended March 31, 1997. The decrease of $8,743
or approximately 81% was attributable to the decrease in product revenue
resulting from fewer sales of board products. Cost of contract and license
revenues for the quarters ended March 31, 1998 was $34,923 as compared to
$40,932 for the quarter ended March 31, 1997. The decrease of $6,009 or
approximately 15% was attributable to the decrease in contract and license
revenues. The cost of contract and license revenues for the quarter ended March
31, 1998 represents a higher percentage of contract and license revenues than
for the quarter ended March 31, 1997 because of increased engineering costs
associated with the generation of contract revenues combined with the decrease
in license revenue.
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The Company recorded a net loss of $311,880 for the first quarter of 1998,
as compared to a net loss of $52,081 for the same period in 1997. The increase
is attributable primarily to the decrease in contract and license revenues of
$100,064 and the increase in cost and expenses of $131,610.
The Company's gross margin on total revenue was 75% for the first quarter
of fiscal year 1998 compared to 81% for the same period in 1997. The decrease in
gross margin was mostly due to the decrease in contract and license revenue of
$100,064.
Research and development costs for the three-month period ended March 31,
1998 were $158,401 or approximately 110% of revenues as compared to $112,491 or
approximately 43% of revenues for the three-month period ended March 31, 1997.
The increase in 1998 of $45,910 was primarily attributable to the hiring of
additional personnel and to associated expenses to support the increase in ASIC
and VHDL development activity. The Company's ongoing engineering emphasis
continues to be on the development of image enhancement ASICs.
Selling and marketing expenses for the three-month period ended March 31,
1998 were $41,707 or approximately 29% of revenues as compared to $7,330 or
approximately 3% of revenues for the three-month period ended March 31, 1997.
The increase of $34,377 is primarily attributable to the hiring of a vice
president of marketing and sales in late 1997 and expenses associated with the
introduction of the XLI-2050 ImageChip.
General and administrative expenses for the three month-period ended March
31, 1998 were $211,342 or approximately 147% of revenues as compared to $145,268
or approximately 50% of revenues for the three-month period ended March 31,
1997. The increase of $66,074 is primarily attributable to costs incurred in
connection with the proposed merger with OTI Acquisition Corporation.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998 the Company had current assets of $61,459, current
liabilities of $846,798 and cash of $39,832, resulting in a working capital
deficit of $785,339. For the quarter ended March 31, 1998, the Company had a
negative cash flow from operations of $239,553.
In connection with the Merger Agreement, XLI and Oak entered into a
Promissory Note and Agreement on April 24, 1998 (the "Note and Agreement")
pursuant to which Oak Technology, Inc. ("Oak") agrees to advance to XLI such
amounts as XLI may request for working capital purposes, up to $500,000. XLI
promises to pay to Oak the principal sum of $500,000, or such lesser principal
amount, as the case may be, at an interest rate equal to the Prime Rate plus
one-half percent. All principal and accrued interest shall be due on August 31,
1998. If the Reorganization Agreement has not closed on or before August 31,
1998, then the principal and accrued interest shall at the option of the Lender
either convert to a prepaid royalty under that Technology License and Supply
Agreement entered into on October 15, 1997 by and between Pixel Magic, Inc., a
Massachusetts corporation and wholly owned subsidiary of Lender, and Borrower or
be immediately due and payable. Lender shall provide written notification to
Borrower on August 31, 1998, indicating the form of repayment it has chosen.
The Company plans to finance its operations from its available cash and
through the working capital line provided by Oak.
CAPITAL EXPENDITURES
The Company does not have any material commitments for capital expenditures
at this time.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF XLI FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
The Private Securities Litigation Reform Act of 1995 contains safe harbor
provisions regarding forward-looking statements. Except for historical
information contained herein, the matters discussed in the Liquidity and Capital
Resources section below contain potential risks and uncertainties, including,
without limitation,
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risks related to the ability of XLI (hereinafter referred to in this section as
the "Company") to successfully develop, test, produce and market its proposed
products, identify and attract partners to help market its proposed products,
identify and attract partners to help commercialize the Company's products;
attract and retain key employees; obtain meaningful patent protection to cover
the Company's proprietary technology; raise capital for future operations and
commercialization of its products; and successfully respond to technological
changes in the marketplace. The Company will need to complete the pending merger
or attract partners in order to exploit its products, and there can be no
assurance that the Company will be successful in completing such transactions.
Additional information regarding potential factors which could affect the
Company's financial results are included in the Company's public filings with
the Securities and Exchange Commission.
GENERAL
In 1997 the Company continued to focus on the design and development of
ASIC and VHDL (Virtual Hardware Description Language) enhancement product
offerings for the OEM printer and printer controller market. During 1997 the
Company delivered VHDL modules to OEMs and introduced the XLI-2050 ImageChip
ASIC (Application Specific Integrated Circuit) that incorporates all of the
Company's current enhancement technology into one chip design. The Company hopes
to increase revenue through additional licensing of the ImageChip technology and
through sales of its ImageChip ASIC to OEMs. The Company's strategy is to become
the primary distributor of its ImageChip ASICs rather than solely a licensor of
the ImageChip technology. The Company believes that its revenues and gross
margins will ultimately be greater from chip sales than from royalties earned
pursuant to technology licenses. Production quantities of the ImageChip are
planned for the second half of 1998. The Company also plans to add additional
engineering resources in 1998 in order to meet the demands from existing and
anticipated OEM agreements. This will result in increased research and
development costs that may negatively affect cash flow. For the fiscal year
ended December 31, 1997, the Company had a negative cash flow from operations of
$102,122.
On January 29, 1998 the Company entered into a Plan of Reorganization and
Agreement of Merger by and among Oak Technology, Inc., Pixel Magic, Inc., and
OTI Acquisition Corporation ("OTI") pursuant to which OTI will be merged with
and into the Company and the Company will become a wholly-owned subsidiary of
Pixel Magic, Inc., which is a wholly-owned subsidiary of Oak Technology, Inc.
The ASIC products of Pixel Magic and XLI are complementary to each other and are
targeted to the same printer/digital copier market. The Company believes that
the merger should enhance XLI's ability to bring its products to the OEM market.
The merger is subject to the approval of the Company's shareholders.
The following table sets forth, for the periods indicated, statements of
operation data of the Company expressed as a percentage of revenues.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenue.................................................. 100% 100% 100%
Cost of Revenue.......................................... 18% 29% 45%
Research and Development................................. 33% 32% 30%
Selling and Marketing.................................... 5% 5% 11%
General and Administrative............................... 48% 50% 33%
Loss from Operations..................................... (4)% (16)% (19)%
Other Income (Expense)................................... (1)% (5)% (2)%
Net Loss................................................. (5)% (21)% (21)%
</TABLE>
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996.
Revenue. Revenue for the fiscal year ended December 31, 1997 was
$1,520,781 as compared to $898,618 for the fiscal year ended December 31, 1996,
an increase of $622,163 or 69%. Contract and license
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revenue for the fiscal year ended December 31, 1997 was $1,422,990 as compared
to $698,250 for the fiscal year ended December 31, 1996. Product revenues for
the fiscal year ended December 31, 1997 were $97,791 as compared to $200,368 for
fiscal year ended December 31, 1996, a decrease of $102,577 or approximately
51%. There were no product revenues from sales of ImageChip ASICs. License
revenue attributable to the ImageChip technology was $1,197,990, which
represented 78.8% of total revenues in 1997. The 104% increase in contract and
license revenue is due to an increase in the number and value of license
agreements entered into by the Company for its ImageChip technology, while the
decrease in product revenue was attributable to a reduction in revenues from
sales of board products. XLI ceased the production and promotion of its board
products in the second half of 1996, and is in the process of selling off its
remaining board inventory. XLI expects its board product revenues to continue to
decrease in the future.
Cost of Revenue. Cost of revenue for the fiscal year ended December 31,
1997 was $281,123 or 18% of revenue, as compared to $258,440 or 29% of revenue
for the fiscal year ended December 31, 1996, an increase of $22,683. The
increase was due mostly to the foundry cost for manufacturing the prototype
XLI-2050 ImageChip partially offset by the decrease in board sales.
Research and Development. Research and development expense for the fiscal
year ended December 31, 1997 was $507,051 or 33% of revenue as compared to
$287,748 or 32% of revenue for the fiscal year ended December 31, 1996. The
increase in 1997 of $219,303 was primarily attributable to the hiring of
additional personnel and to associated expenses to support the increase in
development activity. The Company's ongoing engineering emphasis continued to be
on the development of ASICs.
Selling and Marketing. Selling and marketing expenses for the fiscal year
ended December 31, 1997 were $72,485 or 5% of revenue as compared to $42,942 or
5% of revenue for the fiscal year ended December 31, 1996. The increase of
$29,543 was primarily attributable to the hiring of a Vice President of Sales &
Marketing in late 1997 and expenses associated with the introduction of the
XLI-2050 ImageChip.
General and Administrative. General and administrative expenses were
$718,832 or 48% of revenue for the fiscal year ended December 31, 1997 as
compared to $456,156 or 50% of revenue for the fiscal year ended December 31,
1996. The $262,678 increase in general and administrative expenses was
attributable to the increase in royalty expenses associated with increased
contract and license revenue, increased insurance costs, increased legal fees
associated with the merger, increased consulting fees and additional salary
costs. These increases were partially offset by a recovery of Korean taxes and
negotiated settlements with vendors.
Interest Expense. Net interest expense for the fiscal year ended December
31, 1997 was $19,361 or 1% of revenue as compared to $49,252 or 5% of revenue
for the fiscal year ended December 31, 1996. Interest expense for the fiscal
year ended December 31, 1997 was primarily attributable to interest on leased
equipment.
Net Loss. The Company recorded a net loss of $72,283 for the fiscal year
ended December 31, 1997 as compared to a net loss of $192,588 for the fiscal
year ended December 31, 1996. The decrease in the net loss of $120,305 was
primarily the result of significantly higher contract and licensing revenues.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995.
Revenue. Revenue for the fiscal year ended December 31, 1996 was $898,618
as compared to $1,097,550 for the fiscal year ended December 31, 1995, a
decrease of $198,932 or 18%. Product board revenues for the fiscal year ended
December 31, 1996 were $200,368 as compared to $397,550 for fiscal year ended
December 31, 1995, a decrease of $197,182 or approximately 50%. Contract and
license revenue for the fiscal year ended December 31, 1996 was $698,250 as
compared to $700,000 for the fiscal year ended December 31, 1995. The decrease
in product revenue was primarily attributable to a reduction in revenues from
sales of board products. XLI ceased the production and promotion of its board
products in the second half of 1996, and is in the process of selling off its
remaining board inventory. XLI expects its board product revenues to continue to
decrease in the future.
Cost of Revenue. Cost of revenue for the fiscal year ended December 31,
1996 was $258,440 or 29% of revenue, as compared to $496,866 or 45% of revenue
for the fiscal year ended December 31, 1995, a decrease
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of $238,426. The decrease was primarily due to the approximately 50% decrease in
product revenue and inventory write-offs of $30,516 in connection with the
discontinuation of the Company's board product lines.
Research and Development. Research and development expense for the fiscal
year ended December 31, 1996 was $287,748 or 32% of revenue as compared to
$331,279 or 30% of revenue for the fiscal year ended December 31, 1995. The
decrease in 1996 of $43,531 was primarily attributable to a decrease in
sub-contract work associated with the Company's agreement with Samsung
Electronics. The Company's ongoing engineering emphasis continued to be on the
development of ASICs.
Selling and Marketing. Selling and marketing expenses for the fiscal year
ended December 31, 1996 were $42,942 or 5% of revenue as compared to $117,896 or
11% of revenue for the year ended December 31, 1995. The decrease of $74,954 was
primarily attributable to use of commissioned personnel in lieu of salaried
personnel.
General and Administrative. General and administrative expenses were
$456,156 or 50% of revenue for the fiscal year ended December 31, 1996 as
compared to $358,040 or 33% of revenue for the fiscal year ended December 31,
1995. The $98,116 increase in general and administrative expenses was primarily
attributable to an increase in professional fees and expenses associated with an
unsuccessful merger transaction.
Interest Expense. Net interest expense for the fiscal year ended December
31, 1996 was $49,252 or 5% of revenue as compared to $24,655 or 2% of revenue
for the fiscal year ended December 31, 1995. Interest expense for the fiscal
year ended December 31, 1996 was primarily attributable to interest accrued on
subordinated notes issued by the Company and factoring charges associated with
receivables.
Net Loss. The Company recorded a net loss of $192,588 for the fiscal year
ended December 31, 1996 as compared to a net loss of $223,457 for the fiscal
year ended December 31, 1995. The decrease in the net loss of $30,869 was the
result of lower operating expenses partially offset by reduced revenues.
LIQUIDITY AND CAPITAL RESOURCES
For the fiscal year ended December 31, 1997, the Company had a negative
cash flow from operations of $102,122. This is primarily attributable to an
increase in personnel and expenses associated with the development and
introduction of the XLI-2050 ASIC. At December 31, 1997 the Company had current
assets of $116,001, current liabilities of $647,525 and a working capital
deficit of $531,524. The Company's cash balance at December 31, 1997 was
$112,401 as compared to $219,723 at December 31, 1996.
The Company's working capital deficit in 1997, 1996 and 1995 was $531,524,
$473,687 and $540,447, respectively. During these periods, the Company incurred
significant losses and expended significant amounts on research and development.
Additionally, the administrative costs and professional fees associated with
being a public company contributed to the working capital deficits.
During 1995, the Company entered into an agreement with the Silicon Valley
Bank to factor up to $500,000 against outstanding receivables. Silicon Valley
Bank has no obligation to provide funding and the factoring agreement may be
terminated at any time by Silicon Valley Bank or the Company. The agreement
calls for interest at a monthly rate of 2.5% and requires an administrative fee
of 1% of the receivables factored. Silicon Valley Bank has been granted a
security interest in all of the assets of the Company. As of December 31, 1997,
there were no outstanding loan amounts payable to Silicon Valley Bank.
The Company has no current plans to raise additional capital in 1998. The
Company hopes to fund its ongoing operations and development efforts from
ongoing and additional license and royalty fees as well as from funds generated
from ASIC sales. If the Company is unable to generate sufficient cash flow from
license agreements and ASIC sales, the Company's development efforts and ability
to continue as a going concern will be materially adversely affected. The
Company's auditors have included in their opinion a paragraph indicating that
there is substantial doubt about the Company's ability to continue as a going
concern.
In the year ended December 31, 1997, the Company funded its operations from
its available cash balance at the beginning of the year of approximately
$219,700. After accounting for cash used by operating activities of
approximately $102,000 and cash expended in connection with financing activities
of $5,200, the Company
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had approximately $112,000 of available cash at December 31, 1997. In the fiscal
year ended December 31, 1996, the Company began the year with no cash available.
However, the Company did generate approximately $155,000 of cash from financing
activities in 1996, primarily through the sale of subordinated notes. This
combined with approximately $64,000 of cash provided from operations, resulting
primarily from the collection of approximately $259,000 of accounts receivable
which offset an approximately $193,000 net loss from operations, left the
Company with approximately $219,700 at December 31, 1996. In the fiscal year
ended December 31, 1995, the Company began the year with approximately $75,900
in cash and ended the year with no cash. Net cash used by operating activities
was approximately $60,000 due primarily to a $223,000 net loss from operations.
Additionally, the Company expended approximately $15,800 through financing
activities, with approximately $43,000 used to meet capital lease obligations
for computer and office equipment. This amount was offset by approximately
$26,000 of proceeds from the issuance of short-term promissory notes.
CAPITAL EXPENDITURES
The Company does not have any material commitments for capital expenditures
at this time.
EFFECTS OF INFLATION
The Company believes that the relatively moderate rate of inflation over
the past few years has not had a significant impact on the Company's sales or
operating results.
INCOME TAXES
The Company adopted Statement No. 109 "Accounting for Income Taxes" in 1993
and its implementation has had no effect on the Company's financial position and
results of operation.
ACCOUNTING TREATMENT OF THE MERGER
It is anticipated that the Merger will be accounted for as a purchase
transaction. The holders of XLI Common Stock and XLI Preferred Stock will
receive a minimum cash payment of $.84 per share, and $2.09 per share,
respectively. In addition, if the sum of (i) 56% of XLI's gross product revenue,
(ii) $1.00 for each Digital Modular Feature IC sold and (iii) $2.00 for each
Multiple Feature IC sold exceeds $3,675,000 plus any post-closing audit
adjustments and any indemnification claims for breach of the Merger Agreement,
the holders of XLI Common Stock and XLI Preferred Stock will receive a maximum
cash payment of $2.59 per share, and $6.37 per share, respectively, during the
period commencing with the quarter ending March 31, 1999, and ending December
31, 2000. Record holders of XLI Common Stock or XLI Preferred Stock are entitled
to seek appraisal of their shares if the Merger is consummated, provided that
certain procedures are followed. See "APPRAISAL RIGHTS."
FINANCIAL STATEMENTS
The Company's financial statements for the fiscal year ended December 31,
1997 are shown on pages F1 through F14. The accounting firm of Wolf & Company,
P.C. has been engaged as the Company's independent accountant for the past three
years and its Report of Independent Accountants for fiscal 1997 is shown on page
F2. The Company's financial statements (unaudited) for the fiscal quarter ended
March 31, 1998 are shown on pages F15-F17.
42
<PAGE> 47
MARKET PRICE FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
XLI Common Stock is currently traded on the NASDAQ Bulletin Board under the
symbol "XLCC", and XLI Preferred Stock is traded on NASDAQ Bulletin Board under
the symbol "XLCCP". On January 4, 1995, XLI stock was delisted from the NASDAQ
Small Cap market as it did not meet the minimum requirement for maintaining
listing.
The following table sets forth the range of high and low sale prices quoted
on NASDAQ for the Common Stock for the periods indicated. Such quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
do not necessarily represent actual transactions.
<TABLE>
<CAPTION>
COMMON STOCK
-------------------
HIGH LOW
-------- --------
<S> <C> <C>
1997
First Quarter.......................................... $0.37500 $0.09375
Second Quarter......................................... $0.28425 $0.09375
Third Quarter.......................................... $0.50000 $0.12500
Fourth Quarter......................................... $0.81250 $0.34375
1996
First Quarter.......................................... $ 0.10 $ 0.001
Second Quarter......................................... $ 0.1875 $ 0.001
Third Quarter.......................................... $ 0.4375 $ 0.125
Fourth Quarter......................................... $ 0.4375 $ 0.125
</TABLE>
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On January 24, 1996, XLI received confirmation from Coopers & Lybrand of
the decision by XLI that Coopers & Lybrand would not be engaged as XLI's
independent accountants. The accounting firm of Wolf & Company, P.C. was
appointed and approved by the Board of Directors to replace Coopers & Lybrand.
There was no adverse opinion or disclaimer of opinion or disagreement on any
matter of accounting principles or practices in Coopers & Lybrand's report on
the financial statements for the fiscal years ended December 31, 1994 and
December 31, 1993.
43
<PAGE> 48
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF XLI
The following table sets forth, as of June 30, 1998, the ownership of XLI
Common Stock by (i) each person who is known by XLI to own of record or
beneficially more than five percent of XLI Common Stock, (ii) each of XLI's
directors and (iii) all directors and officers as a group. As Party
Stockholders, all of the stockholders listed in the table have executed
irrevocable proxies appointing the directors on the board of directors of Oak as
their sole and exclusive proxies in connection with the Merger, with full power
of substitution and resubstitution, to vote and exercise all voting and related
rights with respect to all of the shares of capital stock of XLI that they now
own or hereafter may beneficially own. As of June 30, 1998, XLI had 263
stockholders of record.
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
BENEFICIALLY OWNED(1)(2) BENEFICIALLY OWNED
------------------------ -------------------
BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
---------------- ----------- --------- ------- --------
<S> <C> <C> <C> <C>
Anthony D. D'Amelio.................................... 634,554 17.7% 6,000 1.9%
101 Billerica Avenue, 5 Billerica Park
N. Billerica, MA 01862
Roger F. Salava........................................ 182,750 5.1% -- --
101 Billerica Avenue, 5 Billerica Park
N. Billerica, MA 01862
James L. Salerno....................................... 163,584 4.6% 50,000 15.9%
101 Billerica Avenue, 5 Billerica Park
N. Billerica, MA 01862
Daniel J. Allen........................................ 215,001 6.0% -- --
101 Billerica Avenue, 5 Billerica Park
N. Billerica, MA 01862
Joseph L. Katz, Trustee of Research Investment Trust... 186,422 5.2% -- --
101 Billerica Avenue, 5 Billerica Park
N. Billerica, MA 01862
Joseph L. Katz, Individually........................... 30,000 0.8% -- --
101 Billerica Avenue, 5 Billerica Park
N. Billerica, MA 01862
Vincent J. Spoto....................................... 97,108 2.7% -- --
50 Cypress Road
Wellesley, MA 02181
Adam L. Carley......................................... 104,917 2.9% -- --
6 Hillside Road
Windham, NH 03087
All directors and executive officers as a group (7
persons)............................................. 1,614,336 45.0% 56,000 17.8%
</TABLE>
- ---------------
(1) Pursuant to the rules of the Securities and Exchange Commission, shares of
Common Stock which an individual or group has a right to acquire within 60
days pursuant to the exercise of options or warrants are deemed to be
outstanding for the purpose of computing the percentage ownership of such
individual or group.
(2) Does not include 42,777 shares issuable upon exercise of a warrant issued to
Thomas James Associates, Inc. in connection with XLI's offering of Series A
Preferred Stock in February 1994; 254,765 shares issuable upon exercise of
the Underwriter's Warrant included in the offering in February 1994; and
427,758 shares issuable upon exercise of Class A Warrants.
44
<PAGE> 49
INFORMATION CONCERNING OTI ACQUISITION
OTI Acquisition is a corporation organized and existing under the laws of
the State of Delaware as a wholly-owned subsidiary of Pixel for the sole purpose
of effecting the Merger. On the Effective Date, OTI Acquisition shall merge with
and into XLI and the separate corporate existence of OTI Acquisition shall
cease. The Certificate of Incorporation and By-laws of OTI Acquisition, as in
effect at the Effective Time, shall be the Certificate of Incorporation and
By-laws of XLI, except that the name of the surviving corporation shall be
Xerographic Laser Images Corporation.
INFORMATION CONCERNING OAK AND ITS SUBSIDIARIES
The information contained herein regarding the business of Oak and its
subsidiaries is qualified by reference to the documents filed by Oak with the
SEC and incorporated herein by reference. See "INCORPORATION OF CERTAIN
INFORMATION BY REFERENCE."
GENERAL
Oak was incorporated in California on July 2, 1987, and reincorporated in
Delaware on February 8, 1995. Oak's principal executive offices are located at
139 Kifer Court, Sunnyvale, California 94086 and its telephone number is (408)
737-0888. Oak has wholly owned subsidiaries in Japan (Oak Technology K.K.),
Taiwan (Oak Technology Taiwan) and Andover, Massachusetts (Pixel Magic, Inc.).
Oak currently has over 500 employees worldwide.
Oak designs high-performance semiconductors and related software solutions
for the optical storage, consumer electronics and digital office equipment
markets, targeting applications ranging from business productivity to home
entertainment and office automation.
OPTICAL STORAGE MARKET
Oak pioneered the IDE/ATAPI CD-ROM controller chip in 1993 and is one of
the industry's largest merchant suppliers of CD-ROM controllers. Oak's recent
product introductions reflect the Company's commitment to achieving higher
levels of functional integration in future product offerings for the optical
storage market. Oak's current optical storage solutions include integrated
controllers for CD-ROM, CD-R/RW and DVD-ROM drives. The OTI-9325, Oak's recently
announced three-in-one CD-ROM controller, integrates the block decoder, CD-DSP,
servo and audio processor on a single chip, thereby offering drive OEMs a more
cost-effective solution supporting high performance levels. For the coming
generation of optical storage solutions, namely DVD-ROM drives, Oak is currently
sampling the OTI-9800, its first 4x DVD-ROM controller with an integrated CSS
processor.
CONSUMER ELECTRONICS
Oak today offers a family of DVD solutions for the consumer electronics
market. The TroikaCSS(TM), Oak's integrated MPEG-2/Dolby Digital (AC-3) decoder
with CSS authentication and decryption, provides DVD playback capabilities for
DVD players and DVD-enabled PCs. Oak also offers the Interactive DVD Browser(TM)
software, currently the industry's only DirectShow-compliant DVD navigation
tool. In addition, Oak recently introduced its third-generation MPEG-1 decoder
for VideoCD players, the OTI-257. This solution is the first and only controller
on the market to combine an MPEG-1 audio/video decoder, audio DSP for karaoke
functions, on-screen display and a TV encoder that supports NTSC/PAL standards
on a single chip.
DIGITAL OFFICE EQUIPMENT MARKET
The emergence of the multifunction peripheral (MFP) in the small
business/home office environment has created opportunities for Oak to leverage
its subsidiary Pixel Magic's digital image processing technologies
45
<PAGE> 50
for the growing digital office equipment market. Pixel Magic offers a family of
high-performance imaging processors that target applications such as scanners,
digital color copiers, fax machines and MFPs.
FURTHER INFORMATION CONCERNING THE BUSINESS OF OAK AND ITS SUBSIDIARIES
For further information concerning the business of Oak and its
subsidiaries, see the following documents filed by Oak with the SEC, which
documents are incorporated by reference in and made a part of this Proxy
Statement as of their respective dates:
1. Oak's Annual Report on Form 10-K for the fiscal year ended June 30,
1997, a copy of which is attached as Appendix D.
2. Oak's Quarterly Report on Form 10-Q for the quarter ended March 31,
1998, a copy of which is attached as Appendix D, and Oak's Quarterly Report
on Form 10-Q for the quarters ended September 30, 1997 and December 31,
1997.
46
<PAGE> 51
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents, filed by XLI with the Securities and Exchange
Commission ("SEC"), are incorporated by reference in and made a part of this
Proxy Statement as of their respective dates:
1. XLI's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1997, as amended, a copy of which is attached as Appendix C.
2. XLI's Quarterly Report on Form 10-QSB for the fiscal quarter ended
March 31, 1998, as amended, a copy of which is attached as Appendix C.
3. XLI's Form 8-K dated July 10, 1998.
The following documents, filed by Oak with the Securities and Exchange
Commission ("SEC"), are incorporated by reference in and made a part of this
Proxy Statement as of their respective dates:
1. Oak's Annual Report on Form 10-K for the fiscal year ended June 30,
1997, a copy of which is attached as Appendix D.
2. Oak's Quarterly Report on Form 10-Q for the quarter ended March 31,
1998, a copy of which is attached as Appendix D, and Oak's Quarterly Report
on form 10-Q for the quarters ended September 30, 1997 and December 31,
1997.
All documents filed by Oak pursuant to Sections 13(a), 14 or 15(d) of the
Securities Exchange Act of 1934 ("Exchange Act") after the date of this Proxy
Statement and before the date of the Special Meeting will be deemed to be
incorporated by reference in and to be a part of this Proxy Statement from the
date such documents are filed.
Any statement contained in a document incorporated or deemed to be
incorporated by reference in this Proxy Statement will be deemed to be modified
or superseded for purposes of this Proxy Statement to the extent that a
statement contained herein or in any other subsequently filed document that also
is or is deemed to be incorporated by reference herein modifies or supersedes
such statement. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Proxy
Statement.
Copies of any XLI document incorporated by reference in and not attached as
an appendix to this Proxy Statement may be obtained without cost by any person
to whom a Proxy Statement is delivered by written or oral request (telephone
number (978) 670-5999) to XLI at 101 Billerica Avenue, 5 Billerica Park, North
Billerica, MA 01862, Attention: James L. Salerno, Chief Financial Officer.
Copies of any Oak document incorporated by reference in and not attached as
an appendix to this Proxy Statement may be obtained without cost by any person
to whom a Proxy Statement is delivered by written or oral request (telephone
number (408) 737-0888) to Oak Technology at 139 Kifer Court, Sunnyvale, CA
94086, Attention: Sidney S. Faulkner, Chief Financial Officer.
47
<PAGE> 52
XEROGRAPHIC LASER IMAGES CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE(S)
-----------
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheets as of December 31, 1997 and 1996............. F-3
Statements of Loss for the Years Ended December 31, 1997,
1996 and 1995............................................. F-4
Statements of Changes in Stockholders' Deficit for the Years
Ended December 31, 1997, 1996 and 1995.................... F-5
Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995....................................... F-6
Notes to Financial Statements............................... F-7 to F-14
Balance Sheets as of March 31, 1998 (unaudited) and December
31, 1997.................................................. F-15
Statements of Operations for the Three-Month Period Ended
March 31, 1998 and 1997 (unaudited)....................... F-16
Statements of Cash Flows for the Three-Month Period Ended
March 31, 1998 and 1997 (unaudited)....................... F-17
</TABLE>
F-1
<PAGE> 53
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Xerographic Laser Images Corporation:
We have audited the accompanying balance sheets of Xerographic Laser Images
Corporation as of December 31, 1997 and 1996 and the related statements of loss,
stockholders' deficit and cash flows for each of the years in the three-year
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Xerographic Laser Images
Corporation as of December 31, 1997 and 1996 and the results of its operations
and cash flows for each of the years in the three-year period ended December 31,
1997, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
Financial Statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters,
which include a merger for which they will be seeking shareholder approval, are
also discussed in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
WOLF & COMPANY, P.C.
Boston, Massachusetts
February 27, 1998
F-2
<PAGE> 54
XEROGRAPHIC LASER IMAGES CORPORATION
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(NOTE 1)
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 112,401 $ 219,723
Accounts receivable, less allowance for doubtful accounts
of $5,000 in 1996...................................... 3,600 20,314
----------- -----------
Total current assets.............................. 116,001 240,037
Property and equipment, net (Note 4)........................ 16,478 35,191
Other assets................................................ 3,499 4,432
----------- -----------
Total assets...................................... $ 135,978 $ 279,660
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 237,873 $ 352,346
Deferred revenue.......................................... 10,000 101,000
Accrued payroll........................................... 101,705 33,750
Accrued expenses (Note 7)................................. 286,216 146,193
Accrued severance costs (Note 8).......................... -- 68,704
Current portion of capital lease obligations (Note 6)..... 11,731 11,731
----------- -----------
Total current liabilities......................... 647,525 713,724
Capital lease obligations (Note 6).......................... 5,176 16,908
Subordinated notes payable (Note 13)........................ 283,688 283,688
----------- -----------
Total liabilities................................. 936,389 1,014,320
----------- -----------
Stockholders' deficit (Notes 5 and 9)
Series A Preferred stock, $.01 par value; authorized
1,000,000 shares; 315,238 issued and outstanding....... 3,152 3,152
Common stock, $.01 par value; 30,000,000 shares
authorized; 2,039,310 and 1,778,646 issued and
outstanding at December 31, 1997 and 1996,
respectively........................................... 20,393 17,786
Additional paid-in capital................................ 8,438,278 8,434,353
Accumulated deficit....................................... (9,262,234) (9,189,951)
----------- -----------
Total stockholders' deficit....................... (800,411) (734,660)
----------- -----------
Total liabilities and stockholders' deficit....... $ 135,978 $ 279,660
=========== ===========
</TABLE>
See accountants' report and accompanying notes to financial statements.
F-3
<PAGE> 55
XEROGRAPHIC LASER IMAGES CORPORATION
STATEMENTS OF LOSS
(NOTE 1)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues (Note 7):
Product revenues..................................... $ 97,791 $ 200,368 $ 397,550
Contract and license revenues........................ 1,422,990 698,250 700,000
---------- ---------- ----------
Total revenues............................... 1,520,781 898,618 1,097,550
---------- ---------- ----------
Costs and expenses:
Cost of product revenues............................. 29,358 176,886 294,851
Cost of contract and license revenue................. 251,765 81,554 202,015
Research and development............................. 507,051 287,748 331,279
Selling and marketing................................ 72,485 42,942 117,896
General and administrative........................... 718,832 456,156 358,040
---------- ---------- ----------
Total cost and expenses...................... 1,579,491 1,045,286 1,304,081
---------- ---------- ----------
Loss from operations................................... (58,710) (146,668) (206,531)
---------- ---------- ----------
Other income (expense):
Interest expense..................................... (19,361) (49,252) (24,655)
Interest income...................................... -- -- 396
Other income......................................... 5,788 3,332 7,333
---------- ---------- ----------
Total other expense, net..................... (13,573) (45,920) (16,926)
---------- ---------- ----------
Net loss............................................... $ (72,283) $ (192,588) $ (223,457)
========== ========== ==========
Net loss per common share -- basic..................... $ (0.04) $ (0.12) $ (0.18)
Weighted average common and common equivalent shares
outstanding -- basic................................. 1,799,999 1,565,105 1,255,314
</TABLE>
See accountants' report and accompanying notes to financial statements.
F-4
<PAGE> 56
XEROGRAPHIC LASER IMAGES CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
(NOTE 1)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------------- ---------------------
NUMBER OF NUMBER OF ADDITIONAL TOTAL
SHARES SHARES PAID-IN ACCUMULATED STOCKHOLDERS'
ISSUED PAR VALUE ISSUED PAR VALUE CAPITAL DEFICIT DEFICIT
--------- --------- --------- --------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994........... 331,558 $3,316 1,075,023 $10,750 $8,418,088 $(8,773,906) $(341,752)
Conversion of Series A Preferred Stock
into common stock.................... (16,320) (164) 13,623 136 28 -- --
Issuance of common stock to key
employees in lieu of full cash
compensation......................... -- -- 250,000 2,500 5,312 -- 7,812
Net loss............................... -- -- -- -- -- (223,457) (223,457)
------- ------ --------- ------- ---------- ----------- ---------
Balance at December 31, 1995........... 315,238 3,152 1,338,646 13,386 8,423,428 (8,997,363) (557,397)
Issuance of common stock to key
employees in lieu of full cash
compensation......................... -- -- 440,000 4,400 10,925 -- 15,325
Net loss............................... -- -- -- -- -- (192,588) (192,588)
------- ------ --------- ------- ---------- ----------- ---------
Balance at December 31, 1996........... 315,238 3,152 1,778,646 17,786 8,434,353 (9,189,951) (734,660)
Exercise of stock options.............. -- -- 260,664 2,607 3,925 -- 6,532
Net loss............................... -- -- -- -- -- (72,283) (72,283)
------- ------ --------- ------- ---------- ----------- ---------
Balance at December 31, 1997........... 315,238 $3,152 2,039,310 $20,393 $8,438,278 $(9,262,234) $(800,411)
======= ====== ========= ======= ========== =========== =========
</TABLE>
See accountants' report and accompanying notes to financial statements.
F-5
<PAGE> 57
XEROGRAPHIC LASER IMAGES CORPORATION
STATEMENTS OF CASH FLOWS
(NOTE 1)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................................. $ (72,283) $(192,588) $(223,457)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Inventory write-offs............................... -- 30,516 41,855
Write-offs of fixed assets......................... -- -- 3,471
Depreciation and amortization...................... 18,713 33,321 73,766
Issuance of common stock for services rendered..... -- 15,325 7,812
(Increase) decrease in operating assets:
Accounts receivable.............................. 16,714 258,957 (222,702)
Inventory........................................ -- 24,665 75,821
Other assets..................................... 933 11,469 6,281
Increase (decrease) in operating liabilities:
Accounts payable................................. (114,473) (86,882) 118,854
Deferred revenue................................. (91,000) 101,000 --
Accrued expenses................................. 207,978 (27,063) 186,467
Accrued severance costs.......................... (68,704) (104,404) (128,221)
--------- --------- ---------
Net cash provided (used) by operating activities........ (102,122) 64,316 (60,053)
--------- --------- ---------
Cash flows from financing activities:
Exercise of stock options............................. 6,532 -- --
Receipts of notes payable............................. -- 204,500 26,000
Payments of notes payable............................. -- (35,500) --
Payments under capital lease obligations.............. (11,732) (12,161) (43,253)
Increase (decrease) in cash overdraft................. -- (1,432) 1,432
--------- --------- ---------
Net cash provided (used) by financing activities........ (5,200) 155,407 (15,821)
--------- --------- ---------
Net increase (decrease) in cash......................... (107,322) 219,723 (75,874)
Cash at beginning of year............................... 219,723 -- 75,874
--------- --------- ---------
Cash at end of year..................................... $ 112,401 $ 219,723 $ --
========= ========= =========
Supplemental disclosure of cash flow information(1):
Interest paid......................................... $ 19,361 $ 45,616 $ 20,340
</TABLE>
- ---------------
(1) See Note 12 "Supplementary Cash Flow Information" for noncash investing and
financing activities.
See accountants' report and accompanying notes to financial statements.
F-6
<PAGE> 58
XEROGRAPHIC LASER IMAGES CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Xerographic Laser Images Corporation (the "Company") was founded in June
1989 to develop, manufacture and market a proprietary technology which improves
the quality of output from laser printers.
For the fiscal years ended December 31, 1997, 1996 and 1995, the Company
had net losses of $72,283, $192,588 and $223,457, respectively. The Company had
a working capital deficit of $531,524 and total stockholders' deficit of
$800,411 at December 31, 1997.
On January 29, 1998, certain stockholders of the Company executed a "Plan
of Reorganization and Agreement of Merger" (the "Merger Agreement") with OTI
Acquisition Corporation, a wholly-owned subsidiary of Pixel Magic, Inc.
("Pixel"). Under the terms of the Merger Agreement, the Company will become a
wholly-owned subsidiary of Pixel and the Company's stockholders will receive a
cash payment based on the number of shares outstanding at the time of the merger
and the conditional right to receive additional cash payments based on the
Company meeting certain milestones through December 31, 2000. A majority of the
Company's Preferred Stockholders and Common Stockholders, each voting as a
separate class, must vote in favor of the Merger Agreement in order for it to be
effective. Among other things, the Merger Agreement, once effective, appoints
stockholder representatives, adjusts the terms of the Carley Agreement (see note
7), requires the execution of employment agreements and provides for unexercised
stock options and warrants. Please refer to the Proxy Statement filed pursuant
to Section 14(a) of the Securities Exchange Act of 1934 which accompanies these
financial statements.
Should the Merger Agreement not be consummated, there would be substantial
doubt regarding the Company's ability to continue as a going concern. The
financial statements do not include any adjustments that may be necessary should
the Company be unable to continue as a going concern.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the balance
sheet date and the amounts of revenues and expenses recorded during the
reporting period. Actual results could differ from those estimates. Such
estimates primarily relate to accrued expenses and the valuation allowance on
deferred taxes.
Revenue Recognition
Revenues from product sales are recognized at the time of shipment or in
accordance with contractual acceptance terms. Research, development and
licensing contract revenues are recognized when the related costs are incurred
and performance criteria in the contract are met. The Company defers revenue
associated with future services over the term of the related services.
Inventory
Inventory was stated at the lower of cost (first in, first out) or market.
During 1996, all remaining board product inventory became obsolete due to
changing technology, and was written off.
Property and Equipment
Purchased property and equipment are recorded at cost. Depreciation is
recorded using the straight-line method over the estimated useful lives of the
related assets, which is generally five years. Property and
F-7
<PAGE> 59
XEROGRAPHIC LASER IMAGES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
equipment leased under capital leases are stated at cost and are amortized over
the lesser of the lease term or estimated useful life.
Maintenance and repairs are charged to expense as incurred. When assets are
retired or otherwise disposed of, the assets and related allowances for
depreciation and amortization are eliminated from the accounts and any resulting
gain or loss, if any, is reflected in the results of operations.
Research and Development
Research and development costs are expensed as incurred.
Product Warranty Costs
The Company's warranty period on sales of its board products is generally
one year. The Company warrants that its board products are free from defects in
workmanship and materials and conform in all material respects to
specifications. In the event of a warranty claim, the Company may elect to
replace the defective board product or refund to the customer the amount paid
for such product. Estimated future costs for initial product warranties are
considered immaterial.
Income Taxes
Deferred tax assets and liabilities are recorded for temporary differences
between the financial statement and tax bases of assets and liabilities using
the currently enacted income tax rates expected to be in effect when the taxes
are actually paid or recovered. A deferred tax asset is also recorded for net
operating loss and tax credit carryforwards to the extent their realization is
more likely than not. The deferred tax expense for the period represents the
change in the deferred tax asset or liability from the beginning to the end of
the period.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123, "Accounting for Stock-Based Compensation." This Statement
encourages all entities to adopt a fair value based method of accounting for
stock compensation, whereby compensation cost is measured at the grant date
based on the value of the award and is recognized over the service period, which
is usually the vesting period. However, it also allows an entity to continue to
measure compensation cost for employee plans using the intrinsic value based
method of accounting prescribed by Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," whereby compensation cost is
the excess, if any, of the quoted market price of the stock at the grant date
(or other measurement date) over the amount an employee must pay to acquire the
stock. Entities electing to continue to apply APB Opinion No.25 for employee
stock-based compensation must make pro forma disclosures of net income and
earnings per share, as if the fair value based method of accounting had been
applied.
Generally, stock options issued under the Company's stock option plan have
no intrinsic value at the grant date, and under APB Opinion No. 25 no
compensation cost is recognized. The Company will continue its current
accounting treatment for employee stock options and make the pro forma
disclosures proscribed by this Statement.
Net Income (Loss) Per Share
In February 1997, FASB issued SFAS No. 128, "Earnings per Share" which
requires that earnings per share be calculated on a basic and dilutive basis.
Basic earnings per share represents income available to common stock divided by
the weighted-average number of common shares outstanding during the period.
Diluted earnings per share reflects additional common shares that would have
been outstanding if dilutive potential common shares had been issued, as well as
any adjustment to income that would result from the
F-8
<PAGE> 60
XEROGRAPHIC LASER IMAGES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
assumed conversion. Potential common shares that may be issued by the Company
relate solely to outstanding stock options and warrants, and are determined
using the treasury stock method. The assumed conversion of outstanding dilutive
stock options and warrants would increase the shares outstanding but would not
require an adjustment to income as a result of the conversion. For the years
ended December 31, 1997 and 1996, options and warrants applicable to 3,410,584
shares and 3,469,790 shares, respectively were anti-dilutive and excluded from
the diluted earnings per share computation. The statement is effective for
interim and annual periods ending after December 15, 1997, and requires the
restatement of all prior period earnings per share data presented. No
restatement was necessary as the adoption of SFAS No. 128 did not impact the
Company's earnings per share calculations.
3. INCOME TAXES
The Company has generated operating loss carryforwards for federal and
state income tax and federal alternative minimum tax purposes of approximately
$9,110,000 for the period June 9, 1989 (inception) through December 31, 1997.
These net operating losses will expire at various dates through 2012. The
Company has also generated research and development credits of approximately
$268,000 through December 31, 1997, which expire at various dates through 2012.
Utilization of these net operating loss carryforwards and research and
development credits will be subject to annual limitations based on Internal
Revenue Code provisions relating to changes in the Company's ownership.
The approximate tax effect of each type of temporary difference before
allocation of the valuation allowance is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................ $ 3,655,000 $ 3,484,000
Tax credit carryforwards........................ 268,000 211,000
Allowance for doubtful accounts................. -- 2,000
Accrued severance costs......................... -- 27,500
----------- -----------
Total deferred tax asset.......................... 3,923,000 3,724,500
Valuation allowance............................... (3,923,000) (3,724,500)
----------- -----------
Net deferred tax asset............................ $ -- $ --
=========== ===========
</TABLE>
Due to the uncertainty surrounding the timing of realizing the benefits of
its favorable tax attributes in future tax returns, the Company has placed a
100% valuation allowance against deferred tax assets.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
--------- ---------
<S> <C> <C>
Equipment............................................ $ 121,740 $ 121,740
Capitalized lease equipment.......................... 368,964 368,964
--------- ---------
490,704 490,704
Less accumulated depreciation and amortization....... (474,226) (455,513)
--------- ---------
Property and equipment, net.......................... $ 16,478 $ 35,191
========= =========
</TABLE>
F-9
<PAGE> 61
XEROGRAPHIC LASER IMAGES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. STOCK OPTION PLANS
The Company maintains two stock option plans (the "1990 Stock Option Plan"
and the "1992 Stock Option Plan") whereby the Board of Directors, at their
discretion, may issue either incentive stock options or nonqualified options to
employees and nonqualified options to consultants, directors or other
non-employees.
Incentive stock options may not be granted at a price less than the fair
market value of the shares at the grant date (or less than 110% of fair market
value in the case of employees or officers holding 10% or more of the voting
stock) while the nonqualified options may not be granted at a price lower than
the lesser of 50% of the fair market value of the shares at the grant date or
the book value of the shares as of the end of the fiscal year of the Company
immediately preceding the date of the grant. All grants as of December 31, 1997
were at fair market value or greater. The options generally vest ratably over a
period of zero to five years. Incentive stock options granted under the plan
must expire not more than 10 years from the date of grant and not more than five
years in the case of incentive stock options granted to an employee or officer
holding 10% or more of the voting stock of the Company. All options not
exercised prior to the expiration date automatically expire.
The following table summarizes all stock option activity:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- --------
<S> <C> <C>
Outstanding at December 31, 1994........................ 137,986 $1.99
Granted............................................... 287,000 0.03
Canceled.............................................. (74,381) 1.50
Terminated............................................ (25,638) 1.50
--------
Outstanding at December 31, 1995........................ 324,967 $0.41
Granted............................................... 125,500 0.02
Canceled.............................................. (10,417) 0.03
Terminated............................................ (1,176) 1.50
--------
Outstanding at December 31, 1996........................ 438,874 $0.30
Granted............................................... 205,000 0.127
Exercised............................................. (260,664) 0.025
Terminated............................................ (3,542) 0.75
--------
Outstanding at December 31, 1997........................ 379,668 $0.39
========
</TABLE>
In January 1998, all options became exercisable in connection with the
Merger Agreement. All options will terminate once the merger is completed.
Information pertaining to options outstanding at December 31, 1997 is as
follows:
<TABLE>
<CAPTION>
RANGE OF NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISE PRICE
- --------------- ----------- ----------------
<S> <C> <C>
$ .01-$.1375 344,169 $ 0.09
$ 1.50 29,500 $ 1.50
$10.50-$22.50 5,999 $12.16
-------
379,668 $ 0.39
</TABLE>
At December 31, 1997, 59,143 shares are available for future grants. In
January and February 1998, 334,169 options were exercised.
The Company applies APB Opinion 25 and related interpretations in
accounting for its employee option and warrant grants. Accordingly, no
compensation cost has been recognized. Had compensation cost been determined
based on the fair value at the grant dates for awards under those plans
consistent with the method
F-10
<PAGE> 62
XEROGRAPHIC LASER IMAGES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
prescribed by SFAS No. 123, the Company's net loss and net loss per common share
would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
-------- --------- ---------
<S> <C> <C> <C> <C>
Net loss: As reported.... $(72,283) $(192,588) $(223,457)
Pro Forma...... (98,318) (194,138) (251,426)
Net loss per common share: As reported.... (0.04) (0.12) (0.18)
Pro Forma...... (0.05) (0.12) (0.20)
</TABLE>
The fair value of each option or warrant granted is estimated on the grant
date using the Black-Scholes option pricing model. Due to the historical
volatility of the Company's stock price, the fair value of the option or warrant
is generally equal to the fair value of the underlying stock. The weighted
average fair value of options granted as of the grant dates was $.13 and $.01
for 1997 and 1996, respectively.
6. COMMITMENTS
The Company leases its facilities and certain equipment under operating
lease agreements which expire on various dates through 1999. Rental expense
incurred under these agreements was $38,558, $36,100 and $56,179 during 1997,
1996, and 1995, respectively. The Company has entered into various capital
leases for office equipment, the net book value of which were $16,478 and
$28,638 at December 31, 1997 and 1996, respectively.
The future minimum annual lease obligations under these leases for the
respective years ending December 31 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
1998................................................... $ 18,528 $42,234
1999................................................... 8,249 17,014
2000................................................... -- 2,936
-------- -------
Total obligation............................. 26,777 62,184
Less amount representing interest...................... (9,870)
--------
Present value of minimum lease payments................ 16,907
Less current portion................................... (11,731)
--------
Long-term obligation................................... $ 5,176
========
</TABLE>
7. RELATED PARTY TRANSACTIONS
In July 1989, the Company entered into an Agreement (the "Carley
Agreement") with the Carley Corporation, a company founded by Dr. Adam L.
Carley, a founder of the Company, pursuant to which the Company acquired an
exclusive worldwide license to certain technology (the "Carley Technology") for
the printing of text, graphics and photographic images. In consideration
therefore, the Company issued 268,040 shares of common stock valued at $.0l per
share to the two stockholders of the Carley Corporation and agreed to pay
royalties equal to 5% of cash received in connection with sales of hardware or
software products incorporating the Carley Technology and 33 1/3% on all related
technology sublicensed to third parties, up to $2,400,000. The Carley
Corporation has agreed that upon payment of the total royalty amount it will
assign all rights, title and interest to the Carley Technology, including any
improvements or future developments on the Carley Technology, to the Company.
Upon the assignment the Company has agreed to sublicense the Carley Technology
to the Carley Corporation, on an exclusive and royalty-free basis, for retail
services including but not limited to stores, kiosks and booths for purposes of
picture making and picture reproduction.
F-11
<PAGE> 63
XEROGRAPHIC LASER IMAGES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In December 1993, the Company and Carley Corporation amended the Carley
Agreement such that Carley Corporation shall be paid minimum royalties of: (i)
$75,000 in fiscal year 1994; (ii) $82,500 in fiscal year 1995; and (iii) $90,000
in fiscal year 1996. Additionally, Carley Corporation will be entitled to
additional royalties not to exceed $225,000 in each of these years based on a
percentage of net profit after interest, taxes and the minimum royalty payments.
Effective January 1, 1997, the Company and the Carley Corporation again
amended the Carley Agreement to provide a royalty of 15% of cash receipts from
sales and licenses of products incorporating the Carley Technology, in lieu of
the previous royalty rate of 5% on boards and 33 1/3% of license fees.
Royalties expensed under the Carley Agreement were approximately $222,644,
$90,000 and $82,500 for the years ended December 31, 1997, 1996 and 1995
respectively. Cumulative royalties expensed in connection with this agreement
were $740,229 through December 31, 1997. Accrued expenses at December 31, 1997
includes $222,094 due under the Carley Agreement. (See Note 1).
8. SEVERANCE CHARGES
On November 11, 1993, the Company recorded approximately $380,000 for
severance charges relating to the resignation of the Company's President and
Vice President of Engineering. The cash payments associated with these charges
were completed in November 1997.
9. CAPITAL STOCK
Series A Preferred Stock
On February 22, 1994, the Company completed an offering of 850,000 units,
each consisting of one share of Series A Convertible Preferred Stock and one
Class A redeemable Common Stock Purchase Warrant (see "Warrants"). Through
December 31, 1997, 534,762 shares of Series A Convertible Preferred Stock have
been converted into 445,635 shares of Common Stock. To date, there have been no
dividends paid or accrued on Series A Preferred Stock. Series A Preferred
stockholders are entitled to an annual cumulative dividend of 9% provided net
income exceeds 150% of the aggregate dividend payable, and in any year in which
the Company does not have net earnings after taxes in excess of 150% of the
aggregate dividend payable, no dividend shall be paid.
The number of shares of Common Stock that the Series A Convertible
Preferred Stock is convertible into is subject to adjustment based upon the
occurrence of certain events. Each share of convertible preferred stock is
currently convertible into approximately 2.5 shares of the Company's Common
Stock. At December 31, 1997 the 315,238 shares of Series A Preferred Stock are
convertible into 784,429 shares of Common Stock.
Common Stock
On January 20, 1993, the Company completed an initial public offering of
775,000 units, each consisting of two shares of Common Stock and one redeemable
Common Stock Purchase Warrant. On November 29, 1994, the Company held a Special
Meeting of the Stockholders and authorized a 1-for-6 reverse stock split of the
Company's Common Stock. At December 31, 1997 and 1996 there were 2,039,310 and
1,778,646 shares of Common Stock outstanding, respectively. During 1996 and 1995
the Company awarded 440,000 and 250,000 shares of Common Stock, respectively, to
key employees in lieu of cash compensation.
Warrants
In connection with the Company's initial public offering in January 1993,
the Company issued 775,000 Common Stock Purchase Warrants ("IPO Warrants") at a
price of $5.00 per share if exercised prior to July 12, 1995, and at $7.00 per
share if exercised thereafter until January 12, 1998. The Company also issued
F-12
<PAGE> 64
XEROGRAPHIC LASER IMAGES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
to Thomas James Associates, Inc., a warrant (the "Underwriter's IPO Warrant") to
purchase 77,500 Units, each Unit consisting of two shares of Common Stock, and
one IPO Warrant. The Underwriter's IPO Warrant is exercisable for a four year
period commencing January 20, 1994, at an exercise price of $8.45 per unit.
In connection with the Company's offering of Series A Preferred Stock in
February 1994, the Company issued 850,000 Class A Warrants, each warrant
allowing for the purchase of one share of Common Stock, at a price of $1.1375
per share if exercised prior to August 22, 1997, and at $1.3125 per share if
exercised thereafter until February 22, 1999. The Company also issued to Thomas
James Associates, Inc., a warrant (the "Underwriter's Class A Warrant") to
purchase 85,000 Class A Units, each Class A Unit consisting of one share of
Series A Preferred Stock, and one Class A Warrant. The Underwriter's Class A
Warrant is exercisable for a five year period commencing February 22, 1994, at
an exercise price of $4.80 per Class A Unit.
The exercise price and the number of shares of Common Stock purchasable
upon the exercise of the IPO, Class A, Underwriter's IPO and Underwriter's Class
A Warrants are subject to adjustment upon the occurrence of certain events,
including stock dividends, stock splits, combinations or reclassifications of
the Common Stock, or sale by the Company of shares of its Common Stock at a
price below the then applicable exercise price of the Warrants. Additionally, an
adjustment would be made in the case of a reclassification or exchange of Common
Stock, consolidation or merger of the Company with another corporation or sale
of all or substantially all of the assets of the Company in order to enable
Warrant holders to acquire the kind and the number of shares of stock or other
securities or property receivable in such event by a holder of the number of
shares of Common Stock that might otherwise have been purchased upon the
exercise of the Warrant. No adjustment to the exercise price of the Warrants
will be made for dividends (other than stock dividends), if any, paid on the
Common Stock or for securities issued pursuant to the Company's Stock Option
Plans or other employee benefit plans of the Company.
As a result of certain events, at December 31, 1997 the holders of the IPO
Warrants were entitled to purchase 845,329 shares of Common Stock at a price of
$6.42 per share and the Underwriter's IPO Warrant entitled the holder to
purchase 301,602 shares of Common Stock and one Common Stock Purchase Warrant
for $4.34 per share. These Warrants expired in January, 1998. Additionally, as
of December 31, 1997 the holders of Class A Warrants are entitled to purchase
427,758 shares of Common Stock at $2.61 per share and the Underwriter's Class A
Warrant entitles the Underwriter to purchase 254,765 Class A Units at a price of
$1.60 per Unit. These Warrants expire on February 22, 1999. (See Note 1).
At December 31, 1997, the Company had outstanding 818,462 warrants to the
lenders, including insiders, for financings in 1995 and 1996 and 383,000 other
warrants. These warrants were exercised and 1,201,462 shares of Common Stock
were issued for $31,810 in January and February 1998.
10. EXPORT REVENUES
The Company currently operates in one industry segment. Export product
revenues are generated predominantly from Europe and accounted for approximately
6%, 19% and 16% of total revenues in fiscal years 1997, 1996 and 1995,
respectively.
11. SIGNIFICANT CUSTOMERS
For the year ended December 31, 1997, 1996 and 1995, the Company did not
have any customers that accounted for greater than 10% of total product revenue.
In 1997, three customers accounted for 43%, 33% and 16% of total contract and
license revenue. One customer accounted for 72% of total contract and license
revenues in 1996 and 59% in 1995.
F-13
<PAGE> 65
XEROGRAPHIC LASER IMAGES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
12. SUPPLEMENTARY CASH FLOW INFORMATION
Noncash financing and investing activities are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996 1995
----- ------- ------
<S> <C> <C> <C>
Issuance of common stock for services rendered.... -- 15,325 7,812
Accrued interest converted to subordinated
notes payable................................... -- 13,688 --
</TABLE>
13. SUBORDINATED NOTES PAYABLE
On May 31, 1996, the Company raised $283,688 in a limited private offering
to accredited investors of subordinated nonrecourse promissory notes. Included
in this amount was $13,688 of accrued interest and $75,000 of outstanding debt.
In addition to a note, each subscriber received for each dollar invested a five
year warrant to purchase two shares of the Company's Common Stock at an exercise
price of $.0l per share. Principal and interest will be repaid, if at all,
solely from the Company's pre-tax earnings for each of the five fiscal years
commencing with the fiscal year ending December 31, 1996. Payments, if any, will
be made annually to the holders of the notes within thirty days after the
Company files its Form 10-KSB or its then equivalent form with the Securities
and Exchange Commission. Such annual payments shall not exceed, in the
aggregate, approximately 14% of the Company's pre-tax earnings, and shall not
exceed over the five year term of the notes, three times the principal amount of
the notes.
In January, 1998 the holders of the notes agreed that if the Merger
Agreement (see Note 1) were consummated, the notes could be repaid at face
value.
14. FACTORING AGREEMENT
On December 21, 1995, the Company entered into a financing arrangement with
Silicon Valley Financial Services, a division of Silicon Valley Bank, to borrow
against the Company's outstanding receivables. The advances bear interest at a
monthly rate of 2.5% and require an advance fee of 1%. As of December 31, 1997
and 1996, there were no receivables factored with Silicon Valley Bank.
15. SIGNIFICANT RISKS AND UNCERTAINTIES
In the normal course of business, the Company is exposed to certain risks
and uncertainties which could have an impact on the Company's operations.
Patent protection
The Company protects its products and technology through the use of
patents. There can be no assurance that any patent granted will be enforceable
or provide meaningful protection from competitors.
Foreign customers
The Company derives a portion of its revenues from international sales (See
Note 10). The Company could be adversely affected by changes in foreign laws,
regulations, tariffs, and taxes.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
Pursuant to an amendment to the subordinated notes payable, the notes are
expected to be repaid at face value (see Note 13), therefore, the fair value of
the instruments is considered to be their face value. The fair value of capital
lease obligations approximates their carrying value as they bear interest at
market rates.
F-14
<PAGE> 66
XEROGRAPHIC LASER IMAGES CORPORATION
FINANCIAL STATEMENTS FOR THE QUARTER ENDED MARCH 31, 1998
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 39,832 $ 112,401
Accounts receivable....................................... 21,627 3,667
----------- -----------
Total current assets...................................... 61,459 116,069
----------- -----------
Property and equipment, net................................. 15,465 16,478
Other assets................................................ 3,432 3,432
----------- -----------
Total assets.............................................. 80,356 135,979
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable............................................. $ 110,000 $ --
Accounts payable.......................................... 363,019 237,873
Deferred revenue.......................................... -- 10,000
Accrued expenses.......................................... 276,914 286,216
Accrued payroll........................................... 85,133 101,705
Current portion of capital leases......................... 11,731 11,731
----------- -----------
Total current liabilities................................. 846,798 647,525
----------- -----------
Capital lease obligations................................... 1,049 5,176
Subordinated notes payable.................................. 283,688 283,688
----------- -----------
Total liabilities......................................... 1,131,535 936,390
----------- -----------
Stockholders' equity (deficit)
Series A Preferred stock, $.01 par value; authorized
1,000,000 shares; 315,238 issued and outstanding at
March 31, 1998 and December 31, 1997................... 3,152 3,152
Common stock, $.01 par value; 30,000,000 shares
authorized; 3,574,941 issued and outstanding at March
31, 1998 and 2,039,310 outstanding at December 31,
1997................................................... 35,749 20,393
Additional paid-in capital................................ 8,484,033 8,438,278
Accumulated deficit....................................... (9,574,114) (9,262,234)
----------- -----------
Total stockholders' equity (deficit)...................... (1,051,180) (800,411)
----------- -----------
Total liabilities and stockholders' equity................ $ 80,356 $ 135,979
=========== ===========
</TABLE>
F-15
<PAGE> 67
XEROGRAPHIC LASER IMAGES CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1998 MARCH 31, 1997
------------------ ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Product revenues........................................ $ 2,739 $ 20,054
Contract and license revenues........................... 141,603 241,667
--------- ---------
Total revenues........................................ 144,341 261,721
--------- ---------
Cost and expenses:
Cost of product revenues.............................. 2,052 10,795
Cost of contract and license revenues................. 34,923 40,932
Research and development.............................. 158,401 112,491
Sales and marketing................................... 41,707 7,330
General and administrative............................ 211,342 145,268
--------- ---------
Total cost and expenses....................... 448,426 316,816
--------- ---------
Loss from operations.................................... (304,085) (55,095)
--------- ---------
Other income............................................ 100 4,739
Net interest expense.................................... 7,810 1,725
Provision for taxes..................................... 85 --
--------- ---------
Net loss................................................ $(311,880) $ (52,081)
========= =========
Net loss per common share -- basic...................... $ (0.11) $ (0.03)
Weighted average common and common equivalent shares
outstanding -- basic.................................. 2,807,125 1,778,646
</TABLE>
F-16
<PAGE> 68
XEROGRAPHIC LASER IMAGES CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1998 MARCH 31, 1997
------------------ ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss.............................................. $(311,880) $ (52,081)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization......................... 1,013 4,678
Increase (decrease):
Accounts receivable................................ (17,960) 13,743
Increase (decrease):
Accounts payable................................... 125,147 (3,142)
Deferred revenues.................................. (10,000) (41,667)
Accrued expenses................................... (9,302) (94,929)
Accrued payroll.................................... (16,571) --
Accrued severance costs............................ -- (22,144)
--------- ---------
Net cash used in operating activities................... (239,553) (195,542)
--------- ---------
Cash flows from financing activities:
Issuance of common stock.............................. 61,111
Payments under capital lease obligations.............. (4,127) (2,933)
Issuance of Note Payable.............................. 110,000 --
--------- ---------
Net cash provided (used) in investing activities........ 166,984 (2,933)
--------- ---------
Net increase (decrease) in cash......................... (72,569) (198,475)
Cash at beginning of period............................. 112,401 219,723
--------- ---------
Cash at end of period................................... $ 39,832 $ 21,248
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest................................ $ 7,810 $ 1,725
</TABLE>
F-17
<PAGE> 69
APPENDIX A
- --------------------------------------------------------------------------------
PLAN OF REORGANIZATION
AND
AGREEMENT OF MERGER
OAK TECHNOLOGY, INC.,
PIXEL MAGIC, INC.
XEROGRAPHIC LASER IMAGES CORPORATION
AND
OTI ACQUISITION CORPORATION
JANUARY 29, 1998
- --------------------------------------------------------------------------------
<PAGE> 70
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION NO. PAGE NO.
- ----------- --------
<C> <S> <C> <C>
1. DEFINITIONS..
1.1 "Allen"..................................................... 1
1.2 "Base Amount"............................................... 1
1.3 "Carley Technology" and "Carley Rights"..................... 2
1.4 "Certificates".............................................. 2
1.5 "Class A Warrants".......................................... 2
1.6 "Closing Balance Sheet"..................................... 2
1.7 "COBRA"..................................................... 2
1.8 "Code"...................................................... 2
1.9 "Consideration"............................................. 2
1.10 "Contingent Cash"........................................... 2
1.11 "Contingent Cash Adjustment"................................ 2
1.12 "D'Amelio".................................................. 2
1.13 "Digital Modulator Feature IC".............................. 2
1.14 "Dissenting Stockholder".................................... 2
1.15 "Effective Date"............................................ 2
1.16 "Effective Time"............................................ 2
1.17 "Employment Agreements"..................................... 2
1.18 "End User".................................................. 2
1.19 "ERISA"..................................................... 2
1.20 "Escrow Agent".............................................. 2
1.21 "Escrow Agreement".......................................... 2
1.22 "Exchange Act".............................................. 2
1.23 "Exchange Agent"............................................ 2
1.24 "Exchange Agreement"........................................ 2
1.25 "Existing Carley Agreement"................................. 2
1.26 "Gross XLI Product Revenue"................................. 3
1.27 "Indemnifying Stockholders"................................. 3
1.28 "Initial Distribution Amount"............................... 3
1.29 "IPO Warrants".............................................. 3
1.30 "Irrevocable Proxy"......................................... 3
1.31 "Loss" or "Losses".......................................... 3
1.32 "Merger".................................................... 3
1.33 "Merger Cash"............................................... 3
1.34 "Multiple Feature IC"....................................... 3
1.35 "Net Deficit"............................................... 3
1.36 "Oak SEC Reports"........................................... 3
1.37 "Oak Subsidiaries".......................................... 3
1.38 "OEM"....................................................... 3
1.39 "Party Stockholders"........................................ 3
1.40 "Permitted XLI Contact"..................................... 3
1.41 "Pixel ASIC"................................................ 3
1.42 "Post-Closing Audit"........................................ 3
1.43 "Private 1995 Warrants"..................................... 3
1.44 "Private 1996 Warrants"..................................... 3
1.45 "Private Warrants".......................................... 3
1.46 "Related Party"............................................. 3
1.47 "Representative's Warrant".................................. 3
1.48 "SEC"....................................................... 3
1.49 "Securities Act"............................................ 3
</TABLE>
i
<PAGE> 71
<TABLE>
<CAPTION>
SECTION NO. PAGE NO.
- ----------- --------
<C> <S> <C> <C>
1.50 "Statutory Certificate of Merger"........................... 4
1.51 "Stockholder Representatives"............................... 4
1.52 "Sub Stock"................................................. 4
1.53 "Super Chip"................................................ 4
1.54 "Superior XLI Proposal"..................................... 4
1.55 "Technology License and Supply Agreement"................... 4
1.56 "Termination Fee"........................................... 4
1.57 "Threshold Amount".......................................... 4
1.58 "Underwriter"............................................... 4
1.59 "Underwriter's Warrant"..................................... 4
1.60 "Unexpired Private Warrant"................................. 4
1.61 "XLI Certificate of Objections"............................. 4
1.62 "XLI Common Stock".......................................... 4
1.63 "XLI Employee Benefit Plan"................................. 4
1.64 "XLI Intellectual Property Rights".......................... 4
1.65 "XLI Material Contracts".................................... 4
1.66 "XLI Pension Plans"......................................... 4
1.67 "XLI Preferred Stock"....................................... 4
1.68 "XLI Products".............................................. 4
1.69 "XLI SEC Reports"........................................... 4
1.70 "XLI Special Meeting"....................................... 4
1.71 "XLI Stock"................................................. 5
1.72 "XLI Stockholders".......................................... 5
1.73 "XLI Subordinated Notes".................................... 5
1.74 "XLI Subsidiaries".......................................... 5
1.75 "XLI Transaction Proposal".................................. 5
1.76 "XLI Warrants".............................................. 5
2. MERGER.............................................................. 5
2.1 Merger...................................................... 5
2.2 Certificate of Incorporation and Bylaws..................... 5
2.3 Directors and Officers...................................... 5
2.4 Effect of Merger on Outstanding Securities.................. 5
2.4.1 Sub Stock................................................... 5
2.4.2 XLI Stock and XLI Warrants.................................. 5
2.4.3 Merger Cash................................................. 6
2.4.4 Contingent Cash............................................. 6
2.4.5 Base Amount................................................. 7
2.5 Exchange of Certificates; Payment of Merger Cash............ 7
2.5.1 Exchange Agent.............................................. 7
2.5.2 Oak to Provide Cash......................................... 7
2.5.3 Exchange Procedures......................................... 8
2.5.4 No Further Ownership Rights in XLI Stock.................... 8
2.5.5 Lost, Stolen or Destroyed Certificates...................... 8
2.5.6 No Liability................................................ 9
2.6 Payment of Contingent Cash.................................. 9
2.6.1 Time and Payment Procedures................................. 9
2.6.2 Set-Off and Indemnity Hold Back............................. 10
2.6.3 Audit Rights................................................ 10
2.7 Distributions from Escrow................................... 11
2.7.1 Initial Escrow Distribution................................. 11
2.7.2 Upon Exercise of XLI Warrants............................... 11
</TABLE>
ii
<PAGE> 72
<TABLE>
<CAPTION>
SECTION NO. PAGE NO.
- ----------- --------
<C> <S> <C> <C>
2.7.3 Upon Termination of the Escrow Agreement.................... 11
2.7.4 Allocation of XLI Warrant Exercise Amounts.................. 12
2.8 Effective Date.............................................. 12
3. REPRESENTATIONS AND WARRANTIES OF OAK............................... 12
3.1 Organization and Good Standing.............................. 12
3.2 Authorization............................................... 12
3.3 Oak SEC Filings; Financial Statements....................... 13
3.4 Compliance with Other Instruments........................... 13
3.5 Government Consents......................................... 13
4. REPRESENTATIONS AND WARRANTIES OF XLI............................... 13
4.1 Organization and Good Standing.............................. 14
4.2 Capitalization.............................................. 14
4.3 Authorization............................................... 15
4.4 XLI SEC Filings; Financial Statements....................... 15
4.5 Ownership of Property....................................... 16
4.6 Liabilities................................................. 16
4.7 Inventories................................................. 16
4.8 Raw Materials............................................... 17
4.9 Sales Contracts and Bids.................................... 17
4.10 Quality and Conformance of Products......................... 17
4.11 Accounts Receivable......................................... 17
4.12 Taxes....................................................... 17
4.13 FIRPTA Status............................................... 18
4.14 Customer List............................................... 18
4.15 Vendors List................................................ 18
4.16 Business Changes............................................ 18
4.17 XLI Intellectual Property Rights............................ 20
4.18 Compliance with Law......................................... 20
4.19 Hazardous Materials; Environmental Matters.................. 20
4.20 ERISA and Related Matters................................... 21
4.21 Employees................................................... 22
4.22 Litigation.................................................. 22
4.23 Material Contracts.......................................... 23
4.24 Compliance with Other Instruments........................... 23
4.25 Government Consents......................................... 23
4.26 Certain Transactions........................................ 23
4.27 Brokers or Finders.......................................... 23
4.28 Additional Disclosure....................................... 23
4.29 Complete Disclosure......................................... 25
4.30 Materiality................................................. 25
5. REPRESENTATIONS AND WARRANTIES OF PARTY STOCKHOLDERS................ 25
6. COVENANTS........................................................... 25
6.1 XLI Covenants............................................... 25
6.1.1 Special Meeting; Proxy Statement............................ 26
6.1.2 Appraisal Matters........................................... 26
6.1.3 Amendment of XLI Certificate of Incorporation............... 26
6.1.4 Notice of Default or Claim.................................. 26
6.1.5 No Solicitation............................................. 27
6.1.6 Access...................................................... 27
6.1.7 Conduct of Business of XLI Pending the Merger............... 27
</TABLE>
iii
<PAGE> 73
<TABLE>
<CAPTION>
SECTION NO. PAGE NO.
- ----------- --------
<C> <S> <C> <C>
6.1.8 Notice Delivery Requirements................................ 28
6.1.9 Cooperation of XLI.......................................... 28
6.2 Oak, Pixel and Sub Covenants................................ 28
6.2.1 Sub Authorization........................................... 28
6.2.2 Maintenance of XLI Operations............................... 28
6.2.3 Payment by Oak of Certain XLI Accounts Payable.............. 28
6.2.4 Oak Options................................................. 28
7. CONDITIONS TO MERGER................................................ 28
7.1 Conditions to Each Party's Obligations to Effect the
Transaction................................................. 28
7.1.1 Stockholder Approval........................................ 29
7.1.2 Government Approval......................................... 29
7.1.3 Legal Action................................................ 29
7.1.4 Statutes.................................................... 29
7.1.5 Carley Corporation.......................................... 29
7.2 Conditions to Oak's, Pixel's and Sub's Obligations.......... 29
7.2.1 Representations and Warranties.............................. 29
7.2.2 Performance of Obligations of XLI........................... 29
7.2.3 Opinion of XLI's Counsel.................................... 29
7.2.4 Non-Compete and Confidentiality Agreements.................. 29
7.2.5 Satisfactory Form of Legal and Accounting Matters........... 30
7.2.6 No Material Adverse Changes................................. 30
7.2.7 Conditions Fulfilled........................................ 30
7.2.8 Board and Stockholder Resolutions........................... 30
7.2.9 Appraisal Rights............................................ 30
7.2.10 Third-Party Approvals....................................... 30
7.2.11 XLI Stock and Share Equivalents............................. 30
7.2.12 Resignation of XLI Directors and Officers................... 30
7.2.13 Bank Accounts............................................... 30
7.2.14 Employment Agreements....................................... 31
7.2.15 XLI Subordinated Notes...................................... 31
7.2.16 Exercise of Private Warrants................................ 31
7.3 Conditions to XLI's Obligations............................. 31
7.3.1 Representations and Warranties.............................. 31
7.3.2 Performance of Obligations of Oak and Pixel................. 31
7.3.3 Opinion of Oak's Counsel.................................... 31
7.3.4 Satisfactory Form of Legal Matters.......................... 31
7.3.5 Conditions Fulfilled........................................ 31
7.3.6 Board and Stockholders Resolutions.......................... 31
7.3.7 Employment Agreements....................................... 31
8. TERMINATION; AMENDMENT AND WAIVER................................... 31
8.1 Termination................................................. 31
8.2 Effect of Termination....................................... 32
8.3 Amendment and Waiver........................................ 33
9. POST-CLOSING ADJUSTMENT............................................. 33
9.1 Post-Closing Audit.......................................... 33
9.2 Contingent Cash Adjustment.................................. 33
10. NON-RECOURSE INDEMNIFICATION........................................ 33
10.1 Indemnity................................................... 33
10.2 Threshold................................................... 34
10.3 Defense..................................................... 34
</TABLE>
iv
<PAGE> 74
<TABLE>
<CAPTION>
SECTION NO. PAGE NO.
- ----------- --------
<C> <S> <C> <C>
10.4 Term........................................................ 34
10.5 Non-Recourse Indemnity...................................... 34
11. PROVISIONS RELATING TO THE STOCKHOLDER REPRESENTATIVES.............. 34
11.1 Appointment of Stockholder Representatives.................. 34
11.2 Actions and Instructions of Stockholder Representatives..... 34
12. MISCELLANEOUS....................................................... 35
12.1 Governing Laws.............................................. 35
12.2 Binding upon Successors and Assigns......................... 35
12.3 Severability................................................ 35
12.4 Entire Agreement............................................ 35
12.5 Counterparts................................................ 35
12.6 Expenses.................................................... 35
12.7 Other Remedies.............................................. 35
12.8 Survival of Agreements...................................... 36
12.9 Notices..................................................... 36
12.10 Construction of Agreement................................... 36
12.11 Pronouns.................................................... 37
12.12 Further Assurances.......................................... 37
12.13 Absence of Third Party Beneficiary Rights................... 37
12.14 Obligations to Employees.................................... 37
</TABLE>
v
<PAGE> 75
OAK TECHNOLOGY, INC.,
PIXEL MAGIC, INC.
PLAN OF REORGANIZATION
AND AGREEMENT OF MERGER OF
OTI ACQUISITION CORPORATION
WITH AND INTO
XEROGRAPHIC LASER IMAGES CORPORATION
THIS AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") is dated January
29, 1998, by and among Oak Technology, Inc., a Delaware corporation ("Oak"),
Pixel Magic, Inc., a Massachusetts corporation ("Pixel"), OTI Acquisition
Corporation, a Delaware corporation ("Sub"), and Xerographic Laser Images
Corporation, a Delaware corporation ("XLI" or "Surviving Corporation") and
certain stockholders of XLI set forth on the signature pages hereto (the "Party
Stockholders").
RECITALS
A. Oak is a corporation organized and existing under the laws of the State
of Delaware.
B. Pixel, a wholly-owned subsidiary of Oak, is a corporation organized and
existing under the laws of the Commonwealth of Massachusetts.
C. Sub, a wholly-owned subsidiary of Pixel, is a corporation organized and
existing under the laws of the State of Delaware.
D. XLI is a corporation organized and existing under the laws of the State
of Delaware.
E. The Boards of Directors of Oak, Pixel, Sub and XLI deem it advisable
for the welfare and best interests of said corporations and for the best
interests of the respective stockholders of said corporations that Sub be merged
with and into XLI, with XLI being the surviving corporation, on the terms and
conditions hereinafter set forth and in accordance with the applicable
provisions of the Delaware General Corporation Law which permit such a merger.
F. The Party Stockholders have delivered to Pixel irrevocable proxies to
vote in favor of the adoption of this Agreement, the approval of the merger
transaction described herein and the appointment of representatives of the
holders of the capital stock of XLI.
AGREEMENT
NOW, THEREFORE, in reliance on the foregoing recitals and in consideration
of the mutual covenants and agreements contained herein, the parties hereto,
subject to the approval of the stockholders of Sub and XLI as required by law,
and the satisfaction or waiver of the other conditions contained herein, do
hereby agree that Sub shall be merged with and into XLI pursuant to the law of
the State of Delaware, and do hereby agree, prescribe and set forth the terms
and conditions of the merger of Sub with and into XLI, the mode of carrying the
same into effect and the manner of converting shares of XLI and share
equivalents of XLI into cash and a contingent right to receive future cash
payments.
SECTION 1. DEFINITIONS
The following terms shall have the meanings set forth herein:
1.1 "Allen" shall mean Daniel J. Allen.
1.2 "Base Amount" shall have the meaning set forth in Section 2.4 (Effect
of Merger on Outstanding Securities).
<PAGE> 76
1.3 "Carley Technology" and "Carley Rights" shall have the meanings
assigned to such terms in the license agreements to be entered into by and
between Carley Corporation and Pixel pursuant to Section 7.1.5 (Carley
Corporation).
1.4 "Certificates" shall have the meaning set forth in Section 2.5.3
(Exchange Procedures).
1.5 "Class A Warrants" shall mean the warrants issued by XLI in connection
with its offering of Series A Preferred Stock in 1994 and currently held by the
public and the Underwriter.
1.6 "Closing Balance Sheet" shall mean XLI's consolidated balance sheet
prepared for the end of the month immediately preceding the Effective Date or if
the Effective Date is the end of the month, the Effective Date.
1.7 "COBRA" shall mean the Consolidated Omnibus Budget Reconciliation Act
of 1985, as amended.
1.8 "Code" shall mean the Internal Revenue Code of 1986, as amended.
1.9 "Consideration" shall have the meaning set forth in Section 2.4.2 (XLI
Stock and XLI Warrants).
1.10 "Contingent Cash" shall mean an amount per share of XLI Common Stock
as calculated in Section 2.4 (Effect of Merger on Outstanding Securities).
1.11 "Contingent Cash Adjustment" shall have the meaning set forth in
Section 9.2 (Contingent Cash Adjustment).
1.12 "D'Amelio" shall mean Anthony D. D'Amelio.
1.13 "Digital Modulator Feature IC" shall have the meaning set forth in the
Technology License and Supply Agreement.
1.14 "Dissenting Stockholder" shall mean any XLI stockholder exercising
his, her or its rights under Section 262 of the Delaware General Corporation
Law.
1.15 "Effective Date" shall mean the date on which the Statutory
Certificate of Merger is filed with the Secretary of State of the State of
Delaware.
1.16 "Effective Time" shall mean the Delaware local time at which the
Statutory Certificate of Merger is filed with the Secretary of State of the
State of Delaware and is effective.
1.17 "Employment Agreements" shall mean the agreements substantially in the
forms of Exhibit "A-1" and "A-2" hereto entered into by Pixel with D'Amelio and
Allen, respectively.
1.18 "End User" shall mean a person or entity who acquires a Digital
Modular Feature IC or a Multiple Feature IC directly or indirectly from Oak or
Pixel or their Related Parties, agents or distributors, solely for personal or
internal use and not for resale.
1.19 "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
1.20 "Escrow Agent" shall mean State Street Bank and Trust Company.
1.21 "Escrow Agreement" shall mean the agreement substantially in the form
of Exhibit "B" hereto among Oak, the Stockholder Representatives and the Escrow
Agent.
1.22 "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
1.23 "Exchange Agent" shall mean State Street Bank and Trust Company.
1.24 "Exchange Agreement" shall mean the agreement substantially in the
form of Exhibit "C" hereto among Oak, the Stockholder Representatives and the
Exchange Agent.
1.25 "Existing Carley Agreement" shall have the meaning set forth in
Section 7.1.5 (Carley Corporation).
2
<PAGE> 77
1.26 "Gross XLI Product Revenue" shall mean gross revenue from the sale or
license of XLI Products, less any product returns and less any delivery costs
and sales or transfer taxes incurred but not otherwise payable by an End User or
OEM, plus gross revenue from nonrecurring engineering fees, calibration fees and
fees for any other services performed by XLI.
1.27 "Indemnifying Stockholders" shall have the meaning set forth in
Section 10.1 (Indemnity).
1.28 "Initial Distribution Amount" shall have the meaning set forth in
Section 2.7.1 (Initial Escrow Distribution).
1.29 "IPO Warrants" shall mean the warrants issued by XLI in connection
with its initial public offering in 1993 and currently held by the public and
the Underwriter.
1.30 "Irrevocable Proxy" shall mean the agreement in the form of Exhibit
"D" hereto between Oak and each Party Stockholder.
1.31 "Loss" or "Losses" shall have the meaning set forth in Section 10.1
(Indemnity).
1.32 "Merger" shall mean the merger of Sub with and into XLI.
1.33 "Merger Cash" shall mean an amount per share of XLI Common Stock
calculated as set forth in Section 2.4 (Effect of Merger on Outstanding
Securities).
1.34 "Multiple Feature IC" shall have the meaning set forth in the
Technology License and Supply Agreement.
1.35 "Net Deficit" shall mean a negative shareholder's equity, as
calculated in accordance with generally accepted accounting principles and
consistently applied using the accounting treatment historically used by XLI.
1.36 "Oak SEC Reports" shall have the meaning set forth in Section 3.3.1
(Oak SEC Filings; Financial Statements).
1.37 "Oak Subsidiaries" shall mean any subsidiary of Oak.
1.38 "OEM" shall mean an original equipment manufacturer who acquires a
Digital Modulator Feature IC or Multiple Feature IC directly or indirectly from
Oak or Pixel for incorporation into its product for resale.
1.39 "Party Stockholders" shall have the meaning set forth in the preamble
to this Agreement.
1.40 "Permitted XLI Contact" shall have the meaning set forth in Section
6.1.5 (No Solicitation).
1.41 "Pixel ASIC" shall mean an application-specific integrated circuit
designed and/or offered for sale by Pixel for use in digital printers, scanners,
copiers and multi-function devices.
1.42 "Post-Closing Audit" shall have the meaning set forth in Section 9.1
(Post-Closing Audit).
1.43 "Private 1995 Warrants" shall mean the warrants issued by XLI in 1995
to individual private lenders.
1.44 "Private 1996 Warrants" shall mean the warrants issued by XLI in 1996
to individual private lenders.
1.45 "Private Warrants" shall mean any Private 1995 Warrant or Private 1996
Warrant.
1.46 "Related Party" shall mean any entity which is a member of a
"controlled group of corporations" with, or is under "common control" with, a
party as defined in Section 414(b) or (c) of the Code.
1.47 "Representative's Warrant" shall have the meaning set forth in Section
4.2 (Capitalization).
1.48 "SEC" shall mean the United States Securities and Exchange Commission.
1.49 "Securities Act" shall mean the Securities Act of 1933, as amended.
3
<PAGE> 78
1.50 "Statutory Certificate of Merger" shall mean the fully executed
certificate of merger substantially in the form of Exhibit "E" hereto.
1.51 "Stockholder Representatives" shall mean Allen, Adam L. Carley,
D'Amelio, Joseph L. Katz and Vincent J. Spoto.
1.52 "Sub Stock" shall mean the Common Stock of Sub.
1.53 "Super Chip" shall mean any XLI proprietary chip or chip set that
meets the chip specifications set forth in Exhibit "B" to the Technology License
and Supply Agreement.
1.54 "Superior XLI Proposal" shall have the meaning set forth in Section
6.1.5 (No Solicitation).
1.55 "Technology License and Supply Agreement" shall mean that certain
Technology License and Supply Agreement entered into on October 14, 1997 by and
between Pixel and XLI.
1.56 "Termination Fee" shall mean an amount equal to Four Hundred Fifty
Thousand Dollars ($450,000).
1.57 "Threshold Amount" shall have the meaning set forth in Section 2.4.5
(Base Amount).
1.58 "Underwriter" shall mean Thomas James & Co.
1.59 "Underwriter's Warrant" shall have the meaning set forth in Section
4.2 (Capitalization).
1.60 "Unexpired Private Warrant" shall have the meaning set forth in
Section 2.7.1 (Initial Escrow Distribution).
1.61 "XLI Certificate of Objections" shall have the meaning set forth in
Section 6.1.2 (Appraisal Matters).
1.62 "XLI Common Stock" shall mean the Common Stock of XLI.
1.63 "XLI Employee Benefit Plan" shall mean all "employee benefit plans,"
as defined by Section 3(3) of ERISA, and any other employee benefit arrangements
or payroll practices including, without limitation, sick leave, vacation pay,
salary continuation for disability, consulting or other compensation
arrangements (whether funded or unfunded), retirement, deferred or incentive
compensation, bonuses, stock purchase, hospitalization, medical insurance,
severance, life insurance and scholarship programs maintained or made available
by XLI or any Related Party.
1.64 "XLI Intellectual Property Rights" shall mean all patents, copyrights,
trademarks, trade names, service marks and any applications therefor, utility
models, devices, designs, mask-works, net lists and all rights under
documentation related thereto, trade secrets, drawings, schematics, technology,
microcode, know-how, computer software programs or applications, any tangible or
intangible proprietary information, and all other rights with respect thereto,
in whatever form throughout the world, owned or licensed by XLI, including, but
not limited to, the Carley Corporation technology and Carley Corporation rights
licensed from Carley Corporation by XLI pursuant to the Existing Carley
Agreement.
1.65 "XLI Material Contracts" shall have the meaning set forth in Section
4.28 (Additional Disclosure).
1.66 "XLI Pension Plans" shall mean all "employee pension plans" as defined
in Section 3(2) of ERISA maintained or made available by XLI to any current or
former employee of XLI.
1.67 "XLI Preferred Stock" shall mean the Series A Preferred Stock of XLI.
1.68 "XLI Products" shall mean Super Chips, any VHDL (virtual hardware
design logic) of the aforementioned product, and any future product designed and
developed exclusively by XLI.
1.69 "XLI SEC Reports" shall have the meaning set forth in Section 4.4.1
(XLI SEC Filings; Financial Statements).
1.70 "XLI Special Meeting" shall have the meaning set forth in Section
6.1.1 (Special Meeting; Proxy Statement).
4
<PAGE> 79
1.71 "XLI Stock" shall mean the Common and Preferred Stock of XLI.
1.72 "XLI Stockholders" shall mean the holders of XLI Stock and any holder
of XLI Warrants who exercises his, her or its XLI Warrants subject to and in
accordance with this Agreement.
1.73 "XLI Subordinated Notes" shall mean those certain subordinated
nonrecourse promissory notes delivered to individual private lenders in 1996.
1.74 "XLI Subsidiaries" shall mean any subsidiary of XLI.
1.75 "XLI Transaction Proposal" shall have the meaning set forth in Section
6.1.5 (No Solicitation).
1.76 "XLI Warrants" shall mean any IPO Warrant, Representative's Warrant,
Class A Warrant, Underwriter's Warrant, Private 1995 Warrant or Private 1996
Warrant that shall not have been exercised prior to the Effective Time and by
its terms does not terminate at or prior to the Effective Time.
SECTION 2. MERGER
2.1 Merger. On the Effective Date: Sub shall merge with and into XLI; the
corporate existence of XLI shall continue until such time as XLI is merged with
and into Pixel; and the separate corporate existence of Sub shall cease. The
corporate identity, existence, name, purposes, franchises, powers, rights and
immunities of Sub shall be merged into XLI which shall be fully vested
therewith. XLI shall be subject to all of the debts and liabilities of Sub as if
XLI had itself incurred them and all rights of creditors and all liens upon the
property of each of Sub and XLI shall be preserved unimpaired, provided that
such liens, if any, upon the property of Sub shall be limited to the property
affected thereby immediately prior to the Effective Date.
2.2 Certificate of Incorporation and Bylaws. The Certificate of
Incorporation and Bylaws of Sub, as in effect at the Effective Time, shall be
the Certificate of Incorporation and Bylaws of XLI until changed in accordance
with applicable law, except that the name of the surviving corporation as
provided in such Certificate of Incorporation shall be Xerographic Laser Images
Corporation.
2.3 Directors and Officers. The directors and officers of XLI (until
changed in accordance with applicable law and the Certificate of Incorporation
and Bylaws of XLI) as of the Effective Time shall be:
<TABLE>
<CAPTION>
NAME OFFICE
---- ------
<S> <C>
Peter D. Besen............................ President, Secretary and Director
Anthony D. D'Amelio....................... General Manager
Treasurer, Chief Financial Officer and
Sidney S. Faulkner........................ Director
</TABLE>
2.4 Effect of Merger on Outstanding Securities. At the Effective Time of
the Merger.
2.4.1 Sub Stock. Each then outstanding share of the Sub Stock shall,
by virtue of the Merger and without any action on the part of the holder
thereof, be converted into one share of XLI Common Stock.
2.4.2 XLI Stock and XLI Warrants. The then outstanding shares of XLI
Stock shall, by virtue of the Merger and without any action on the part of
the holder thereof, be converted into Merger Cash and the right to receive
Contingent Cash as set forth below, and the XLI Warrants shall be converted
into the right to receive Merger Cash and Contingent Cash as set forth
below (Merger Cash and Contingent Cash are hereafter collectively referred
to as the "Consideration").
2.4.2.1 XLI Stock. Each share of XLI Common Stock shall be
converted into Merger Cash and the right to receive Contingent Cash.
Each share of XLI Preferred Stock shall be converted into an amount
equal to Merger Cash multiplied by the number of shares of XLI Common
Stock into which each share of XLI Preferred Stock is convertible, and
the right to receive an amount equal to Contingent Cash multiplied by
the number of shares of XLI Common Stock into which each such share of
Preferred Stock is convertible.
2.4.2.2 XLI Warrants. Each XLI Warrant shall be converted into
the right to receive Merger Cash and Contingent Cash, upon exercise of
the XLI Warrant by the holder thereof and
5
<PAGE> 80
delivery to the Exchange Agent of the exercise price therefor. Upon the
exercise of any XLI Warrant and delivery to the Exchange Agent of the
exercise price therefor, such XLI Warrant shall be converted into an
amount equal to Merger Cash multiplied by the number of shares of XLI
Common Stock (on an as converted basis in the case of any exercise of an
XLI Warrant for shares of XLI Preferred Stock) for which the exercise
price has been paid to the Exchange Agent under the XLI Warrant, and the
right to receive an amount equal to Contingent Cash multiplied by the
number of shares of XLI Common Stock (on an as converted basis in the
case of any exercise of an XLI Warrant for shares of XLI Preferred
Stock) for which the exercise price has been paid to the Exchange Agent
under the XLI Warrant. In the event of any dispute regarding the number
of shares of XLI Common Stock (on an as converted basis in the case of
any exercise of an XLI Warrant for shares of XLI Preferred Stock)
purchasable under an XLI Warrant at the Effective Time, or the exercise
price per share payable therefor, the written instructions of the
Stockholder Representatives concerning such calculations, as delivered
to the Escrow Agent and the Exchange Agent by the Stockholder
Representatives, shall control. No XLI Warrant shall be exercisable for
shares of the capital stock of XLI or of Oak or any Oak Subsidiary
subsequent to the Effective Time, and no adjustments in the number of
shares of XLI Stock originally purchasable under the XLI Warrant or in
the exercise price of such XLI Warrant shall be made subsequent to the
Effective Time. Notwithstanding anything to the contrary contained in
this Agreement, including, without limitation, this Section 2.4.2.2 (XLI
Warrants), any XLI Warrant that is not exercised in accordance with the
provisions hereof, and prior to the date of termination or other
expiration of such XLI Warrant, shall terminate and be of no further
force and effect.
2.4.2.3 XLI Common Stock Equivalents. Any warrant (other than an
XLI Warrant), option, convertible note, convertible security or other
right to acquire shares of XLI Common Stock that is not exercised
immediately prior to or in connection with the Merger shall terminate
and be of no further force and effect, effective as of the Effective
Time.
2.4.3 Merger Cash. Merger Cash shall be an amount calculated
according to the following formula:
<TABLE>
<S> <C> <C>
MC = $3,675,000
-----------------
CS + PS + PW
WHERE
-----
MC = Merger Cash
CS = Total Number of Shares of XLI Common Stock Outstanding at
the Effective Time
PS = Total Number of Shares of XLI Common Stock into which the
Issued and Outstanding Shares of XLI Preferred Stock are
Convertible at the Effective Time
PW = Total Number of Shares of XLI Common Stock Purchasable Under
any Private Warrants Outstanding at the Effective Time
</TABLE>
2.4.4 Contingent Cash. Contingent Cash shall be an amount calculated
pursuant to the following formula:
<TABLE>
<S> <C> <C>
CC = BA - $3,675,000 - SA
-----------------------
CS + PS + WS
WHERE
-----
CC = Contingent Cash
BA = Base Amount as Calculated in Section 2.4.5 (Base Amount)
SA = Set Off Amounts Due Oak or Pixel Under Section 9
(Post-Closing Adjustment) and Under Section 10
(Non-Recourse Indemnification)
CS = Total Number of Shares of XLI Common Stock Issued and
Outstanding at the Effective Time, plus Total Number of
Shares of XLI Common Stock Issued and Outstanding as a
Result of the Exercise of XLI Warrants Exercised after the
Effective Time (Including any Shares of XLI Common Stock
into which Shares of XLI Preferred Stock were Converted in
Connection with any such XLI Warrant Exercise)
PS = The meaning set forth in Section 2.4.3 (Merger Cash)
</TABLE>
6
<PAGE> 81
<TABLE>
<S> <C> <C>
WS = Total Number of Shares of XLI Common Stock (Including Any
Shares of XLI Common Stock into which Shares of Preferred
Stock, that were issuable upon exercise of the
Underwriter's Warrant, were Convertible) Purchasable Under
the XLI Warrants Outstanding at the Effective Time, Less
Total Number of Shares of XLI Common Stock Covered by XLI
Warrants Exercised after the Effective Time (Including any
Shares of XLI Common Stock into which Shares of XLI
Preferred Stock were Converted in Connection with any such
XLI Warrant Exercise), and Less Total Number of Shares of
XLI Common Stock Covered by XLI Warrants that Lapsed
Unexercised After the Effective Time and Prior to any
Calculation Pursuant to Section 2.6.1 (Time and Payment
Procedures)
</TABLE>
The maximum aggregate amount of Base Amount shall be Fifteen Million
Dollars ($15,000,000). At such time as Base Amount in the amount of Fifteen
Million ($15,000,000) is accrued, no further Contingent Cash shall be accrued or
payable.
2.4.5 Base Amount. For purposes of Section 2.4 (Effect of Merger on
Outstanding Securities), Base Amount, until such time as Base Amount in the
aggregate equals Three Million Six Hundred Seventy-Five Thousand Dollars
($3,675,000) (the "Threshold Amount"), shall be equal to the sum of: (i)
fifty-six percent (56%) of Gross XLI Product Revenue; and (ii) One Dollar
($1.00) for each Digital Modulator Feature IC sold by Oak or Pixel or their
Related Parties, agents or distributors to an End User or an OEM; and (iii)
Two Dollars ($2.00) for each Multiple Feature IC sold by Oak or Pixel or
their Related Parties, agents or distributors to an End User or an OEM; in
the case of each of clauses (ii) and (iii) above, net of product returns.
At such time as Base Amount in the aggregate is equal to the Threshold
Amount, then Base Amount thereafter shall be equal to the sum of (i)
thirty-two percent (32%) of Gross XLI Product Revenue; and (ii) One Dollar
($1.00) for each Digital Modulator Feature IC sold by Oak or Pixel or their
Related Parties, agents or distributors to an End User or an OEM; and (iii)
Two Dollars ($2.00) for each Multiple Feature IC sold by Oak or Pixel or
their Related Parties, agents or distributors to an End User or an OEM; in
the case of each of clauses (ii) and (iii) above, net of product returns.
If Oak or Pixel sells XLI Products bundled with other products, for
purposes of calculating Base Amount, Base Amount, until such time as Base
Amount is equal to the Threshold Amount, shall include fifty-six percent
(56%) of an amount equal to Pixel's standard sales price for the XLI
Product included in the bundled product at similar volumes; at such time as
Base Amount is equal to the Threshold Amount, then Base Amount thereafter
shall include thirty-two percent (32%) of an amount equal to Pixel's
standard sales price for the XLI Product included in the bundled product at
similar volumes. Gross XLI Product Revenue from the sale of XLI Products
shall be as determined for financial reporting purposes using generally
acceptable accounting principles consistently applied. Samples and
demonstration copies of Digital Modulator Feature ICs and Multiple Feature
ICs provided free of charge shall not be considered sold. Base Amount shall
be calculated for each calendar quarter during the period commencing
January 1, 1998 and ending December 31, 2000; Base Amount for such calendar
quarter shall be added to the aggregate amount of Base Amount accrued for
the calendar quarters ended prior to such calendar quarter; provided,
however, that in no event shall the maximum aggregate amount of Base Amount
exceed Fifteen Million Dollars ($15,000,000).
2.5 Exchange of Certificates; Payment of Merger Cash.
2.5.1 Exchange Agent. Prior to the Effective Date, Oak shall appoint
the Exchange Agent to act as exchange agent in the Merger.
2.5.2 Oak to Provide Cash. Promptly after the Effective Date of the
Merger (but in no event later than one business day thereafter), Oak shall
make available to the Exchange Agent for exchange in accordance with this
Agreement, through such reasonable procedures as Oak may adopt, Three
Million Six Hundred Seventy-Five Thousand Dollars ($3,675,000), less
amounts held in reserve under this Section 2.5.2, to be made available for
payment of Merger Cash in accordance with Section 2.5 (Exchange of
Certificates; Payment of Merger Cash).
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2.5.2.1 Exchange of Merger Cash for XLI Stock. An amount equal to
Merger Cash multiplied by the sum of (i) the total number of shares of
XLI Common Stock outstanding at the Effective Time, plus (ii) the total
number of shares of XLI Common Stock into which outstanding shares of
XLI Preferred Stock are convertible at the Effective Time, shall be made
available in exchange for outstanding shares of XLI Stock in accordance
with the terms of this Agreement. Oak shall deduct from such amount, an
amount equal to Merger Cash multiplied by the total number of shares of
XLI Stock (on an as converted basis) held by Dissenting Stockholders,
such amount to be retained by Oak. Any Dissenting Stockholder that does
not perfect its rights to dissent shall be paid its allowable Merger
Cash directly by Oak.
2.5.2.2 Escrow of Merger Cash for Private Warrants. An amount
equal to Merger Cash multiplied by the total number of shares of XLI
Common Stock purchasable under the Private Warrants outstanding at the
Effective Time shall be delivered by Oak to the Escrow Agent to be held
in escrow by the Escrow Agent and disbursed by the Escrow Agent in
accordance with Section 2.7 (Distributions from Escrow) and the terms of
the Escrow Agreement.
2.5.3 Exchange Procedures. As soon as practicable after the
Effective Time of the Merger, the Exchange Agent shall mail to each holder
of record of a certificate or certificates which immediately prior to the
Effective Time of the Merger represented outstanding shares of XLI Stock
(the "Certificates") whose shares are being converted into the
Consideration, (i) a letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates
shall pass, only upon delivery of the Certificates to the Exchange Agent
and shall be in such form and have such other provisions as Oak may
reasonably specify) and (ii) instructions for use in effecting the
surrender of the Certificates in exchange for the Consideration. Upon
surrender of a Certificate for cancellation to the Exchange Agent or to
such other agent or agents as may be appointed by Oak, together with such
letter of transmittal, duly executed, the holder of such Certificate shall
be entitled to receive in exchange therefor the Consideration which the
holder of XLI Stock is entitled pursuant to Section 2.4 (Effect of Merger
on Outstanding Securities) and are represented by the Certificates so
surrendered. The Certificates so surrendered shall forthwith be canceled.
In the event of a transfer of ownership of XLI Stock which is not
registered in the transfer records of XLI, the appropriate amount of
Consideration may be delivered to a transferee if the Certificate
representing such XLI Stock is presented to the Exchange Agent and
accompanied by all documents required to evidence and effect such transfer
and to evidence that any applicable stock transfer taxes have been paid.
Until surrendered as contemplated by this Section 2 (Merger), each
Certificate shall be deemed at any time after the Effective Time of the
Merger to represent the right to receive upon such surrender the amount of
Consideration as provided by this Section 2 (Merger) and the provisions of
the Delaware General Corporation Law. Notwithstanding anything to the
contrary contained in this Section 2.5.3 (Exchange Procedures), no letter
of transmittal or instructions for use in effecting the surrender of
Certificates for the Consideration shall be mailed by the Exchange Agent to
any Dissenting Stockholder, nor shall the Exchange Agent accept surrender
of a Certificate held by a Dissenting Stockholder or pay the Consideration
to such Dissenting Stockholder. Any Certificates or other correspondence
received from Dissenting Stockholders shall be promptly forwarded to Oak by
the Exchange Agent.
2.5.4 No Further Ownership Rights in XLI Stock. All XLI Stock
delivered upon the surrender for exchange into the Consideration in
accordance with the terms hereof shall be deemed to have been delivered in
full satisfaction of all rights pertaining to such shares of XLI Stock.
There shall be no further registration of transfers on the stock transfer
books of XLI of the shares of XLI Stock which were outstanding immediately
prior to the Effective Time of the Merger. If, after the Effective Time of
the Merger, Certificates, other than Certificates held by Dissenting
Stockholders, are presented to XLI for any reason, they shall be canceled
and exchanged as provided in this Section 2 (Merger).
2.5.5 Lost, Stolen or Destroyed Certificates. In the event any
Certificate shall have been lost, stolen or destroyed, upon the making of
any affidavit of that fact by the person claiming such Certificate to be
lost, stolen or destroyed and, if required by Oak or the Exchange Agent, a
bond in such sum as Oak or the Exchange Agent may reasonably direct as
indemnity against any claim that may be made against
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Oak or the Exchange Agent with respect to the Certificate alleged to have
been lost, the Exchange Agent will issue the Consideration as provided in
this Section 2.5 (Exchange of Certificates; Payment of Merger Cash) in
exchange for such lost, stolen or destroyed Certificate.
2.5.6 No Liability. Notwithstanding anything to the contrary
contained in this Section 2.5 (Exchange of Certificates; Payment of Merger
Cash) or elsewhere in this Agreement, none of the Exchange Agent, the
Escrow Agent, Oak, Pixel, XLI or any other party hereto shall be liable to
any holder of XLI Stock (including any Dissenting Stockholder or any holder
of an XLI Warrant who exercises such XLI Warrant) for any amount properly
paid to a public official pursuant to any applicable abandoned property,
escheat or similar law.
2.6 Payment of Contingent Cash.
2.6.1 Time and Payment Procedures. Within thirty (30) days after the
end of each calendar quarter commencing with the quarter ending March 31,
1998 and ending with the quarter ending December 31, 2000, Pixel shall
prepare and deliver to the Stockholder Representatives a certificate
calculating the Base Amount as set forth in Section 2.4.5 (Base Amount) and
the amount of Contingent Cash as set forth in Section 2.4.4 (Contingent
Cash). Subject to Section 2.4 (Effect of Merger on Outstanding Securities)
and this Section 2.6 (Payment of Contingent Cash), at such time as the
amount of Contingent Cash is a positive amount, it shall be delivered by
Oak to the Escrow Agent or the Exchange Agent, as the case may be, as
provided in this Section 2.6 (Payment of Contingent Cash). Amounts due as
payments of Contingent Cash shall be net of prior payments of Contingent
Cash under this Section 2.6 (Payment of Contingent Cash).
2.6.1.1 Payment of Contingent Cash to XLI Stockholders. The
amount, if any, of Contingent Cash payable by Oak for any calendar
quarter ending prior to June 30, 1999 shall be delivered by Oak to the
Escrow Agent as provided in Section 2.6.1.2 (Escrow of Contingent Cash).
Commencing with the calendar quarter ending June 30, 1999, until such
time as the Escrow Agreement shall terminate in accordance with its
terms, the amount, if any, of Contingent Cash payable by Oak for a
calendar quarter shall be delivered by Oak to the Exchange Agent in
accordance with this Section 2.6.1.1 (Payment of Contingent Cash to XLI
Stockholders), less any amount required to be delivered by Oak to the
Escrow Agent under Section 2.6.1.2 below (Escrow of Contingent Cash),
and less any amount representing shares formerly held by Dissenting
Stockholders, which amount shall be retained by Oak. Upon termination of
the Escrow Agreement in accordance with its terms, the amount, if any of
Contingent Cash payable by Oak for any calendar quarter thereafter shall
be delivered by Oak to the Exchange Agent in accordance with this
Section 2.6.1.1 (Payment of Contingent Cash to XLI Stockholders), less
any amount representing shares formerly held by Dissenting Stockholders,
which amount shall be retained by Oak. Quarterly amounts, if any,
payable by Oak to the Exchange Agent pursuant to this Section 2.6.1.1
(Payment of Contingent Cash to XLI Stockholders) shall be delivered by
Oak to the Exchange Agent at least five (5) business days prior to any
distribution required to be made to the XLI Stockholders by the Exchange
Agent under this Section 2.6.1.1 (Payment of Contingent Cash to XLI
Stockholders), together with written instructions regarding calculation
of the amount payable by Oak hereunder for any calendar quarter. Any
such amount delivered to the Exchange Agent by Oak hereunder, or to the
Exchange Agent by the Escrow Agent pursuant to Section 2.7
(Distributions from Escrow) and the terms of the Escrow Agreement, shall
be allocated by the Exchange Agent pro rata (a) to all outstanding
shares of XLI Common Stock held by XLI Stockholders at the Effective
Time (excluding any shares of XLI Common Stock into which shares of XLI
Preferred Stock were convertible at the Effective Time), (b) all shares
of XLI Preferred Stock held by XLI Stockholders at the Effective Time,
on an as converted basis, and (c) all shares of XLI Common Stock
(including shares of XLI Common Stock into which shares of XLI Preferred
Stock, that were issued upon exercise of the Underwriter's Warrant, were
converted) attributable to XLI Warrants exercised after the Effective
Time and prior to the end of the calendar quarter for which such payment
is being made. Any such amount due to the XLI Stockholders as described
in the immediately preceding sentence, including, without limitation,
the Initial Distribution Amount, shall be deposited by the Exchange
Agent in the United
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States mail, not later than forty-five (45) days after the close of the
calendar quarter to which the distribution relates, first class postage
prepaid, to the addresses as set forth in the stock and warrant records
of XLI; provided that amount allocated to shares formerly held by
Dissenting Stockholders shall be paid to Oak. The Stockholder
Representatives shall deliver, or cause to be delivered, to the Exchange
Agent and the Escrow Agent, not later than one business day following
the Effective Date, and from time to time thereafter, such information
as is requested by the Exchange Agent or the Escrow Agent to effect such
distributions, including, without limitation, that information which XLI
is delivering to Oak pursuant to Section 7.2.11 (XLI Stock and Share
Equivalents). Any Dissenting Stockholder that does not perfect its
rights to dissent shall be paid its allowable Contingent Cash directly
by Oak.
2.6.1.2 Escrow of Contingent Cash. Commencing with the calendar
quarter ending March 31, 1998 and terminating with the calendar quarter
ending March 31, 1999, the amount, if any, of Contingent Cash payable by
Oak for a calendar quarter shall be delivered by Oak to the Escrow
Agent. Thereafter, until such time as the Escrow Agreement terminates in
accordance with its terms, Oak shall deliver to the Escrow Agent an
amount equal to the amount of Contingent Cash due by Oak hereunder for
any calendar quarter, multiplied by the total number of shares of XLI
Common Stock purchasable under the Private Warrants outstanding at the
end of such calendar quarter. The Contingent Cash amount for any
calendar quarter shall be delivered by Oak to the Escrow Agent within
forty-five (45) days after the end of such calendar quarter, provided,
however, that the Contingent Cash amount, if any, due for the calendar
quarter ended March 31, 1999 shall be delivered by Oak to the Escrow
Agent within thirty (30) days after the end of such calendar quarter.
All such Contingent Cash amounts shall be held in escrow by the Escrow
Agent and disbursed by the Escrow Agent in accordance with Section 2.7
(Distributions from Escrow) and the terms of the Escrow Agreement.
Written instructions regarding calculation of the amount, if any,
payable by Oak hereunder for any calendar quarter shall be delivered to
the Escrow Agent concurrent with payment to the Escrow Agent of any
amount due hereunder. As soon as practicable after the Effective Time of
the Merger, the Exchange Agent shall mail to each holder of an XLI
Warrant instructions for use in effecting the exercise of any XLI
Warrant.
2.6.2 Set-Off and Indemnity Hold Back.
2.6.2.1 Set-Off. In the event of any Contingent Cash Adjustment
under Section 9 (Post-Closing Adjustment), then the amounts otherwise
payable under Section 2.6.1 (Time and Payment Procedures) shall be
reduced by the amount of the Contingent Cash Adjustment until such time
as the amount of the Contingent Cash Adjustment shall have been
satisfied in full.
2.6.2.2 Indemnity Hold Back. In the event that Oak or Pixel has
made a claim under Section 10 (Non-Recourse Indemnification) which has
not been liquidated or has not been agreed to by the Stockholder
Representatives, then Oak shall hold back from amounts otherwise payable
under Section 2.6.1 (Time and Payment Procedures) the amount of such
claim as specified in the notice to the Stockholder Representatives
delivered by Oak or Pixel pursuant to Section 10 (Non-Recourse
Indemnification) until such time as the Oak or Pixel claim is resolved.
Immediately after such resolution, any amounts payable by Oak pursuant
to Section 2.6.1 (Time and Payment Procedures) shall be paid by Oak
within thirty (30) days of such resolution, together with interest at
the rate of eight percent (8%) per annum from the date payment was
otherwise due.
2.6.3 Audit Rights. The Stockholder Representatives shall have the
right, at their sole cost and expense, to have an independent certified
public accountant conduct, during normal business hours and not more
frequently than quarterly, an audit of the calculation of Base Amount and
Contingent Cash. If such amounts are found to be different than those
reported by Pixel, any additional Contingent Cash shall be payable,
together with an eight percent (8%) per annum late payment charge, within
thirty (30) days of notice of such discrepancy from the Stockholder
Representatives. If the discrepancy in Contingent Cash to date reported by
the Stockholder Representatives is greater than five percent (5%) of the
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Contingent Cash reported to date by Pixel, then Oak will pay the reasonable
costs and expenses associated with such audit.
2.7 Distributions from Escrow. Distributions shall be made from the
escrow by the Escrow Agent in accordance with the Escrow Agreement. The Escrow
Agreement shall provide for distributions as follows:
2.7.1 Initial Escrow Distribution. Not later than fifteen (15)
calendar days following delivery to the Escrow Agent of the amount, if any,
of Contingent Cash payable by Oak for the calendar quarter ended March 31,
1999, the Escrow Agent shall deliver to the Exchange Agent, for
distribution to the XLI Stockholders, all funds, if any, held in escrow by
the Escrow Agent, less the sum of (i) Merger Cash paid into escrow by Oak
pursuant to Section 2.5.2.2 (Escrow of Merger Cash for Private Warrants)
with respect to any Private Warrant that has not been exercised prior to
March 31, 1999 and has not otherwise terminated ("Unexpired Private
Warrant"), (ii) Contingent Cash paid into escrow by Oak pursuant to Section
2.6.1.2 (Escrow of Contingent Cash) with respect to any Unexpired Private
Warrant and (iii) the net exercise price, if any, paid into escrow with
respect to any XLI Warrant exercised after the Effective Time (the "Initial
Distribution Amount"). The Initial Distribution Amount shall be allocated
pro rata to all shares of XLI Stock outstanding prior to March 31, 1999,
including shares of XLI Stock attributable to XLI Warrant exercises
occurring prior to March 31, 1999, subject to and in accordance with the
provisions of Section 2.6.1.1 (Payment of Contingent Cash to XLI
Stockholders). The net exercise price, if any, paid into escrow with
respect to any XLI Warrant exercised after the Effective Time, to the
extent not previously delivered to Oak, shall be delivered to Oak, subject
to and in accordance with Section 2.7.4 (Allocation of XLI Warrant Exercise
Amounts).
2.7.2 Upon Exercise of XLI Warrants. Upon Exercise of any XLI
Warrant in accordance with the provisions of this Agreement and the Escrow
Agreement, and delivery to the Exchange Agent of the exercise price per
share therefor, such XLI Warrant shall be converted into Merger Cash and a
right to receive Contingent Cash, subject to and in accordance with Section
2.4.2.2 (XLI Warrants), this Section 2.7 (Distributions from Escrow),
including, without limitation, Section 2.7.1 (Initial Escrow Distribution),
and the Escrow Agreement. Merger Cash payable to the holder of any Private
Warrant under this Section 2.7.2 (Upon Exercise of XLI Warrants) shall be
paid to the holder of such Private Warrant from the escrow proceeds
delivered by Oak to the Escrow Agent pursuant to Section 2.5.2.2 (Escrow of
Merger Cash for Private Warrants). Merger Cash payable to the holder of any
XLI Warrant, other than a Private Warrant, under this Section 2.7.2 (Upon
Exercise of XLI Warrants) shall be paid by the Exchange Agent to the holder
of such XLI Warrant from the proceeds received by the Exchange Agent upon
delivery to the Exchange Agent by the holder of such XLI Warrant of the
exercise price per share due upon exercise of the XLI Warrant. (Net
exercises of XLI Warrants, including any Private Warrants, shall be
prohibited.) Contingent Cash payable to the holder of any XLI Warrant
(including any Private Warrant) under this Section 2.7.2 (Upon Exercise of
XLI Warrants), who exercises such XLI Warrant (including any Private
Warrant) prior to March 31, 1999, shall be paid by the Escrow Agent, for
the period commencing on January 1, 1998 and ending on March 31, 1999, in
accordance with the provisions of Section 2.7.1 (Initial Escrow
Distribution) and the terms of the Escrow Agreement. Contingent Cash
payable to the holder of any Private Warrant under this Section 2.7.2 (Upon
Exercise of XLI Warrants), who exercises such Private Warrant subsequent to
March 31, 1999, shall be paid to the holder of such Private Warrant from
the escrow proceeds delivered by Oak to the Escrow Agent with respect to
such Private Warrant pursuant to Section 2.6.1.2 (Escrow of Contingent
Cash) prior to exercise of such Private Warrant. Following exercise of such
Private Warrant, any Contingent Cash amount payable to the holder of such
Private Warrant thereafter shall be paid to such Private Warrant holder by
the Exchange Agent pursuant to Section 2.6.1.1 (Payment of Contingent Cash
to XLI Stockholders).
2.7.3 Upon Termination of the Escrow Agreement. Upon Termination of
the Escrow Agreement (which shall occur upon expiration or exercise of all
rights to purchase XLI Common Stock under the XLI Warrants), all funds, if
any, remaining in escrow upon termination of the Escrow Agreement, less any
exercise price amounts required to be delivered to Oak pursuant to Section
2.7.4 (Allocation of XLI Warrant Exercise Amounts), shall be paid out
following the termination of the Escrow Agreement. Such
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amount shall be promptly delivered by the Escrow Agent to the Exchange
Agent for distribution to the XLI Stockholders, and shall be allocated and
distributed by the Exchange Agent subject to and in accordance with Section
2.6.1.1 (Payment of Contingent Cash to XLI Stockholders); provided,
however, that such amount shall be paid out within fifteen (15) business
days following delivery of the amount to the Exchange Agent.
2.7.4 Allocation of XLI Warrant Exercise Amounts. All amounts
received by the Escrow Agent or the Exchange Agent in connection with the
exercise of any XLI Warrants, net of the Merger Cash amounts payable under
the terms of the Escrow Agreement from the proceeds of any XLI Warrant
exercises other than Private Warrant exercises, shall be delivered to Oak
pursuant to the provisions of the Escrow Agreement. If, upon expiration of
the term of the Escrow Agreement, the aggregate exercise price paid to Oak
in connection with any exercise of XLI Warrants, net of amounts, if any, of
Merger Cash payable with respect to any XLI Warrant (other than a Private
Warrant) upon exercise of such XLI Warrant, exceeds the aggregate costs and
expenses incurred by Oak in connection with the Escrow Agreement and the
Exchange Agreement, including all costs and expenses that Oak reasonably
expects to incur prior to and in connection with termination of the
Exchange Agreement, then the amount representing such difference shall be
promptly delivered by Oak to the Exchange Agent for distribution to the XLI
Stockholders of record at the Effective Time (which shall include any XLI
Stockholders who exercised their XLI Warrants prior to termination of the
Escrow Agreement). Any such amount due to the XLI Stockholders shall be
allocated and distributed to the XLI Stockholders subject to and in
accordance with Section 2.6.1.1 (Payment of Contingent Cash to XLI
Stockholders); provided, however, that such amount shall be paid out within
thirty (30) business days following delivery of the amount to the Exchange
Agent.
2.8 Effective Date. Pixel, Sub and XLI shall each take or cause to be
taken all such actions, or do or cause to be done, all such things as are
necessary, proper or advisable under the laws of the State of Delaware to make
effective the Merger, subject, however, to receipt of any required approval by
outstanding shares of any of them in accordance with Delaware law and subject,
also, to compliance with all other applicable laws. Upon compliance with
applicable laws and upon receipt of any required approval of the outstanding
shares of every party, a copy of the statutory Certificate of Merger as required
by Section 251(c) of the Delaware General Corporation Law shall be filed in the
office of the Delaware Secretary of State. The Merger shall become effective
upon such filing.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF OAK
Except as disclosed by Oak in Exhibit "F" to this Agreement, Oak represents
and warrants to XLI that:
3.1 Organization and Good Standing. Each of Oak and Sub is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware, and has all requisite corporate power and authority to carry
on its business as now conducted and as proposed to be conducted, and is duly
qualified as a foreign corporation and is in good standing in all other
jurisdictions in which such qualification is required; provided, however, that
neither Oak nor Sub shall be required to be qualified in any jurisdiction in
which its failure to qualify would not have a material and adverse effect on its
operations or financial condition. Pixel is a corporation duly organized,
validly existing and in good standing under the laws of the Commonwealth of
Massachusetts, and has all requisite corporate power and authority to carry on
its business as now conducted and as proposed to be conducted, and is duly
qualified as a foreign corporation and is in good standing in all other
jurisdictions in which such qualification is required; provided, however, that
Pixel may not be qualified in jurisdictions in which its failure to qualify
would not have a material and adverse effect on its operations or financial
condition. Sub is a wholly-owned subsidiary of Pixel and Pixel is a wholly-owned
subsidiary of Oak. Sub does not own, lease or operate any property.
3.2 Authorization. All corporate action on the part of Oak, Pixel and Sub
and their respective officers, directors and stockholders necessary for the
authorization, execution, delivery and performance of all obligations of Oak,
Pixel and Sub under this Agreement will be taken prior to the Effective Date.
This
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Agreement, when executed and delivered, will constitute a valid and legally
binding obligation of Oak, Pixel and Sub.
3.3 Oak SEC Filings; Financial Statements.
3.3.1 Oak has filed all forms, reports and documents required to be
filed with the SEC since March 1, 1995, and has made available to XLI
complete and correct copies of (i) its Annual Report on Form 10-K for the
fiscal year ended June 30, 1997, (ii) its Quarterly Report on Form 10-Q for
the period ended September 30, 1997, (iii) all proxy statements relating to
Oak's meetings of stockholders (whether annual or special) held since
January 1, 1997, (iv) all other reports or registration statements (other
than Reports on Form 10-Q not referred to in clause (ii) above and Reports
on Form SR) filed by Oak with the SEC since January 1, 1997 and (iv) all
amendments and supplements to all such reports and registration statements
filed by Oak with the SEC (collectively, the "Oak SEC Reports"). The Oak
SEC Reports (i) were prepared in accordance with the requirements of the
Securities Act or the Exchange Act, as the case may be, and (ii) did not at
the time they were filed (or if amended or superseded by a filing prior to
the date of this Agreement, then on the date of such filing) contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. None of the Oak Subsidiaries is required to file any forms,
reports or other documents with the SEC.
3.3.2 Each of the consolidated financial statements (including, in
each case, any related notes thereto) contained in the Oak SEC Reports was
prepared in accordance with generally accepted accounting principles
applied on a consistent basis throughout the periods involved (except as
may be indicated in the notes thereto) and each fairly presented the
consolidated financial position of Oak and the Oak Subsidiaries as at the
respective dates thereof and the consolidated results of Oak's operations
and cash flows for the periods indicated.
3.3.3 Oak has heretofore furnished to XLI a complete and correct copy
of any amendments or modifications, which have not yet been filed with the
SEC but which are required to be filed, to agreements, documents or other
instruments which previously had been filed by Oak with the SEC pursuant to
the Securities Act or the Exchange Act.
3.4 Compliance with Other Instruments. Oak is not in violation of any
provisions of its Certificate of Incorporation or Bylaws as amended and in
effect on the date of this Agreement; Pixel is not in violation of any
provisions of its Articles of Organization or Bylaws as amended and in effect on
the date of this Agreement. Neither Oak nor Pixel is in violation in any
material respect of any provisions of any material instrument or contract to
which it is a party, or, to the best of Oak's knowledge, of any provision of any
federal or state judgment, writ, decree, order, statute, rule or governmental
regulation applicable to Oak or Pixel. The execution, delivery and performance
of this Agreement will not result in any such violation or be in conflict with
or constitute a default under any material contract or agreement to which Oak or
Pixel is a party, or result in the creation of any mortgage, pledge, lien,
encumbrance or charge upon any of the property or assets of Oak pursuant to any
such provision, except as otherwise contemplated by this Agreement.
3.5 Government Consents. All consents, approvals, orders or
authorizations of, or registrations, qualifications, designations, declarations
or filings with, any federal or state governmental authority on the part of Oak,
Pixel or Sub required in connection with the consummation of the transactions
contemplated by this Agreement shall have been obtained prior to, and be
effective as of, the Effective Time.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF XLI
For purposes of this Section 4, all references to XLI shall include the XLI
Subsidiaries and all such representations and warranties shall apply to the XLI
Subsidiaries except where the context makes such reference inapplicable. Except
as disclosed by XLI in Exhibit "G" to this Agreement, XLI warrants and
represents to Oak, Pixel and Sub that:
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4.1 Organization and Good Standing.
4.1.1 XLI is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware, and has all
requisite corporate power and authority to carry on its business as now
conducted and as proposed to be conducted, and is duly qualified as a
foreign corporation and is in good standing in all other jurisdictions in
which such qualification is required; provided, however, that XLI may not
be qualified in jurisdictions in which its failure to qualify would not
have a material and adverse effect on its operations or financial
condition.
4.1.2 The XLI Subsidiaries are corporations duly organized, validly
existing and in good standing under the laws of the country or state of
their incorporation, and have all requisite corporate power and authority
to carry on their businesses as now conducted and as proposed to be
conducted, and are duly qualified as foreign corporations and are in good
standing in all other jurisdictions in which such qualification is
required; provided, however, that any XLI Subsidiary may not be qualified
in a jurisdiction in which such failure to qualify would not have a
material and adverse effect on its operations or financial condition.
4.1.3 Other than the XLI Subsidiaries, XLI does not presently own or
control, directly or indirectly, any other corporation, association, or
other business entity.
4.2 Capitalization.
4.2.1 The authorized capital stock of XLI consists of Thirty Million
(30,000,000) ($0.01 par value) shares of Common Stock, of which Two Million
Thirty-Nine Thousand Three Hundred Ten (2,039,310) ($0.01 par value) shares
are validly issued and outstanding, fully paid and non-assessable; and One
Million (1,000,000) ($0.01 par value) shares of Preferred Stock, of which
Eight Hundred Fifty Thousand (850,000) ($0.01 par value) shares are
designated Series A Preferred Stock, of which Three Hundred Fifteen
Thousand Two Hundred Thirty-Eight (315,238) ($0.01 par value) shares are
validly issued and outstanding, fully paid and non-assessable, and of which
Eighty-Five Thousand (85,000) shares are reserved for issuance upon
exercise of the Underwriter's Warrant. The shares of Series A Preferred
Stock of XLI issued and outstanding as of the date of this Agreement are
convertible into Seven Hundred Eighty-Four Thousand Four Hundred
Twenty-Nine (784,429) shares of XLI Common Stock in connection with the
Merger, and the shares of XLI Preferred Stock reserved for issuance upon
exercise of the Underwriter's Warrant are convertible into Two Hundred
Fifty-Four Thousand Seven Hundred Sixty Five (254,765) shares of XLI Common
Stock.
4.2.2 XLI has adopted a 1990 Stock Option Plan and a 1992 Stock
Option Plan under which options to purchase up to Two Hundred Ninety-Nine
Thousand Nine Hundred Forty-Two (299,942) and One Fifty Thousand (150,000)
shares of XLI Common Stock, respectively, may be granted to key employees,
directors and consultants. Options to purchase Two Hundred Twenty-Nine
Thousand Six Hundred Sixty-Eight (229,668) shares of XLI Common Stock and
One Hundred Fifty Thousand (150,000) shares of XLI Common Stock are
presently outstanding under the 1990 Stock Option Plan and the 1992 Stock
Option Plan, respectively. No options to purchase shares of XLI Common
Stock will be outstanding as of the Effective Time.
4.2.3 Except as described below in this Section 4.2.3, no warrants or
convertible notes to purchase shares of XLI Stock will be outstanding as of
the Effective Time. Any such warrants or convertible notes outstanding at
the Effective Time shall be exercisable only in exchange for the
Consideration. The agreements governing the exercise of such warrants or
convertible notes do not permit adjustments to be made in the number of
shares of XLI Common Stock purchasable under such warrants or convertible
notes or in the exercise prices of such warrants or convertible notes, at
any time at or after the Effective Time.
4.2.3.1 IPO Warrants to purchase Eight Hundred Forty-Five Thousand
Three Hundred Twenty-Nine (845,329) shares of XLI Common Stock, at an
exercise price of $6.4176 per share, are presently issued and
outstanding. In addition, a warrant to purchase up to One Hundred Fifty
Thousand Eight Hundred One (150,801) shares of XLI Common Stock and
Eighty-Four Thousand
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Five Hundred Thirty-Two (84,532) IPO Warrants (the "Representative's
Warrant") was issued to the Underwriter in connection with XLI's initial
public offering on January 12, 1993, and is presently outstanding. The
exercise price of the Representative's Warrant is Six Hundred Fifty-Four
Thousand Eight Hundred Seventy-Five Dollars ($654,875) (or $4.3426 per
share of XLI Common Stock included in the Representative's Warrant) and
the exercise price of the IPO Warrants included in the Representative's
Warrant is $6.4176 per share. All IPO Warrants, including any IPO
Warrants underlying the Representative's Warrant, expire on January 12,
1998. The Representative's Warrant expires on January 20, 1998.
4.2.3.2 Class A Warrants to purchase Four Hundred Twenty-Seven
Thousand Seven Hundred Fifty-Eight (427,758) shares of XLI Common Stock,
at an exercise price of $2.608 per share, are presently issued and
outstanding. In addition, a warrant to purchase Eighty-Five Thousand
(85,000) units, at an exercise price of $4.80 per unit (the
"Underwriter's Warrant") was issued to the Underwriter in connection
with XLI's public offering in February 1994, for a total exercise price
of Four Hundred Eight Thousand Dollars ($408,000), and is presently
outstanding. The units consist of up to Forty-Two Thousand Seven Hundred
Seventy-Seven (42,777) Class A Warrants, having an exercise price of
$2.608 per share, and Eighty-Five Thousand (85,000) shares of XLI
Preferred Stock. The shares of XLI Preferred Stock underlying the
Underwriter's Warrant are convertible into Two Hundred Fifty-Four
Thousand Seven Hundred Sixty-Five shares of XLI Common Stock. All Class
A Warrants, including any Class A Warrants underlying the Underwriter's
Warrant, expire on February 11, 1999. The Underwriter's Warrant expires
on February 22, 1999.
4.2.3.3 Private 1995 Warrants to purchase Six Hundred Eight
Thousand (608,000) shares of XLI Common Stock, at an exercise price
ranging from $0.03125 to $0.10 per share, are presently issued and
outstanding. All Private 1995 Warrants will have expired by no later
than December 31, 2000.
4.2.3.4 Private 1996 Warrants to purchase Five Hundred
Ninety-Three Thousand Four Hundred Sixty-Two (593,462) shares of XLI
Common Stock, at an exercise price of $0.01 per share, are presently
issued and outstanding. All Private 1996 Warrants will have expired by
no later than May 31, 2001.
4.2.4 XLI has reserved sufficient shares of XLI Common Stock for
issuance upon conversion of any issued and outstanding shares of XLI
Preferred Stock and upon exercise of any options, warrants, convertible
notes, convertible securities or other rights presently outstanding.
4.2.5 All outstanding securities of XLI were issued in compliance
with applicable federal and state securities laws.
4.2.6 There are no other options, warrants, convertible notes,
convertible securities or other rights presently outstanding to purchase
any of the authorized but unissued capital stock of XLI or the XLI
Subsidiaries.
4.3 Authorization. All corporate action on the part of XLI and its
officers, directors and stockholders necessary for the authorization, execution,
delivery and performance of all obligations of XLI under this Agreement will be
taken prior to the Effective Date. This Agreement, when executed and delivered,
will constitute a valid and legally binding obligation of XLI.
4.4 XLI SEC Filings; Financial Statements.
4.4.1 XLI has filed all forms, reports and documents required to be
filed with the SEC since January 1, 1993, and has made available to Oak and
Pixel complete and correct copies of (i) its Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1996, (ii) its Quarterly Reports on
Form 10-QSB for the periods ended March 31, 1997, June 30, 1997 and
September 30, 1997, (iii) all proxy statements relating to XLI's meetings
of stockholders (whether annual or special) held since January 1, 1993,
(iv) all other reports or registration statements (other than Reports on
Form 10-QSB not referred to in clause (ii) above and Reports on Form SR)
filed by XLI with the SEC since January 1, 1993 and (iv) all amendments and
supplements to all such reports and registration statements filed by XLI
with
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the SEC (collectively, the "XLI SEC Reports"). The XLI SEC Reports (i) were
prepared in accordance with the requirements of the Securities Act or the
Exchange Act, as the case may be, and (ii) did not at the time they were
filed (or if amended or superseded by a filing prior to the date of this
Agreement, then on the date of such filing) contain any untrue statement of
a material fact or omit to state a material fact required to be stated
therein or necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading. None of
the XLI Subsidiaries is required to file any forms, reports or other
documents with the SEC.
4.4.2 Each of the consolidated financial statements (including, in
each case, any related notes thereto) contained in the XLI SEC Reports was
prepared in accordance with generally accepted accounting principles
applied on a consistent basis throughout the periods involved (except as
may be indicated in the notes thereto) and each fairly presented the
consolidated financial position of XLI and the XLI Subsidiaries as at the
respective dates thereof and the consolidated results of XLI's operations
and cash flows for the periods indicated.
4.4.3 XLI has heretofore furnished to Oak and Pixel a complete and
correct copy of any amendments or modifications, which have not yet been
filed with the SEC but which are required to be filed, to agreements,
documents or other instruments which previously had been filed by XLI with
the SEC pursuant to the Securities Act or the Exchange Act.
4.5 Ownership of Property.
4.5.1 Except (a) as reflected in the XLI SEC Reports or in the notes
thereto, (b) for liens for current taxes not yet delinquent, (c) for liens
imposed by law and incurred in the ordinary course of business for
obligations not yet due to carriers, warehousemen, laborers, materialmen
and the like, (d) for liens in respect of pledges or deposits under
workers' compensation laws or similar legislation, or (e) for minor defects
in title, none of which, individually or in the aggregate, materially
interferes with the use of such property, XLI owns its property free and
clear of all mortgages, liens, loans and encumbrances. With respect to the
property it leases, XLI is in compliance with such leases and, to the best
of its knowledge, holds a valid leasehold interest free of any liens,
claims and encumbrances, subject to clauses (b) through (e) above.
4.5.2 All leases described in the list delivered pursuant to Section
4.28(xii) (Additional Disclosure) are in full force and effect, and there
are no material defaults by either party thereunder. XLI owns no real
property and will not acquire any real property before the Effective Date.
4.5.3 The personal property described in the list delivered pursuant to
Section 4.28(xiii) (Additional Disclosure) is not held under any lease,
security agreement, conditional sales contract, or other title retention or
security arrangement, nor is such property located other than in the
possession of XLI. There will be no material and adverse changes in the
amount and type of tangible personal property in the possession of, or used
by, XLI during the period from September 30, 1997 to and including the
Effective Date.
4.5.4 All personal property owned by XLI, taken as a whole, is in
good condition and repair, subject to normal wear and tear, and its use in
the business of XLI is in compliance with all material, applicable,
governmental regulations.
4.6 Liabilities. XLI has no material liabilities except as disclosed
herein and in the XLI SEC Reports.
4.7 Inventories. The inventories of XLI, whether finished goods, work in
process or raw materials, shown on the XLI SEC Reports or thereafter acquired,
are all items of a quality usable or saleable in the ordinary and usual course
of the business of XLI, except for inventory items which are obsolete or not
usable or saleable in the ordinary course of business which have been written
down to an amount not in excess of realizable market value or for which adequate
reserves or allowances have been provided in the XLI SEC Reports. The values at
which inventories are carried reflect the inventory valuation policy of XLI
which is consistent with its past practice and in accordance with generally
accepted accounting principles applied on a consistent basis.
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4.8 Raw Materials. All raw materials and finished goods purchased by XLI
and placed in inventory were done so in the ordinary course of XLI's business
and are presently available on reasonable terms and conditions from the vendors
listed on the vendors list provided pursuant to Section 4.28(ix) (Additional
Disclosure). There are no sole source providers of raw materials or finished
goods material to XLI's business.
4.9 Sales Contracts and Bids. All cost and pricing data stated in the
bids, proposals, quotations, sales contracts and other commitments described on
the list provided pursuant to Section 4.28(xv) (Additional Disclosure) were when
made, accurate, complete and current in all material respects. To the best of
XLI's knowledge, each such sales contract and other commitment is a valid
agreement pursuant to which no default of any material nature exists or is
contemplated thereunder, and no notice of cancellation thereof has been received
by XLI nor is XLI aware of any contemplated cancellation thereof by the customer
thereunder. To the best of XLI's knowledge, none of such documents (i) contains
terms, conditions or requirements which exceed the current capacity or
capabilities of XLI or calls for performance unattainable within XLI's current
capabilities, (ii) is the subject of any change or adjustment yet to be
negotiated with the customer thereunder, (iii) is subject to any dispute or (iv)
provided Oak and Pixel make no material changes in XLI's performance standards
or operating procedures or levels, will result upon completion of performance
either in a total cost of performance which is in excess of the contract or bid
price, or a cost to complete performance in excess of the remaining unbilled
portion of the contract price. To the best of XLI's knowledge, no sales contract
or other commitment of XLI completed or under performance is or will be the
subject of any claim against XLI for reduction in the purchase price, return of
excess profits or violation of any government regulations or contracting
procedures.
4.10 Quality and Conformance of Products. XLI's products and all
components thereof, whether actually delivered or currently being produced,
packaged or manufactured by XLI, have met or meet the specifications set forth
in the sales contracts or purchase orders relating to such products and any
applicable governmental minimum quality standards. To the best of XLI's
knowledge, each such product and component is free from any defect in quality,
materials or packaging standards that would subject XLI to any contract claim,
product liability or other liability of any nature whatsoever, whether asserted
by the purchaser thereof or any third party.
4.11 Accounts Receivable. All of the accounts receivable of XLI shown on
the XLI SEC Reports or thereafter acquired arose and are collectible in the
ordinary and usual course of XLI's business, except that the value of any
account receivable, the collection of which is doubtful or which is subject to a
defense or set-off, has been written down to an amount not in excess of
realizable market value or adequate reserves or allowances therefor have been
provided in the XLI SEC Reports. The values at which accounts receivable are
carried reflect the accounts receivable valuation policy of XLI which is
consistent with its past practice and in accordance with generally accepted
accounting principles applied on a consistent basis.
4.12 Taxes. XLI and the XLI Subsidiaries have prepared and filed all
state, local, United States and other applicable domestic or foreign
jurisdictions corporate income, real and personal property, withholding, sales
and other tax returns that are required to be filed by them and have paid or
made provision for the payment of all taxes that have become due pursuant to
such returns or are otherwise due. The tax returns of XLI and the XLI
Subsidiaries have not been audited by the Internal Revenue Service or any other
governmental agency. No deficiency, assessment or proposed adjustment of XLI's
or any XLI Subsidiary's taxes is pending and XLI has no knowledge of any
proposed liability for any tax to be imposed upon its or any XLI Subsidiary's
properties or assets. XLI has not made an election under Section 341(f) of the
Code. XLI has not made or agreed (or been required) to make any adjustment or
change in accounting method. No material special charges, penalties, fines,
liens or similar encumbrances have been asserted against XLI or the XLI
Subsidiaries with respect to the payment or failure to pay any taxes which have
not been paid or received without further liability to XLI or the XLI
Subsidiaries. Proper and accurate amounts have been withheld by XLI and the XLI
Subsidiaries from their employees for all periods in compliance with the
withholding provisions of applicable law. No payments by XLI to its officers,
directors, employees or consultants under any contact, plan or agreement,
including but not limited to this Agreement, or payments contemplated by this
Agreement, constitute parachute payments within the meaning of Section 280G of
the Code.
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4.13 FIRPTA Status. XLI is not, and has not been at any time during the
five year period preceding the date hereof, a "United States real property
holding corporation" as defined in Section 897 of the Code and the regulations
promulgated thereunder.
4.14 Customer List. It is understood and agreed by the parties hereto
that no representation is being made hereunder that the customers listed on the
customer list provided pursuant to Section 4.28(viii) (Additional Disclosure)
will become or remain customers of XLI subsequent to the Effective Date.
4.15 Vendors List. XLI is not aware of any vendor appearing on the
vendors list provided pursuant to Section 4.28(ix) (Additional Disclosure) that
has refused to (or threatened to refuse to) continue to do business with XLI or
has threatened to refuse to do business with XLI after the Merger on the same
terms and conditions as XLI did business with such vendors prior to the
Effective Date and in no event on terms and conditions less favorable to Oak and
Pixel than customary terms and conditions in XLI's industry. To the best
knowledge of XLI, no vendor appearing on the vendors list provided pursuant to
Section 4.28(ix) (Additional Disclosure) has the right to terminate any
agreement entered into with XLI.
4.16 Business Changes. Since September 30, 1997, except as otherwise
contemplated by this Agreement, XLI has conducted its business only in the
ordinary and usual course and, without limiting the generality of the foregoing:
4.16.1 XLI has not sustained any damage, destruction or loss, by
reason of fire, explosion, earthquake, casualty, labor trouble, requisition
or taking of property by any government or agent thereof, windstorm,
embargo, riot, act of God or public enemy, flood, accident, revocation of
license or right to do business, total or partial termination, suspension,
default or modification of contracts, governmental restriction or
regulation, other calamity or other event (whether or not covered by
insurance) materially and adversely affecting the financial condition,
business, assets or operations of XLI.
4.16.2 There have been no changes in the financial condition,
business, assets, operations, obligations or liabilities (fixed or
contingent) of XLI which, in the aggregate, have had or may be reasonably
expected to have (whether before or after the Effective Time of the Merger)
a materially adverse effect on the financial condition, business, assets or
operations of XLI.
4.16.3 XLI has not issued, or authorized for issuance, any equity
security, bond, warrant, note, convertible security or other security of
XLI, except for shares of XLI Stock issued upon the exercise of the
outstanding stock options or the outstanding warrants referenced in
Sections 4.2.2 and 4.3.3 (Capitalization), respectively, or accelerated the
vesting of any employee stock benefits (including vesting under stock
purchase agreements or exercisability of stock options) and XLI has not
granted, or entered into, any commitment or obligation to issue or sell any
such equity security, bond, warrant, note, convertible security or other
security of XLI, whether pursuant to offers, stock option agreements, stock
bonus agreements, stock purchase plans, incentive compensation plans,
warrants, calls, conversion rights or otherwise, except for shares of XLI
Stock issuable upon the exercise of the outstanding stock options and the
outstanding warrants referenced in Sections 4.2.2 and 4.3.3
(Capitalization), respectively.
4.16.4 XLI has not incurred additional debt for borrowed money, nor
incurred any obligation or liability (fixed or contingent), except in the
ordinary and usual course of the business of XLI and consistent with past
practice.
4.16.5 XLI has not paid any obligation or liability (fixed or
contingent), or discharged or satisfied any lien or encumbrance, or settled
any liability, claim, dispute, proceeding, suit or appeal, pending or
threatened against it or any of its assets or properties, except for
current liabilities included in the XLI SEC Reports and current liabilities
incurred since the date of the XLI SEC Reports in the ordinary and usual
course of the business of XLI and consistent with past practice.
4.16.6 XLI has not declared or made any dividend, payment or other
distribution on or with respect to any share of capital stock of XLI, and
is not required to declare or accrue any dividend, payment or other
distribution with respect to any share of capital stock of XLI.
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4.16.7 XLI has not split, combined or reclassified its capital stock
or issued or authorized or proposed the issuance of any other securities in
respect of, in lieu of or in substitution for shares of its capital stock.
XLI has not purchased, redeemed or otherwise acquired or committed itself
to acquire, directly or indirectly, any share or shares of capital stock of
XLI.
4.16.8 XLI has not mortgaged, pledged, otherwise encumbered or
subjected to lien any of its assets or properties, tangible or intangible,
nor has it committed itself to do any of the foregoing, except for liens
for current taxes which are not yet due and payable and purchase-money
liens arising out of the purchase or sale of products or services made in
the ordinary and usual course of business.
4.16.9 XLI has not disposed of, or agreed to dispose of, any asset or
property, tangible or intangible, except in the ordinary and usual course
of business, and in each case for consideration at least equal to the fair
value of such asset or property, nor has XLI leased or licensed to others
(including officers and directors), or agreed so to lease or license, any
asset or property, except in the ordinary course of business, nor has XLI
discontinued any product line or the production, sale or other disposition
of any of its products or services.
4.16.10 XLI has not purchased or agreed to purchase or otherwise
acquire any debt or equity securities of any corporation, partnership,
joint venture, firm or other entity; XLI has not made any expenditure or
commitment for the purchase, acquisition, construction or improvement of a
capital asset, except in the ordinary and usual course of business, and no
commitment has been made which includes obligations of XLI extending beyond
March 31, 1998.
4.16.11 XLI has not entered into any transaction or contract, or made
any commitment to do the same, except in the ordinary and usual course of
business, nor has XLI waived any right of substantial value or canceled any
debts or claims or voluntarily suffered any extraordinary losses which
individually or in the aggregate would have a materially and adverse effect
on the business of XLI.
4.16.12 XLI has not sold, assigned, transferred or conveyed, or
committed itself to sell, assign, transfer or convey, any XLI Intellectual
Property Rights, except in the ordinary course of business and XLI has not
amended or modified any existing agreements with respect to the XLI
Intellectual Property Rights.
4.16.13 XLI has not effected or agreed to effect any amendment or
supplement to any employee profit sharing, stock option, stock purchase,
pension, bonus, incentive, retirement, medical reimbursement, life
insurance, deferred compensation or any other employee benefit plan or
arrangement.
4.16.14 Except for (i) the increases in wages, salaries and benefits
reflected on the employee list provided pursuant to Section 4.28(xvi)
(Additional Disclosure) at the rates shown thereon and (ii) normal merit
wage, salary and benefit increases for non-senior management employees
consistent with XLI's established practices, XLI has not paid or committed
itself to pay to or for the benefit of any of its directors, officers,
employees or stockholders any compensation of any kind other than wages,
salaries and benefits at times and rates in effect prior to September 30,
1997.
4.16.15 XLI has not effected or agreed to effect any change in its
directors or executive management.
4.16.16 Except as set forth in Section 6.1.3 (Amendment of XLI
Certificate of Incorporation), XLI has not effected or committed itself to
effect any amendment or modification to its Certificate of Incorporation or
Bylaws.
4.16.17 To the knowledge of XLI, no statute has been enacted nor has
any rule or regulation been adopted (whether before or after September 30,
1997) which may reasonably be expected to have a material and adverse
effect on the financial condition, business, assets or operations of XLI.
4.16.18 XLI has not effected any change in accounting methods or
practices (including, without limitation, any change in depreciation or
amortization policies or rates).
4.16.19 XLI has not revalued any of its assets.
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4.16.20 XLI has not made any loan to any person or entity.
4.16.21 XLI has not granted any exclusive or royalty free licenses to
make, use or sell any XLI Intellectual Property Rights or products since
September 30, 1997.
4.16.22 XLI has not taken or agreed to take, and will not take or
agree to take, any of the actions described in Sections 4.16.1 to 4.16.21
above, or any action which would make any of the representations or
warranties of XLI contained in this Agreement untrue or incorrect on the
Effective Date, or prevent XLI from performing or cause XLI not to perform
its covenants hereunder, or result in any of the conditions to the Merger
set forth herein not being satisfied.
4.17 XLI Intellectual Property Rights. XLI owns, or is otherwise licensed
or has sufficient rights to use, all XLI Intellectual Property Rights used in
the business of XLI, and the same are sufficient to conduct its business as it
has been and is now being conducted. All patents, registered trademarks and
copyrights held by XLI are valid. There are no claims, disputes, actions,
proceedings, suits or appeals pending against XLI or Carley Corporation with
respect to any XLI Intellectual Property Rights, and, to the knowledge of XLI,
none have been threatened against XLI or Carley Corporation . To the knowledge
of XLI, there are no facts or circumstances which would reasonably serve as a
basis for any claim (i) that the manufacture, sale or use of any product, or any
licensing of XLI Intellectual Property Rights, infringes on any patent,
copyright or trade secret, (ii) against the use by XLI of any XLI Intellectual
Property Rights or (iii) challenging the ownership or validity of any XLI
Intellectual Property Rights. To the knowledge of XLI, there is no unauthorized
use, infringement or misappropriation of any XLI Intellectual Property Rights by
any third party, including Adam Carley, Leonard Weisberg, Carley Corporation or
any employee or consultant, or former employee or consultant, of XLI. Neither
XLI nor Carley Corporation has been sued or charged in writing as a defendant in
any claim, suit, action or proceeding which involves a claim of infringement of
trade secrets, patents, trademarks, service marks or copyrights, which has not
been finally terminated prior to the date hereof nor does XLI have knowledge of
any infringement liability with respect to, or infringement by, XLI or Carley
Corporation of any trade secret, patent, trademark, service mark or copyright of
another. XLI maintains a trade secret protection program pursuant to which its
officers, employees and consultants have been requested to sign a Development
and Confidential Information Agreement. Since January 1, 1993 and thereafter,
each of the XLI's officers, employees and consultants with access to technical
data of XLI has signed such an agreement and each such an agreement remains in
full force and effect. To the knowledge of XLI, none of its officers, employees
or consultants is in violation of such agreements.
4.18 Compliance with Law. Except for possible minor exceptions, the
curing or non-curing of which would not have a material effect on the financial
condition, business, assets or operations of XLI, the business of XLI has been
conducted in accordance with all applicable laws, regulations, orders and other
requirements of governmental authorities, including, without limiting the
generality of the foregoing, ERISA and all other laws, regulations and orders
relating to employment practices and procedures and the health and safety of
employees. XLI has not received any notice of alleged violations of the
foregoing.
4.19 Hazardous Materials; Environmental Matters. XLI and the XLI
Subsidiaries to the best of XLI's knowledge (i) have obtained all applicable
permits, licenses and other authorizations which are required under Federal,
state or local laws relating to pollution or protection of the environment,
including laws relating to emissions, discharges, releases or threatened
releases of pollutants, contaminants, or hazardous or toxic materials or wastes
into ambient air, surface water, ground water or land, or otherwise relating to
the manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of pollutants, contaminants or hazardous or toxic
materials or wastes by XLI or the XLI Subsidiaries (or their respective agents);
(ii) are in compliance with all terms and conditions of such required permits,
licenses and authorizations, and also are in compliance with all other
limitations, restrictions, conditions, standards, prohibitions, requirements,
obligations, schedules and timetables contained in such laws or contained in any
regulation, code, plan, order, decree, judgment, notice or demand letter issued,
entered, promulgated or approved thereunder; (iii) as of the date hereof, are
not aware of nor have received notice of any event, condition, circumstance,
activity, practice, incident, action or plan which is reasonably likely to
interfere with or prevent continued compliance or which would give rise to any
common law or statutory liability, or
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otherwise form the basis of any claim, action, suit or proceeding, based on or
resulting from XLI's or any of XLI's Subsidiaries (or any of their respective
agents) manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling, or the emission, discharge or release into the
environment, of any pollutant, contaminant, or hazardous or toxic material or
waste; and (iv) have taken all actions necessary under applicable requirements
of Federal, state or local laws, rules or regulations to register any products
or materials required to be registered by XLI or the XLI Subsidiaries (or any of
their respective agents) thereunder.
4.20 ERISA and Related Matters.
4.20.1 The XLI Pension Plans are qualified under Section 401 of the
Code and the trusts maintained pursuant thereto are exempt from federal
income taxation under Section 501 of the Code, and nothing has occurred
with respect to the operation of the XLI Pension Plans which could cause
the loss of such qualification or exemption or the imposition of any
liability or tax under ERISA or the Code.
4.20.2 Neither XLI nor any Related Party maintains or has ever
maintained a pension plan subject to Title IV of ERISA.
4.20.3 There is no material violation of ERISA or the Code with
respect to the filing of applicable statements, reports, documents and
notices with the Secretary of Labor or the Secretary of the Treasury or the
furnishing of statements, reports, documents and notices to the
participants or beneficiaries with respect to the XLI Employee Benefit
Plans.
4.20.4 True, correct and complete copies of the following documents
for each XLI Employee Benefit Plan have been made available to Oak or its
counsel by XLI: (i) all plan documents and related trust documents,
insurance contracts and other documents pursuant to which benefits under
such Plans are funded or paid, including all amendments, modifications and
supplements thereto, (ii) Forms 5500, financial statements and actuarial
reports, if any, for the last three Plan years and any estimates of
projected future liabilities, (iii) the last Internal Revenue Service
determination letter, (iv) the most recent summary Plan descriptions, (v)
all written communications given to all or any specific group of employees
and (vi) written descriptions of all oral agreements relating to the
Employee Benefit Plans.
4.20.5 There are no pending claims or lawsuits which have been
asserted or instituted against any XLI Employee Benefit Plan, the assets of
any of the trusts under such Plans, XLI or a Related Party or against any
fiduciary of any Employee Benefit Plan with respect to the operation of
such Plans, nor does XLI have knowledge of facts which could form the basis
for any such claim or lawsuit.
4.20.6 All amendments and actions required to have been taken prior
to the date hereof to bring the XLI Employee Benefit Plans and the XLI
Pension Plans into conformity in all material respects with all of the
applicable provisions of ERISA and all other applicable laws have been made
or taken.
4.20.7 Any bonding required with respect to the XLI Pension Plans in
accordance with applicable provisions of ERISA has been obtained, and will
be in full force and effect until the Effective Time.
4.20.8 Each XLI Employee Benefit Plan has been maintained, in all
material respects, in accordance with its terms and with all provisions of
ERISA (including rules and regulations thereunder) and other applicable
law, and neither XLI (or a Related Party) nor any "party in interest" or
"disqualified person" with respect to any such Employee Benefit Plan has
engaged in a "prohibited transaction" within the meaning of Section 4975 of
the Code or Title I, Part 4 of ERISA for which no statutory or
administrative exemption exists.
4.20.9 None of the XLI Employee Benefit Plans which are "welfare
benefit plans" within the meaning of Section 3(1) of ERISA provides for
continuing benefits or coverage for any participant or any beneficiary of a
participant after such participant's termination of employment except as
may be required under COBRA or at the expense of the participant or the
participant's beneficiary. XLI and each Related Party has complied in all
material respects with the notice and continuation requirements of COBRA.
There are no commitments, whether contractual in nature or based upon any
representation, warranty or
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other undertaking by XLI which would preclude Oak or Pixel from increasing
the cost charged individuals for participating in any continuing medical
benefit coverage.
4.20.10 Neither XLI nor any Related Party has withdrawn in a complete
or partial withdrawal from any multi-employer plan within the meaning of
Section 4001(a)(3) of ERISA prior to the Effective Time. Neither XLI nor
any Related Party has contributed to or been obligated to contribute to any
multi-employer plan within the meaning of Section 4001(a)(3) of ERISA.
4.20.11 Nothing expressed or implied in this Agreement shall confer
upon any employee of XLI or a Related Party, any beneficiary or dependent
of such employee, or upon any legal representative or collective bargaining
agent of such employee, or upon any other person not a party to this
Agreement any rights or remedies, of any nature or kind whatsoever, under
or by reason of this Agreement, including without limitation any right to
employment or to continued employment for any specified period or any right
to participation or to continued participation in any XLI Employee Benefit
Plan or in any compatible arrangement for current or deferred compensation.
4.20.12 XLI has no arrangements covering employees maintained outside
the United States which would be Employee Benefit Plans if they were
maintained inside the United States.
4.21 Employees.
4.21.1 The officers and directors of XLI are, and except to the
extent, if any, that Oak shall be notified of changes, will be immediately
prior to the Effective Time, as set forth on the employee list delivered
pursuant to Section 4.28(xvi) (Additional Disclosure); such list also sets
forth:
4.21.1.1 The names of all full-time present employees and their
annual compensation from XLI (including, without limitation, salaries,
bonuses, overrides and commissions) for the present fiscal year (at
their present or presently anticipated rates, including bonuses,
overrides and commissions);
4.21.1.2 A list of all employment contracts, bonus, stock option,
profit sharing and other agreements, plans, arrangements or
authorizations providing for employee remuneration or benefits to which
XLI is a party or by which it is bound;
4.21.1.3 A list of all material consulting, agency and
distribution relationships and agreements to which XLI is a party or by
where it is bound; and
4.21.1.4 The names of all persons, if any, holding
powers-of-attorney from XLI and a summary statement of the terms
thereof. XLI has delivered to Oak copies of all powers-of-attorney set
forth in such list.
4.21.2 Except as they may be modified by judicial doctrines in the
Commonwealth of Massachusetts, all of XLI's employment contracts and
consulting agreements are terminable at will.
4.21.3 XLI has not, since December 31, 1996, paid any bonuses,
premiums or other unusual payments to its officers, directors, employees or
other persons, except as set forth in such employee list.
4.21.4 Except as disclosed on such employee list, XLI has not made
any loans or advances to any employee, officer, director or agent of XLI,
except in the ordinary course of business.
4.21.5 XLI has no contract with, or commitment or liability to, any
labor organization or association of employees, or pending or contemplated
negotiation with any such organization or association, and no attempt, plan
or threat to organize the employees of XLI is pending or, to the best of
XLI's knowledge, is threatened or contemplated.
4.22 Litigation. There is no action, proceeding or investigation pending
or, to the best knowledge of XLI, threatened against XLI before any court or
administrative agency that might result, either individually or in the
aggregate, in any material liability on the part of XLI or in any material and
adverse change in the business of XLI or in XLI's ability to carry on its
businesses or which questions the validity of this Agreement or any actions
taken or to be taken in connection therewith.
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4.23 Material Contracts. All XLI Material Contracts are in full force and
effect and are legal, binding and enforceable by XLI. XLI is not in material
default under any of such contracts and, to the best of XLI's knowledge, no
other party to any such contract is in material default thereunder.
4.24 Compliance with Other Instruments. XLI is not in violation of any
provisions of its Certificate of Incorporation or Bylaws as amended and in
effect on the date of this Agreement. XLI is not in violation in any material
respect of any provisions of any material instrument or contract to which it is
a party, or, to the best of its knowledge, of any provision of any federal or
state judgment, writ, decree, order, statute, rule or governmental regulation
applicable to XLI. The execution, delivery, and performance of this Agreement
will not result in any such violation or be in conflict with or constitute a
default under any material contract or agreement to which XLI is a party, or
result in the creation of any mortgage, pledge, lien, encumbrance or charge upon
any of the property or assets of XLI pursuant to any such provision.
4.25 Government Consents. All consents, approvals, orders or
authorizations of, or registrations, qualifications, designation, declarations
or filings with any federal or state governmental authority on the part of XLI
required in connection with the consummation of the transactions contemplated by
this Agreement shall have been obtained prior to, and be effective as of, the
Effective Time.
4.26 Certain Transactions. XLI is not indebted, either directly or
indirectly, to any of its officers, directors or stockholders, or their
respective spouses or children, in any amount whatsoever, other than for payment
of salary for services rendered and reasonable expenses; none of said officers,
directors, stockholders, or to the best of XLI's knowledge, any members of their
immediate families, are indebted to XLI or have any direct or indirect ownership
interest in any firm or corporation (except with respect to any interest in less
than five percent (5%) of the stock of any corporation whose stock is publicly
traded): (a) with which XLI is affiliated; (b) with which XLI has a business
relationship; or (c) or any firm or corporation which competes with XLI. No such
officer, director or stockholder, or to the best of XLI's knowledge, any members
of their immediate families, is, directly or indirectly, interested in any
material contract with XLI excluding options granted under the 1990 Stock Option
Plan or the 1992 Stock Option Plan and excluding outstanding warrants. XLI is
not a guarantor or indemnitor of any indebtedness of any other person, firm or
entity.
4.27 Brokers or Finders. XLI has not incurred and will not incur,
directly or indirectly, any liability for any brokerage or finders' fees or
agents commissions or any similar charges in connection with this Agreement or
any transaction contemplated hereby.
4.28 Additional Disclosure. XLI has delivered or made available to Oak or
its counsel true and complete copies of:
(i) the currently effective Certificate of Incorporation and Bylaws of
XLI.
(ii) a complete list of all agreements entered into by XLI, if any,
providing for the acquisition of its present business or any portions thereof.
(iii) a complete list of all federal and other tax returns filed by XLI
and any XLI Subsidiary for each of the most recent three (3) fiscal years
ended December 31.
(iv) a list showing (A) the names and addresses of the holders of XLI
Common Stock, XLI Preferred Stock, IPO Warrants, Class A Warrants, Private
1995 Warrants, Private 1996 Warrants, the XLI Subordinated Notes, the
Representative's Warrant, the Underwriter's Warrant and all outstanding stock
options (including designation of any XLI option which is an incentive stock
option under Section 422A of the Code), (B) the number of shares of XLI Stock
held by, or subject to warrants, convertible notes, convertible securities,
options or other rights granted or issued to the holders thereof, (including
any IPO Warrants, Class A Warrants, Private 1995 Warrants, Private 1996
Warrants, XLI Subordinated Notes, Representative's Warrant or Underwriter's
Warrant), including all adjustments to the number of such shares or shares
underlying such warrants, convertible notes, convertible securities, options
or other rights (including any IPO Warrants, Class A Warrants, Private 1995
Warrants, Private 1996 Warrants, XLI Subordinated Notes, Representative's
Warrant or Underwriter's Warrant), (C) the manner in which such shares,
warrants, convertible notes, convertible securities, options or other rights
are so held (including any
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IPO Warrants, Class A Warrants, Private 1995 Warrants, Private 1996 Warrants,
XLI Subordinated Notes, Representative's Warrant or Underwriter's Warrant),
including copies of any XLI stock option or similar plans and a copy of each
outstanding warrant agreement, convertible note agreement, convertible
security agreement and stock option agreement, and (D) the price payable by
each holder thereof in connection with the exercise of any such warrant,
convertible note, convertible security, option or other right to purchase
shares of XLI Stock (including any IPO Warrants, Class A Warrants, Private
1995 Warrants, Private 1996 Warrants, XLI Subordinated Notes, Representative's
Warrant or Underwriter's Warrant).
(v) a list (including titles) of the current directors and officers of
XLI and the XLI Subsidiaries.
(vi) a list of all jurisdictions in which XLI and any XLI Subsidiary is
qualified as a foreign corporation or is licensed to do business, and a
complete list of all jurisdictions in which XLI and any XLI Subsidiary is
conducting, or has conducted, any business during the last two (2) years.
(vii) a complete list of all licenses, permits, certificates or other
evidences of authority of XLI or any XLI Subsidiary to conduct its business or
any part thereof.
(viii) a customer list.
(ix) a list of all vendors of design tools, raw materials, finished
goods and other products placed in inventory by XLI.
(x) an aged list of all accounts receivable as of December 31, 1997.
(xi) an aged list of all accounts payable and all other short-term
liabilities as of December 31, 1997.
(xii) a list of all real property in which it has a leasehold interest
or other interest, the uses thereof by it, and any material lien, security
interest, charge or encumbrance thereon (which list of real property shall
include the addresses and (if known) square footage of all properties and, if
applicable, the aggregate monthly rental or other fee payable under any
lease).
(xiii) a list setting forth by location all furniture, equipment,
automobiles, supplies and other tangible personal property owned by, in the
possession of or used by it in connection with its business which has a book
value in excess of One Thousand Dollars ($1,000).
(xiv) a list containing the names of each bank, savings institution or
mutual fund in which XLI or any XLI Subsidiary has an account or safe deposit
box and the names of all persons authorized to draw thereon or who have access
thereto.
(xv) a list of all outstanding bids, proposals, quotations, sales
contracts and other commitments for the sale or license of its products.
(xvi) a list of all employees of XLI or any XLI Subsidiary including a
description of their wages, salaries and benefits, their salary review dates,
accrued vacation, accrued sick leave and similar items.
(xvii) a list of all patents, copyrights, trademarks, trade names,
service marks, and any applications therefor, utility models, devices,
designs, mask-works, net lists, trade secrets, drawings, schematics,
technology, microcode, computer software programs and any and all
documentation related to the foregoing list. The list should specify the
jurisdictions in which each XLI Intellectual Property Right has issued or been
registered or in which an application for such issuance or registration has
been filed, including the respective registrations and application numbers.
(xviii) a list of all Employee Benefit Plans including the XLI Pension
Plans.
(xix) a list of all fire and casualty, property, and directors' and
officers' insurance policies maintained by it.
(xx) a list of all written contracts, personal property leases and other
agreements under which XLI or any XLI Subsidiary is bound to pay Fifty
Thousand Dollars ($50,000) or more in the aggregate on an annual basis
together with the amount of such annual payment (the "XLI Material
Contracts").
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(xxi) a complete list of all investments of XLI or any XLI Subsidiary in
securities (whether debt or equity), if any, including investments in
subsidiaries.
(xxii) a complete list of any consents or approvals required to be
obtained from third parties by XLI or any XLI Subsidiary in order to
consummate the Merger, as well as the subsequent merger of XLI with and into
Pixel, including any required consents or approvals relating to contracts,
licenses, leases and other instruments material to the business of XLI.
(xxiii) a list of all notes payable and all other long-term liabilities
as of December 31, 1997, including, without limitation, all XLI Subordinated
Notes.
(xxiv) a list of all agreements, setting forth the parties, dates of
execution and expiration dates, which relate to the XLI Intellectual Property
Rights, to which XLI or any XLI Subsidiary is a party or to which any of the
XLI Intellectual Property Rights are subject.
(xxv) a list of all consultants employed by XLI or any XLI Subsidiary
since January 1, 1993.
(xxvi) a list of all liens, encumbrances and security interests
encumbering any assets of XLI or any XLI Subsidiary.
All items delivered as described above in this Section 4.28 are identified
by the Section numbers as set forth above and attached hereto as Exhibit "H."
XLI has made available its Minute Books for inspection by Oak and its
counsel. Copies of any documents listed or described in any of the lists,
schedules or exhibits referenced in this Section 4.28 (Additional Disclosure)
have, if requested by Oak, been furnished to Oak or its counsel. All such
documents furnished to Oak are correct and complete copies, and there are no
amendments or modifications thereto, except as expressly noted in such list,
schedule or exhibit in which such document is referenced. The Minute Books of
XLI made available to Oak and its counsel for inspection contain full, complete
and accurate records of all meetings and other corporate actions taken by the
directors and stockholders of XLI. Any approval or consent of the directors or
stockholders of XLI required to be obtained by XLI in connection with any action
taken by XLI prior to the date of this Agreement was obtained by XLI in
accordance with its Certificate of Incorporation and Bylaws then in effect and
the requirements of applicable law. The lists, schedules and exhibits delivered
pursuant to this Section 4.28 (Additional Disclosure) are correct and complete
on the date of their delivery.
4.29 Complete Disclosure. To the best of XLI's knowledge, neither this
Agreement nor any of the documents delivered to Oak or Pixel by XLI in
connection herewith contains any untrue statement of a material fact or omits a
statement of any material fact necessary in order to make the statements
contained herein and therein not misleading in light of the circumstances under
which such statements were made.
4.30 Materiality. Representations and warranties in this Section 4
limited to "material" items mean items material to XLI on a consolidated basis.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF PARTY STOCKHOLDERS
Each Party Stockholder represents and warrants to Oak, Pixel and Sub that
it has the capacity and authority to enter into this Agreement and to execute
and deliver to Oak its Irrevocable Proxy to vote in favor of the adoption of
this Agreement, the approval of the Merger and the appointment of the
Stockholder Representatives. Each Stockholder Party further represents and
warrants to Oak and Pixel that this Agreement and the Irrevocable Proxy, when
executed and delivered, will constitute valid and legally binding obligations of
such Stockholder Party.
SECTION 6. COVENANTS.
6.1 XLI Covenants. XLI covenants with Oak, Pixel and Sub, as an
inducement to Oak, Pixel and Sub to enter into this Agreement, that:
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6.1.1 Special Meeting; Proxy Statement.
6.1.1.1 XLI shall prepare, in cooperation with Oak and Pixel, and
XLI shall file with the SEC under the Exchange Act preliminary proxy
materials for the purpose of soliciting proxies from XLI Stockholders to
vote in favor of the adoption of this Agreement, the approval of the
Merger and the appointment of the Stockholder Representatives at a
special meeting of XLI Stockholders to be called and held for such
purpose (the "XLI Special Meeting"). XLI, with the assistance of Oak and
Pixel, shall promptly respond to any SEC comments on the proxy materials
and shall otherwise use its best efforts to resolve as promptly as
practicable all SEC comments to the satisfaction of the SEC. XLI agrees
to provide to Oak and Pixel copies of any proxy materials or
correspondence related thereto prior to any filing of such proxy
materials or correspondence with the SEC.
6.1.1.2 Promptly following the resolution to the satisfaction of
the SEC of all SEC comments on the proxy statement (or the expiration of
the ten-day period under Rule 14a-6(a) under the Exchange Act, if no SEC
comments are received by such date), XLI shall distribute the proxy
statement to the XLI Stockholders and, pursuant thereto, shall call the
XLI Special Meeting in accordance with the Delaware General Corporation
Law and shall solicit proxies from the XLI Stockholders to vote in favor
of the adoption of this Agreement, the approval of the Merger and the
appointment of the Stockholder Representatives at the XLI Special
Meeting.
6.1.1.3 XLI shall comply with all applicable provisions of the
Delaware General Corporation Law in the preparation, filing and
distribution of the proxy statement, the solicitation of proxies
thereunder, and the calling and holding of the XLI Special Meeting.
Without limiting the foregoing, XLI shall ensure that the proxy
statement does not, as of the date on which it is distributed to XLI
Stockholders, and as of the date of the XLI Special Meeting, contain any
untrue statement of a material fact, or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading (provided that
XLI shall only be responsible for the accuracy and completeness of
information relating to XLI or furnished by XLI in writing for inclusion
in the proxy statement).
6.1.1.4 XLI, acting through its Board of Directors, shall include
in the proxy statement the recommendation of its Board of Directors that
the XLI Stockholders vote in favor of the adoption of this Agreement,
the approval of the Merger and the appointment of the Stockholder
Representatives, and shall otherwise use its best efforts to obtain the
requisite stockholder approval.
6.1.1.5 The proxy statement shall comply with the notice
provisions of Section 262(d) of the Delaware General Corporation Law.
6.1.2 Appraisal Matters. Upon such approval of this Agreement, the
Merger and the appointment of the Stockholder Representatives by the XLI
Stockholders, XLI shall, within ten (10) days after the Effective Date,
mail to each stockholder entitled thereto under Section 262(d)(1) of the
Delaware General Corporation Law a notice of that the Merger has become
effective. XLI shall deliver to Oak and Pixel, on the first business day
after the XLI Special Meeting, a certificate of the Secretary of XLI (the
"XLI Certificate of Objections") stating the number of shares of XLI Stock
as to which written demands for appraisal were filed in accordance with the
Delaware General Corporation Law. The XLI Certificate of Objections shall
include the names and mailing addresses of the XLI Stockholders who shall
have filed written demands for appraisal.
6.1.3 Amendment of XLI Certificate of Incorporation. XLI agrees to
solicit from the XLI Stockholders waivers of certain provisions of the XLI
Certificate of Incorporation as requested by Oak or Pixel, including
without limitation waivers of the dividend and liquidation provisions set
forth therein in exchange for the Consideration set forth in this
Agreement.
6.1.4 Notice of Default or Claim. XLI will give prompt written
notice to Oak and Pixel of any notice of default received by it subsequent
to the date of this Agreement and prior to the Effective Time of the Merger
under any instrument or agreement to which XLI is a party or by which it is
bound, and of the assertion of any claim which, if upheld, would render
inaccurate any representation of XLI herein.
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6.1.5 No Solicitation. Subject to this Section 6.1.5, XLI and the
Party Stockholders shall not, and XLI shall use its best efforts to cause
its Related Parties and each of its officers, directors, employees,
representatives and agents not to, directly or indirectly, (a) solicit,
initiate or knowingly encourage discussions or negotiations with any person
or entity (other than Oak or Pixel) concerning any merger, consolidation,
sale of material assets, tender offer (including a self-tender offer),
recapitalization, accumulation of XLI Stock, proxy solicitation or other
business combination involving XLI, any XLI Subsidiary or any division of
XLI or of any XLI Subsidiary ("XLI Transaction Proposal") or (b) provide
any non-public information concerning the business, properties or assets of
XLI or any XLI Subsidiary to any person or entity (other than Oak or
Pixel). Notwithstanding anything to the contrary contained in the
immediately preceding sentence, XLI shall not be prohibited from (x)
furnishing information pursuant to a written confidentiality agreement to a
third party who has initiated contact with XLI regarding a bona fide
unsolicited XLI Transaction Proposal under circumstances not constituting a
breach of the provisions of clause (a) of this Section 6.1.5 (a "Permitted
XLI Contact"), (y) engaging in discussions or negotiations with a third
party who has initiated a Permitted XLI Contact regarding an XLI
Transaction Proposal or (z) following receipt of an XLI Transaction
Proposal taking and disclosing to its stockholders a position contemplated
by Rule 14e-2(a) under the Exchange Act or otherwise make disclosure to its
stockholders, but in each case referred to in the foregoing clauses (x)
through (z) only to the extent that the Board of Directors of XLI shall
have concluded in good faith in the exercise of its fiduciary duties, after
consultation with its outside counsel and financial advisor, that such
actions are more likely than not to result in a bona fide XLI Transaction
Proposal, the terms of which would be more favorable to XLI Stockholders
than the Merger (a "Superior XLI Proposal"). XLI shall immediately notify
Oak and Pixel of and shall disclose to Oak and Pixel all details of, any
inquiries, discussions or negotiations of the notice described in this
Section 6.1.5, and if XLI receives an XLI Transaction Proposal, XLI shall
within one business day of its receipt of such proposal inform Oak and
Pixel of the terms and conditions of such proposal and identity of the
person making it. Immediately from and after the date of this Agreement,
XLI shall cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted heretofore with
respect to any XLI Transaction Proposal. Any confidentiality agreement
entered into with any person or entity (other than Oak or Pixel) in
accordance with the provisions of this Section 6.1.5 shall require that any
non-public information concerning the business, properties or assets of XLI
or any XLI Subsidiary shall be kept confidential by the recipient of such
information, shall not be used by the recipient of such information other
than for purposes of conducting a due diligence investigation of XLI, and
shall be returned to XLI upon consummation of the Merger pursuant to this
Agreement.
6.1.6 Access. XLI shall, between the date hereof and the Effective
Date, give Oak's and Pixel's representatives full access, during normal
business hours and upon reasonable notice, to all of XLI's assets,
properties, books, records, agreements and commitments, and furnish Oak's
and Pixel's representatives during such period with all such information
concerning XLI affairs as Oak and Pixel may reasonably request; provided,
however, that Oak and Pixel and their Related Parties and agents will hold
in strict confidence all documents and information concerning XLI so
furnished, and, if the transactions contemplated in this Agreement shall
not be consummated, such confidence shall be maintained and all such
documents shall immediately thereafter be returned to XLI.
6.1.7 Conduct of Business of XLI Pending the Merger. XLI covenants
and agrees that, between the date of this Agreement and the Effective Time,
XLI shall, and XLI shall cause the business of any XLI Subsidiary to be
conducted only in, and XLI and the XLI Subsidiaries shall not take any
action except in, the ordinary course of business and in a manner
consistent with past practice, and XLI shall use all reasonable efforts to
preserve substantially intact the business organization of XLI and the XLI
Subsidiaries, to keep available the services of the present officers,
employees and consultants of XLI and the XLI Subsidiaries, and to preserve
the present relationships of XLI and the XLI Subsidiaries with customers,
suppliers and other persons with which XLI or any XLI Subsidiary has
significant business relations. XLI and the Party Stockholders further
consent and agree that XLI shall refrain from taking any action prior to
the Effective Time that would result in a breach by XLI of any
representation or warranty contained in Section 4.16 (Business Changes).
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6.1.8 Notice Delivery Requirements. XLI shall timely provide any
notices required to be delivered by XLI to holders of XLI Stock or
outstanding stock options, warrants, convertible notes, convertible
securities or other rights with respect to the transactions described
herein (including, without limitation, any notices required to be given to
holders of outstanding IPO Warrants, Class A Warrants, Private 1995
Warrants, Private 1996 Warrants or XLI Notes), under the terms of the
agreements governing the same.
6.1.9 Cooperation of XLI. XLI shall cooperate with Pixel in
obtaining any consents or approvals of third parties relating to contracts,
licenses, leases and other instruments material to the business of XLI,
including any consents or approvals required in connection with the merger
of XLI into Pixel. XLI further covenants and agrees to execute and deliver
or cause to be executed and delivered all deeds and instruments of
assignment requested by Oak or Pixel, including instruments of assignment
for any patent, trademark or copyright of XLI, and to take or cause to be
taken such further or other action as Oak or Pixel may deem necessary or
desirable in order to vest in and confirm to Pixel title to and possession
of any property of XLI acquired or to be acquired by Pixel in connection
with the merger of XLI with and into Pixel, and otherwise to carry out the
intent and purpose of such merger.
6.2 Oak, Pixel and Sub Covenants. Oak, Pixel and Sub covenant with XLI,
as an inducement to enter into this Agreement, that:
6.2.1 Sub Authorization. Prior to the Effective Date, Pixel, as sole
stockholder of Sub, will take all action necessary or advisable for the
consummation of the Merger by Sub and the carrying out by Sub of the
transactions contemplated hereby.
6.2.2 Maintenance of XLI Operations. Until the earlier of December
31, 2000 or payment in full by Oak of the amount of Contingent Cash due to
the XLI Stockholders under Section 2.4.4 (Contingent Cash), XLI shall be
maintained as a subsidiary or a separate division of Pixel. In addition,
Oak and Pixel agree that until such time as Oak's obligations under Section
2.6 (Payment of Contingent Cash) have terminated, separate income statement
and financial ledgers will be maintained with respect to the operations of
XLI and the calculation of Gross XLI Product Revenues. During the term of
the employment of D'Amelio pursuant to the Employment Agreement to be
entered into by and between Pixel and D'Amelio, D'Amelio shall submit to
the President of Pixel for the review and approval of Pixel, prior to any
funding of XLI operations by Pixel, an operating budget for XLI for each
calendar quarter of XLI; provided, however, that nothing contained in this
Section 6.2.2 (Maintenance of XLI Operations) or in any such operating
budget shall obligate Pixel to fund the operations of XLI.
6.2.3 Payment by Oak of Certain XLI Accounts Payable. Subject to
Section 9 (Post-Closing Adjustment), Oak covenants and agrees to pay within
thirty (30) days following the Effective Date those accounts payable of XLI
set forth on Exhibit "I" hereto; provided, however, that Oak shall have no
obligation to pay any amounts due with respect to the XLI Subordinated
Notes, unless XLI shall have entered into written agreements with the
holders of such XLI Subordinated Notes, prior to the Effective Date,
providing for payment to such XLI Subordinated Note holders solely of
amounts of principal due with respect to such XLI Subordinated Notes, and
acknowledging forgiveness of any interest due on the principal amount of
such XLI Subordinated Notes or any penalties due under the terms of such
Subordinated Notes.
6.2.4 Oak Options. On the first business day of the first month
after the Effective Date Oak shall submit to the Compensation Committee of
its Board of Directors a request that Oak grant XLI's eligible employees
options to purchase Oak Common Stock under the Oak 1994 Stock Option Plan
in accordance with the guidelines adopted by such Committee for the
granting of stock options.
SECTION 7. CONDITIONS TO MERGER.
7.1 Conditions to Each Party's Obligations to Effect the Transaction. The
respective obligations of each party to effect the transaction shall be subject
to the satisfaction on or prior to the Effective Date of the following
conditions:
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7.1.1 Stockholder Approval. The transaction shall have been approved
and adopted by the required affirmative vote or written consent of the
stockholders of Sub and XLI, and, if outstanding, any other voting
securities of Sub and XLI required to vote on the transaction.
7.1.2 Government Approval. All authorizations, consents, orders or
approvals of, or declarations or filings with, or expiration of waiting
periods imposed by, any governmental entity necessary for the consummation
of the transactions contemplated by this Agreement shall have been filed,
occurred or been obtained.
7.1.3 Legal Action. No temporary restraining order, preliminary
injunction or permanent injunction or other order preventing the
consummation of the transaction shall have been issued by any federal or
state court and remain in effect, and no litigation seeking the issuance of
such an order or injunction, or seeking the imposition against XLI, Oak or
Pixel of substantial damages if the transaction is consummated, shall be
pending which, in the good faith judgment of XLI's, Oak's or Pixel's Board
of Directors (acting upon advice of their respective outside counsel) has a
reasonable probability of resulting in such order, injunction or damages.
In the event any such order or injunction shall have been issued, each
party agrees to use its reasonable efforts to have any such order or
injunction lifted.
7.1.4 Statutes. No statute, rule or regulation shall have been
enacted by the government of the United States or any state or agency
thereof which would make the consummation of the transaction illegal.
7.1.5 Carley Corporation. The parties shall have agreed on a
mutually acceptable satisfaction of XLI's obligations to Carley Corporation
pursuant to that certain Agreement dated January 15, 1990 between Carley
Corporation and XLI, as amended by the First, Second, Third, Fourth and
Fifth Agreement Amendments thereto (the "Existing Carley Agreement"), and
Pixel shall have entered into an agreement with Carley Corporation, the
terms of which are satisfactory to Oak and Pixel in their sole discretion.
Pixel shall pay Five Hundred Thousand Dollars ($500,000) of XLI's
obligations to Carley Corporation provided that the royalty rates specified
in Section 4 of the Fifth Agreement Amendment are reduced from fifteen
percent (15%) to eleven percent (11%) as of the Effective Time.
7.2 Conditions to Oak's, Pixel's and Sub's Obligations. The obligations
of Oak, Pixel and Sub under this Agreement are subject to the fulfillment on or
before the Effective Date of each of the following conditions:
7.2.1 Representations and Warranties. The representations and
warranties of XLI contained in Section 4 (Representations and Warranties of
XLI) shall be true on and as of the Effective Date with the same force and
effect as if they had been made at the Effective Date.
7.2.2 Performance of Obligations of XLI. XLI shall have performed in
all material respects all obligations required to be performed by it prior
to the Effective Date, and Oak and Pixel shall have received a certificate
signed by the President and by the Chief Financial Officer of XLI to such
effect. Such certificate shall attach or reference all of the lists and
schedules delivered by XLI to Oak pursuant to Section 4.28 (Additional
Disclosure) and shall describe any amendments or changes to such lists or
schedules after the date of their delivery.
7.2.3 Opinion of XLI's Counsel. Oak and Pixel shall have received an
opinion dated the Effective Date of Warner & Stackpole LLP, counsel to XLI,
substantially in the form of Exhibit "J" attached hereto.
7.2.4 Non-Compete and Confidentiality Agreements. Each Party
Stockholder, and any employee of XLI who holds, or will hold immediately
prior to the Effective Time, any shares of the capital stock of XLI, shall
have executed and delivered to Oak and Pixel Non-Compete Agreements,
substantially in the form of Exhibit "K" attached hereto, and any employees
of XLI who become employees of Pixel shall have executed and delivered to
Oak Confidentiality Agreements, substantially in the form of Exhibit "L"
attached hereto.
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7.2.5 Satisfactory Form of Legal and Accounting Matters. The form,
scope and substance of all legal and accounting matters contemplated hereby
and all closing documents and other papers delivered hereunder shall be
reasonably acceptable to Oak's and Pixel's counsel.
7.2.6 No Material Adverse Changes. The business, properties or
operations of XLI shall not have been adversely affected in any material
way as a result of any fire, accident or other casualty or any labor
disturbance or act of God. There shall not have occurred any material
adverse change since September 30, 1997 in the business, properties,
results of operations or business or financial condition or prospects of
XLI. The consequences of any action or of actions not taken by XLI at the
specific written request of Oak or Pixel, which otherwise would not have
been in the usual and ordinary course of business of XLI, shall not be
deemed to be a material adverse event of XLI.
7.2.7 Conditions Fulfilled. Oak and Pixel shall have received a
certificate of the President of XLI to the effect that all conditions in
this Section 7.2 (Conditions to Oak's, Pixel's and Sub's obligations) to
Oak's, Pixel's and Sub's obligations under this Agreement have been
satisfied or waived by Oak, Pixel and Sub.
7.2.8 Board and Stockholder Resolutions. Oak and Pixel shall have
received resolutions of the Board of Directors of XLI approving this
Agreement and the transactions contemplated herein and resolutions of XLI's
Stockholders approving this Agreement, the Merger and appointing the
Stockholder Representatives, certified by the Secretary of XLI.
7.2.9 Appraisal Rights. The holders of no more than two percent (2%)
of all shares of the capital stock of XLI shall have requested appraisal of
their shares under Section 262 of the Delaware General Corporation Law.
7.2.10 Third-Party Approvals. Any and all consents or approvals
required from third parties relating to contracts, licenses, leases and
other instruments, material to the business of XLI shall have been
obtained, including consents and approvals required to be obtained in
connection with the merger of XLI with and into Pixel.
7.2.11 XLI Stock and Share Equivalents. Oak and Pixel shall have
received a certificate signed by the President and by the Chief Financial
Officer of XLI to the effect that there are no options, warrants,
convertible notes, convertible securities or other rights to acquire shares
of the capital stock of XLI outstanding as of the Effective Time, other
than the XLI Warrants. Such certificate shall attach a list of the names
and addresses of the holders of XLI Warrants, the number of shares of XLI
Common Stock (including any shares of XLI Common Stock into which shares of
XLI Preferred Stock are convertible) purchasable under the XLI Warrants
held by each holder immediately prior to the Effective Time, the exercise
price payable by each holder of XLI Warrants immediately prior to the
Effective Time and the date of expiration of each XLI Warrant. Such
certificate shall also attest to the number of shares of XLI Common Stock
outstanding immediately prior to the Effective Time, including the number
of shares of XLI Common Stock into which the shares of XLI Preferred Stock
are convertible at the Effective Time, and shall include a list of such
holders of XLI Common Stock and XLI Preferred Stock, their addresses of
record and the number of shares of XLI Common Stock held by such holders,
including holders of shares of XLI Preferred Stock that are convertible
into shares of XLI Common Stock at the Effective Time.
7.2.12 Resignation of XLI Directors and Officers. Oak and Pixel
shall have received written resignations from the XLI directors and
officers, stating that such directors' and officers' resignations shall be
effective as of the Effective Time.
7.2.13 Bank Accounts. The persons authorized to draw on the accounts
maintained by XLI or any XLI Subsidiary at any bank, savings institution or
mutual fund shall have been approved by Oak and Pixel, and all
documentation required to effect any change in such authorization shall
have been completed to Oak's and Pixel's reasonable satisfaction.
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7.2.14 Employment Agreements. Each of D'Amelio and Allen shall have
executed and delivered to Pixel his Employment Agreement, and any
employment agreement entered into by and between D'Amelio and XLI or Allen
and XLI prior to the Effective Date shall have been terminated and be of no
further force or effect; provided, further, that, except as set forth in
Exhibit "I" to this Agreement, no amounts payable with respect to bonus,
severance or other similar amounts under the terms of any employment
agreement entered into by and between D'Amelio and XLI or Allen and XLI
prior to the Effective Date shall be paid to D'Amelio or Allen in
connection with the termination of any such employment agreement.
7.2.15 XLI Subordinated Notes. The XLI Subordinated Notes shall have
been amended to provide for the elimination of all interest due on the
principal amounts outstanding under the XLI Subordinated Notes and the
elimination of all prepayment penalties due in connection with the payment
in full of the XLI Subordinated Notes.
7.2.16 Exercise of Private Warrants All Private Warrants shall have
been exercised on or prior to the Effective Date; provided, however, that
the exercise of any Private Warrant may be conditioned upon closing of the
Merger pursuant to this Agreement.
7.3 Conditions to XLI's Obligations. The obligations of XLI under this
Agreement are subject to the fulfillment on or before the Effective Date of each
of the following conditions:
7.3.1 Representations and Warranties. The representations and
warranties of Oak contained in Section 3 (Representations and Warranties of
Oak) shall be true on and as of the Effective Date with the same force and
effect as if they had been made at the Effective Date.
7.3.2 Performance of Obligations of Oak and Pixel. Oak and Pixel
shall have performed all obligations required to be performed by them prior
to the Effective Date, and XLI shall have received a certificate signed by
the President or the Chief Financial Officer of Oak or Pixel to such
effect.
7.3.3 Opinion of Oak's Counsel. XLI shall have received an opinion
dated the Effective Date of Tomlinson Zisko Morosoli & Maser LLP, counsel
to Oak and Pixel, substantially in the form of Exhibit "M" attached hereto.
7.3.4 Satisfactory Form of Legal Matters. The form, scope and
substance of all legal matters contemplated hereby and all closing
documents and other papers delivered hereunder shall be reasonably
acceptable to counsel to XLI.
7.3.5 Conditions Fulfilled. XLI shall have received a certificate
signed by the President or the Chief Financial Officer of Oak or Pixel to
the effect that all conditions in this Section 7.3 (Conditions to XLI's
obligations) to XLI's obligations under this Agreement have been satisfied
or waived by XLI.
7.3.6 Board and Stockholders Resolutions. XLI shall have received
resolutions of the Oak and Pixel Boards of Directors approving this
Agreement and the transactions contemplated herein certified by their
respective Secretaries and resolutions of Sub's stockholder approving the
Merger, certified by the Secretary of Sub.
7.3.7 Employment Agreements. Pixel shall have executed and delivered
to D'Amelio and Allen the Employment Agreements.
SECTION 8. TERMINATION; AMENDMENT AND WAIVER.
8.1 Termination. Anything herein or elsewhere to the contrary
notwithstanding, this Agreement may be terminated and the Merger abandoned at
any time prior to the Effective Date (whether before or after approval of the
stockholders of Sub or XLI or both):
8.1.1 by mutual consent of the respective Boards of Directors of Oak,
Pixel, Sub and XLI.
8.1.2 by Oak, Pixel and Sub if any of the conditions set forth in
Section 7.1 (Conditions to Each Party's Obligations to Effect the
Transaction) or 7.2 (Conditions to Oak's, Pixel's and Sub's Obligations)
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hereof shall not have been fulfilled on or prior to the date specified for
fulfillment thereof, or shall have become incapable of fulfillment, and
shall not have been waived on or before March 31, 1998.
8.1.3 by XLI if any of the conditions set forth in Section 7.1
(Conditions to Each Party's Obligations to Effect the Transaction) or 7.3
(Conditions to XLI's Obligations) hereof shall not have been fulfilled on
or prior to the date specified for fulfillment thereof, or shall have
become incapable of fulfillment, and shall not have been waived on or
before March 31, 1998.
8.1.4 by any of Oak, Pixel, Sub or XLI if any action or proceeding
before any court or other governmental body or agency shall have been
instituted or threatened to restrain, modify or prohibit the Merger.
8.1.5 by Oak, Pixel or Sub if, in the opinion of the Board of
Directors of Oak, Pixel or Sub evidenced by a certified copy of resolutions
of such Board filed with the other parties to this Agreement, the Merger is
impractical or undesirable by reason of the fact that demands of Dissenting
Stockholders of XLI to this Agreement for purchase of their shares are so
great in amount as to render the Merger inadvisable.
8.1.6 by Oak, Pixel, Sub or XLI if the Statutory Certificate of
Merger shall not have been filed with the Secretary of State of the State
of Delaware and if the Merger shall not have become effective, on or before
March 31, 1998 (or such other later date as of the Boards of Directors of
Oak, Pixel, Sub and XLI shall mutually approve).
8.1.7 by XLI if prior to the consummation of the Merger (i) XLI
receives a bona fide written XLI Transaction Proposal from a third party,
(ii) the Board of Directors of XLI determines in good faith pursuant to
Section 6.1.5 (No Solicitation) that such XLI Transaction Proposal is a
Superior XLI Proposal and (iii) XLI has provided Oak and Pixel with at
least five (5) business days' prior written notice of such XLI Transaction
Proposal, including a copy thereof, and of the determination of its Board
of Directors referred to in clause (ii) above; provided, however, that a
condition to the effectiveness of the termination of this Agreement and the
abandonment of the Merger pursuant to this subsection 8.1.7 is the payment
to Oak, as liquidated damages, the amount of the Termination Fee in same
day funds. Such payment shall be made by wire transfer to an account
designated by Oak. At Oak's sole option and upon written notice to XLI, the
amount of the Termination Fee payable by XLI to Oak may be reduced by the
amount of any royalties or other payments due to XLI by Oak or Pixel under
the Technology License and Supply Agreement entered into between Pixel and
XLI. The parties agree that the Termination Fee is a reasonable sum
considering all the circumstances existing on the date of this Agreement,
including the relationship of the sum to the range of harm to Oak and Pixel
that reasonably could be anticipated and the anticipation that proof of
actual damages would be costly or incorrect.
8.1.8 by Oak for any reason, other than as provided in Sections
8.1.1, 8.1.2, 8.1.4, 8.1.5 or 8.1.6 above, upon payment to XLI, as
liquidated damages, the amount of the Termination Fee in same day funds.
The parties agree that the Termination Fee is a reasonable sum considering
all the circumstances existing as of the date of this Agreement, including
the relationship of the sum to the range of damage to XLI that reasonably
could be anticipated and the anticipation that proof of actual damages
would be costly or incorrect.
8.2 Effect of Termination. In the event that this Agreement is terminated
and the Merger herein abandoned as described above, this Agreement (except
Sections 1 (Definitions), 6.1.6 (Confidentiality), 8 (Termination; Amendment and
Waiver) and 12 (Miscellaneous) hereof) shall become void and of no force and
effect, without any liability on the part of any of the parties hereto (or their
respective stockholders, directors, officers or attorneys) under this Agreement;
provided that such termination shall not affect any existing agreement between
any of the parties hereto, including, without limitation, the Technology License
and Supply Agreement between Pixel and XLI, except as provided in Sections 8.1.7
and 8.1.8 above.
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8.3 Amendment and Waiver.
8.3.1 Oak, Pixel, Sub and XLI may, by written agreement among them
authorized by their respective Boards of Directors, amend this Agreement or
the Statutory Certificate of Merger at any time prior to the Effective
Date, provided that, after the earlier of the Sub or XLI stockholders
consents, no amendment shall be made that changes the terms of this
Agreement or the Statutory Certificate of Merger in a way that is
materially adverse to the stockholders who have approved the transactions,
unless such amendment is approved by such stockholders. Any amendment to
this Agreement entered into subsequent to the Effective Date shall be
approved by the Stockholder Representatives instead of by XLI or the
stockholders of XLI.
8.3.2 Any condition to the performance of Oak, Pixel, Sub or XLI
which may legally be waived at or prior to the Effective Date may be waived
at any time by the party entitled to the benefit thereof by action taken or
authorized by the Board of Directors of the waiving party.
SECTION 9. POST-CLOSING ADJUSTMENT.
9.1 Post-Closing Audit. Oak shall have thirty (30) days following the
Effective Date to conduct an audit ("Post Closing Audit") of the Closing Balance
Sheet of XLI. At Oak's sole option, Oak may consult with KPMG Peat Marwick, or
such other accountants as are acceptable to Oak, in performing such Post-
Closing Audit. Such Post-Closing Audit shall be conducted in accordance with
generally accepted accounting principles applied on a consistent basis as of the
date of XLI's Closing Balance Sheet.
9.2 Contingent Cash Adjustment. If the audit performed pursuant to
Section 9.1 (Post-Closing Audit) establishes that the Net Deficit of XLI as of
the date of the Closing Balance Sheet is greater than Eight Hundred Twenty-Five
Thousand Dollars ($825,000) then the amounts otherwise payable under Section 2.6
above (Payment of Contingent Cash) shall be reduced by the amount of such
shortfall (a "Contingent Cash Adjustment"). Written notice of any Contingent
Cash Adjustment shall be provided to the Stockholder Representatives promptly
following Oak's receipt of the Post-Closing Audit.
SECTION 10. NON-RECOURSE INDEMNIFICATION.
10.1 Indemnity. All XLI Stockholders, effective on the Effective date,
and, in the case of any holders of XLI Warrants who become XLI Stockholders (as
such term is defined in Section 1.72 hereof), effective as of the date such
holders of XLI Warrants become XLI Stockholders (collectively referred to
hereafter as the "Indemnifying Stockholders"), agree, jointly and severally, to
indemnify and hold Oak and Pixel harmless against all claims, losses,
liabilities, damages, deficiencies, costs, interest, penalties and expenses,
including reasonable attorneys' fees and expenses of investigation (hereafter
individually a "Loss" and collectively "Losses") incurred by Pixel or Oak as a
result of (i) any inaccuracy of a representation or breach of any warranty
contained herein or in any schedule, exhibit or other document delivered
pursuant hereto by XLI or the Stockholder Representatives, (ii) any failure of
XLI or the Stockholder Representatives to perform or comply with any covenant
contained herein or in any schedule, exhibit or other document delivered
pursuant hereto, or (iii) any inaccuracy in any certificate or other information
delivered by XLI or the Stockholder Representatives pursuant to Section 7.2.11
of this Agreement (XLI Stock and Share Equivalents), Section 4.4.2 of the Escrow
Agreement or Section 4 of the Exchange Agreement. In addition, the Indemnifying
Stockholders agree, jointly and severally, to indemnify and hold Oak and Pixel
harmless against all losses which may be sustained or incurred by Pixel, its
subsidiaries, affiliates, sublicensees or customers as a result of any claim or
claims that any Carley Technology, any documentation, any product (to the extent
of the Carley Technology or documentation contained therein or practiced
thereby) or any Carley Right infringes or violates any patent, copyright, trade
secret or other proprietary right of any third party. Payments with respect to
XLI Dissenting Stockholders shall not constitute a "Loss" hereunder. The term
"Loss" shall not include any changes to the financial statements (including
balance sheet valuations) of XLI caused by a change in accounting methods used
after the Effective Time of the Merger as opposed to those used by XLI before
the Effective Time of the Merger. This limitation of the definition of Loss
shall not apply to Losses
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caused as a result of XLI's failure to prepare the financial statements of XLI
in accordance with generally accepted accounting principles consistently
applied.
10.2 Threshold. Notwithstanding anything herein to the contrary, the
Indemnifying Stockholders shall be liable and shall be obligated with respect to
the indemnity provided herein only to the extent that claims individually or in
the aggregate exceed Fifty Thousand Dollars ($50,000), provided that once such
claims exceed Fifty Thousand Dollars ($50,000), the Indemnifying Stockholders
shall be responsible for the first Fifty Thousand Dollars ($50,000) of such
claims.
10.3 Defense. Oak and Pixel agree to give the XLI Stockholder
Representatives written notice of any claim or assertion of which they have
knowledge concerning any liability as to which they may request indemnification
hereunder. Each party will cooperate with the other in determining the validity
of any such claim or assertion. Upon obtaining knowledge of the institution of
any action, proceeding or other event which could give rise to a claim of
indemnity pursuant to this Section 10, Oak or Pixel shall promptly give written
notice to the XLI Stockholder Representatives. If such claim or demand relates
to a claim or demand asserted by a third party, the XLI Stockholder
Representatives shall have the right at their expense to employ counsel to
defend such claim or demand and Oak and Pixel shall have the right, but not the
obligation, to participate in the defense of any such claim or demand. So long
as the XLI Stockholder Representatives are defending such claim or demand in
good faith, Oak and Pixel will not settle such claim or demand without the
consent of the XLI Stockholder Representatives, which consent shall not be
unreasonably withheld. Oak and Pixel shall make available to the XLI Stockholder
Representatives all records and other materials reasonably required by them in
contesting a claim or demand asserted by a third party against Oak or Pixel and
shall cooperate in the defense thereof.
10.4 Term. The indemnity obligations of the Indemnifying Stockholders
shall survive the Effective Date and shall remain in effect until the later of
March 31, 2001 or the date on which the final payment of any Contingent Cash is
payable pursuant to Section 2.6 (Payment of Contingent Cash).
10.5 Non-Recourse Indemnity. With respect to amounts due under this
Section 10 (Non-Recourse Indemnification), Oak and Pixel shall have no recourse
against the XLI Stockholders personally and Oak and Pixel shall be entitled
solely to a right of set-off against amounts otherwise payable under Section 2.6
(Payment of Contingent Cash). It is the intent of the parties that the sole
recourse of Oak and Pixel with respect to amounts due under this Section 10
(Non-Recourse Indemnification) shall be to withhold payments otherwise due to
the XLI Stockholders as part of the Contingent Cash payments under Section 2.6
(Payment of Contingent Cash). Oak and Pixel shall not have recourse to amounts
already paid to the XLI Stockholders under Section 2.6 (Payment of Contingent
Cash), but shall be entitled to withhold payments otherwise due to the XLI
Stockholders in the future as Contingent Cash under Section 2.6 (Payment of
Contingent Cash).
SECTION 11. PROVISIONS RELATING TO THE STOCKHOLDER REPRESENTATIVES.
11.1 Appointment of Stockholder Representatives. By virtue of the
affirmative vote approving the Merger and this Agreement, the XLI Stockholders
shall irrevocably appoint the Stockholder Representatives to act as
attorneys-in-fact of the XLI Stockholders with authority to make all decisions
on behalf of the Stockholders with respect to any matters upon which the
Stockholder Representatives are authorized to act under this Agreement,
including without limitation, any payments to be made under Section 2.6 (Payment
of Contingent Cash), any adjustments thereto under this Agreement, any claims
for indemnification under Section 10 (Non-Recourse Indemnification) and any
amendments to this Agreement under Section 8.3.1 hereof, and any decisions of
the Stockholder Representatives with respect to any of such matters shall be
final and binding on the XLI Stockholders as if expressly confirmed in writing
by each of them.
11.2 Actions and Instructions of Stockholder Representatives. Any action
required to be taken, or notice or instructions required to be given, to Oak,
the Escrow Agent or the Exchange Agent under this Agreement, the Escrow
Agreement or the Exchange Agreement may be taken or given by a majority of the
Stockholder Representatives; provided, however, that less than a majority of the
Stockholder Representatives may take such action or give such notice or
instructions upon delivery to Oak, the Escrow Agent or the
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Exchange Agent, as the case may be, of a notice signed by a majority of the
Stockholder Representatives stating that any action may be taken and any notice
or instructions may be given to Oak, the Escrow Agent or the Exchange Agent, as
the case may be, by the number of Stockholder Representatives specified in such
notice. If for any reason there is only one Stockholder Representative at any
time, then Oak, the Escrow Agent and the Exchange Agent, as the case may be,
shall be entitled to rely on any action taken by, or notice or instructions
given by, such Stockholder Representative. Written notice of any resignation or
removal of a Stockholder Representative, or any appointment of a successor
Stockholder Representative, shall be promptly provided to Oak, the Escrow Agent
and the Exchange Agent.
SECTION 12. MISCELLANEOUS.
12.1 Governing Laws. IT IS THE INTENTION OF THE PARTIES HERETO THAT THE
INTERNAL LAWS OF THE STATE OF DELAWARE, U.S.A. (IRRESPECTIVE OF ITS CHOICE OF
LAW PRINCIPLES) SHALL GOVERN THE VALIDITY OF THIS AGREEMENT, THE CONSTRUCTION OF
ITS TERMS, AND THE INTERPRETATION AND ENFORCEMENT OF THE RIGHTS AND DUTIES OF
THE PARTIES HERETO. THE PARTIES HEREBY EXCLUDE THE UNITED NATIONS CONVENTION ON
CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS FROM THIS AGREEMENT.
12.2 Binding upon Successors and Assigns. Subject to, and unless
otherwise provided in, this Agreement, each and all of the covenants, terms,
provisions, and agreements contained herein shall be binding upon, and inure to
the benefit of, the permitted successors, executors, heirs, representatives,
administrators and assigns of the parties hereto. This Agreement shall not be
assigned by any party without the prior written consent of the other parties
hereto.
12.3 Severability. If any provision of this Agreement, or the application
thereof, shall for any reason and to any extent be invalid or unenforceable, the
remainder of this Agreement and application of such provision to other persons
or circumstances shall be interpreted so as best to reasonably effect the intent
of the parties hereto. The parties further agree to replace such void or
unenforceable provision of this Agreement with a valid and enforceable provision
which will achieve, to the extent possible, the economic, business and other
purposes of the void or unenforceable provision.
12.4 Entire Agreement. This Agreement and the Technology License and
Supply Agreement, the exhibits and schedules hereto and thereto, the documents
referenced herein and therein, and the exhibits and schedules thereto,
constitute the entire understanding and agreement of the parties hereto with
respect to the subject matter hereof and thereof and supersede all prior and
contemporaneous agreements or understandings, inducements or conditions, express
or implied, written or oral, between the parties with respect hereto and
thereto. The express terms hereof control and supersede any course of
performance or usage of the trade inconsistent with any of the terms hereof.
12.5 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original as against any party whose
signature appears thereon and all of which together shall constitute one and the
same instrument. This Agreement shall become binding when one or more
counterparts hereof, individually or taken together, shall bear the signatures
of all of the parties reflected hereon as signatories.
12.6 Expenses. Except as provided to the contrary herein, each party
shall pay all of its own costs and expenses incurred with respect to the
negotiation, execution and delivery of this Agreement and the exhibits hereto,
including without limitation fees to investment bankers, lawyers, accountants
and appraisers. Such expenses will have been accrued, but not necessarily paid,
by XLI, by the date of the Closing Balance Sheet.
12.7 Other Remedies. Any and all remedies herein expressly conferred upon
a party shall be deemed cumulative with and not exclusive of any other remedy
conferred hereby or by law on such party, and the exercise of any one remedy
shall not preclude the exercise of any other.
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12.8 Survival of Agreements. All covenants, agreements, representations
and warranties made herein shall survive the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby.
12.9 Notices. Whenever any party hereto desires or is required to give
any notice, demand or request with respect to this agreement, each such
communication shall be in writing and shall be given or made by, telecopy,
telegraph, cable, mail or other delivery and telecopied, telegraphed, cabled,
mailed or delivered to the intended recipient at the addresses specified below:
<TABLE>
<S> <C>
XLI: Xerographic Laser Images Corporation
101 Billerica Avenue
5 Billerica Park
North Billerica, MA 01862
Attn: Mr. Anthony D. D'Amelio
Telecopier: (978) 670-8835
If to XLI, with a copy to: Warner & Stackpole LLP
75 State Street
Boston, MA 02109
Attn: Michael A. Hickey, Esq.
Telecopier: (617) 951-9151
Party Stockholders: To the addresses set forth on the signature pages
hereto.
Stockholder Representatives: c/o Xerographic Laser Images
101 Billerica Avenue
5 Billerica Park
North Billerica, MA 01862
Attn: Mr. Anthony D. D'Amelio
Telecopier: (978) 670-8835
Oak, Pixel or Sub: Oak Technology, Inc.
139 Kifer Court
Sunnyvale, CA 94086
Attn: Shawn M. Soderberg, General Counsel
Telecopier: (408) 774-5337
If to Oak, Pixel or Sub, Tomlinson Zisko Morosoli & Maser, LLP
with a copy to: 200 Page Mill Road, Second Floor
Palo Alto, CA 94306
Attn: Timothy Tomlinson, Esq.
Telecopier: (650) 324-1808
</TABLE>
Except as may be otherwise provided elsewhere in this Agreement, all such
communications shall be deemed to have been duly given when transmitted by
telecopier with verified receipt by the receiving telecopier, when delivered to
the telegraph or cable office, when personally delivered, or in the case of a
mailed notice, five (5) days after being deposited in the United States
certified or registered mail, postage prepaid. Any party may change its address
for such communications by giving notice thereof to the other parties in
conformance with this Section 12.9 (Notices).
12.10 Construction of Agreement. This Agreement has been negotiated by
the respective parties hereto and their attorneys and the language hereof shall
not be construed for or against any party. A reference in this Agreement to any
Section shall include a reference to every Section the number of which begins
with the number of the Sections to which reference is specifically made (e.g., a
reference to Section 5.8 shall include a reference to Sections 5.8.1 and
5.8.2.1). The titles and headings herein are for reference purposes only and
shall not in any manner limit the construction of this Agreement which shall be
considered as a whole.
36
<PAGE> 111
12.11 Pronouns. All pronouns and any variations thereof shall be deemed
to refer to the masculine, feminine or neuter, singular or plural, as the
identity of the person, persons, entity or entities may require.
12.12 Further Assurances. Each party agrees to cooperate fully with the
other parties and to execute such further instruments, documents and agreements
and to give such further written assurances, as may be reasonably requested by
any other party, to better evidence and reflect the transactions described
herein and contemplated hereby, and to carry into effect the intents and
purposes of this Agreement.
12.13 Absence of Third Party Beneficiary Rights. No provisions of this
Agreement are intended nor shall be interpreted to provide or create any third
party beneficiary rights or any other rights of any kind in any client,
customer, affiliate, stockholder, partner or Related Party of any party hereto
or any other person; unless specifically provided otherwise herein, and, except
as so provided, all provisions hereof shall be personal solely between the
parties to this Agreement.
12.14 Obligations to Employees. XLI, Pixel and Oak hereby acknowledge
that none of such parties will, on the Effective Date, have any employment
obligations to any officer, director or employee of any of them extending beyond
the Effective Date except as set forth in a writing signed by an officer of the
party to be bound.
37
<PAGE> 112
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the dates set forth below and this Agreement shall be effective as of the date
first hereinabove written.
OAK TECHNOLOGY, INC.
Date: 1/29/98
- ------------------------------------
By: /s/ David Tsang
----------------------------------
DAVID TSANG
CHIEF EXECUTIVE OFFICER
OTI ACQUISITION CORPORATION
Date: 1/29/98
- ------------------------------------
By: /s/ Peter D. Besen
----------------------------------
PETER D. BESEN
PRESIDENT
PIXEL MAGIC, INC.
Date: 1/29/98
- ------------------------------------
By: /s/ Peter D. Besen
----------------------------------
PETER D. BESEN
PRESIDENT
XEROGRAPHIC LASER IMAGES CORPORATION
Date: 1/29/98
- ------------------------------------
By: /s/ Anthony D. D'Amelio
----------------------------------
ANTHONY D. D'AMELIO
CHIEF EXECUTIVE OFFICER
38
<PAGE> 113
PARTY STOCKHOLDERS
Date: 1/21/98
- ------------------------------------
/s/ Daniel J. Allen
------------------------------------
DANIEL J. ALLEN
ADDRESS: 35 FROST ROAD
DERRY, NH 03038
Date: 1/21/98
- ------------------------------------
/s/ Adam L. Carley
------------------------------------
ADAM L. CARLEY
ADDRESS: 6 HILLSIDE ROAD
WINDHAM, NH 03087
Date: 1/21/98
- ------------------------------------
/s/ Anthony D. D'Amelio
------------------------------------
ANTHONY D. D'AMELIO
ADDRESS: 25 CLEEK COURT
N. READING, MA 01864
Date: 1/21/98
- ------------------------------------
/s/ Joseph L. Katz
------------------------------------
JOSEPH L. KATZ
ADDRESS: 9 MITCHELL GRANT WAY
BEDFORD, MA 01730
RESEARCH INVESTMENT TRUST
Date: 1/21/98
- ------------------------------------
/s/ Joseph L. Katz
------------------------------------
JOSEPH L. KATZ, TRUSTEE
ADDRESS: 9 MITCHELL GRANT WAY
BEDFORD, MA 01730
Date: 1/21/98
- ------------------------------------
/s/ Roger F. Salava
------------------------------------
ROGER F. SALAVA
ADDRESS: 74 CONCORD STREET
SEABROOK, NH 03874
39
<PAGE> 114
DATE: 1/21/98
- ------------------------------------
/S/ JAMES L. SALERNO
------------------------------------
JAMES L. SALERNO
ADDRESS: 13 CARDINAL LANE
ANDOVER, MA 01810
Date: 1/21/98
- ------------------------------------
/s/ Vincent J. Spoto
------------------------------------
VINCENT J. SPOTO
ADDRESS: 50 CYPRESS ROAD
WELLESLEY, MA 02181
ACKNOWLEDGED AND AGREED:
Date: 1/22/98
- ------------------------------------
STOCKHOLDER REPRESENTATIVES
/s/ Daniel J. Allen
------------------------------------
DANIEL J. ALLEN
ADDRESS:
Date: 1/21/98
- ------------------------------------
/s/ Adam L. Carley
------------------------------------
ADAM L. CARLEY
ADDRESS:
Date: 1/21/98
- ------------------------------------
/s/ Anthony D. D'Amelio
------------------------------------
ADDRESS:
Date: 1/21/98
- ------------------------------------
/s/ Joseph L. Katz
------------------------------------
DR. JOSEPH L. KATZ
ADDRESS:
Date: 1/21/98
- ------------------------------------
/s/ Vincent J. Spoto
------------------------------------
VINCENT J. SPOTO
ADDRESS:
40
<PAGE> 115
LIST OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT TITLE
------- -----
<S> <C>
"A-1" Form of D'Amelio Employment Agreement
"A-2" Form of Allen Employment Agreement
"B" Form of Escrow Agreement
"C" Form of Exchange Agreement
"D" Form of Irrevocable Proxy
"E" Form of Statutory Certificate of Merger
"F" Exceptions to Representations and Warranties of Oak
Technology, Inc.
"G" Exceptions to Representations and Warranties of Xerographic
Laser Images Corporation
"H" XLI Disclosure Schedules
"I" Schedule of Payments by Oak of Certain XLI Accounts Payable
"J" Form of Warner & Stackpole LLP Legal Opinion
"K" Form of Non-Compete Agreement
"L" Form of Confidentiality Agreement
"M" Form of Tomlinson Zisko Morosoli & Maser LLP Legal Opinion
</TABLE>
41
<PAGE> 116
EXHIBIT B
ESCROW AGREEMENT
THIS ESCROW AGREEMENT (the "Escrow Agreement") is made and entered into
effective as of this day of , 1998, by and among OAK TECHNOLOGY, INC.
("Oak"), DANIEL J. ALLEN, ADAM L. CARLEY, ANTHONY D. D'AMELIO, JOSEPH L. KATZ
and VINCENT J. SPOTO (EACH A "Stockholder Representative" and collectively, the
"Stockholder Representatives") and STATE STREET BANK AND TRUST COMPANY (the
"Escrow Agent"), and the Exchange Agent, with respect to the duties of the
Exchange Agent described in Section 4 of this Escrow Agreement.
RECITALS
This Escrow Agreement is being entered into in accordance with the
provisions of that certain Plan of Reorganization and Agreement of Merger dated
as of January , 1998 (the "Plan of Reorganization"), by and among Oak, Pixel
Magic, Inc., OTI Acquisition Corporation, Xerographic Laser Images Corporation
("XLI") and certain stockholders of XLI. Capitalized terms used but not defined
herein shall have the respective meanings assigned to such terms in the Plan of
Reorganization.
NOW, THEREFORE, in consideration of the mutual agreements set forth below
and in the Plan of Reorganization, and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto agree as follows:
AGREEMENT
1. Appointment of Stockholder Representatives. XLI, with the approval of
the required affirmative vote of the stockholders of XLI entitled to vote on the
Plan of Reorganization, irrevocably nominated, constituted and appointed the
Stockholder Representatives, and each of them, as the agent and true and lawful
attorney-in-fact of the stockholders of XLI, to act in the name, place and stead
of the stockholders of XLI and any holders of options, warrants or other rights
to acquire the capital stock of XLI (collectively, the "XLI Stockholders") for
purposes of executing any documents and taking any actions that said Stockholder
Representatives may in their sole discretion determine to be necessary or
desirable in connection with this Escrow Agreement or any of the transactions
contemplated hereby, and each of said Stockholder Representatives has accepted
said appointment. Pursuant to the Plan of Reorganization, the Stockholder
Representatives are granted full authority to execute, deliver, acknowledge,
certify and file on behalf of the XLI Stockholders (in the name of any or all of
the XLI Stockholders or otherwise) any and all documents which the Stockholder
Representatives may in their sole discretion determine to be necessary,
desirable or appropriate, in such forms and containing such provisions as the
Stockholder Representatives may in their sole discretion determine to be
appropriate, including without limitation amendments to this Escrow Agreement,
amendments to any agreements, instruments or other documents executed in
connection with this Escrow Agreement, documents relating to this Escrow
Agreement (including escrow instructions) and other documents which may be
required to be executed, delivered, acknowledged or certified in connection with
any of the foregoing documents. Oak, the Escrow Agent and the Exchange Agent
shall be entitled to deal exclusively with the Stockholder Representatives on
all matters relating to this Escrow Agreement, including without limitation any
notice to, or any consent, approval or action to be given or taken by, any XLI
Stockholder, and any amount to be distributed or paid to any XLI Stockholder or
any holder of an XLI Warrant. Oak, the Escrow Agent and the Exchange Agent shall
be entitled to rely on any action taken by the Stockholder Representatives with
respect to this Escrow Agreement or any of the transactions contemplated hereby
as being fully binding on the XLI Stockholders, and any action of the
Stockholder Representatives shall fully bind the XLI Stockholders provided that
such action is taken in accordance with the provisions of Section 6 of this
Agreement. The agency and power of attorney granted in this Section 1 shall not
be affected by the subsequent incapacity of any XLI Stockholder. If for any
reason there is only one Stockholder
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Representative at any time, then, so long as there is only one Stockholder
Representative, such references herein to the Stockholder Representatives shall
mean such Stockholder Representative.
2. Plan of Reorganization. The Escrow Agent hereby acknowledges receipt
of a copy of the Plan of Reorganization, but except for reference thereto for
definitions of certain words or terms not defined herein, the Escrow Agent is
not charged with any duties or responsibilities with respect to the Plan of
Reorganization.
3. Funds Placed Into Escrow.
3.1 Merger Cash Funds. Pursuant to the Plan of Reorganization,
including Section 2.5.2.2 thereof, Oak shall deliver to the Escrow Agent
not later than one business day following the Effective Date, by wire
transfer of funds, an amount equal to Merger Cash, multiplied by the total
number of shares of XLI Common Stock purchasable under the Private Warrants
outstanding at the Effective Time, which aggregate amount together with
interest earned thereon (collectively, the "Merger Cash Funds") is to be
held by the Escrow Agent and released in accordance with the provisions of
this Escrow Agreement.
3.2 Contingent Cash Funds. Commencing with the calendar quarter
ending March 31, 1998 and terminating with the calendar quarter ending
March 31, 1999, Oak shall deliver to the Escrow Agent an amount equal to
the amount of Contingent Cash, if any, due by Oak for each such calendar
quarter under Section 2 of the Plan of Reorganization (subject to any
adjustments provided for in Sections 9 and 10 of the Plan of
Reorganization). Thereafter, pursuant to the Plan of Reorganization,
including Section 2.6.1.2 thereof, Oak shall deliver to the Escrow Agent an
amount equal to the amount of Contingent Cash, if any, due by Oak for any
calendar quarter under Section 2 of the Plan of Reorganization, multiplied
by the total number of shares of XLI Common Stock purchasable under the
Private Warrants outstanding at the end of such calendar quarter. The
Contingent Cash amount for any calendar quarter shall be delivered by Oak
to the Escrow Agent within forty-five (45) days after the end of such
calendar quarter, provided, however, that the Contingent Cash amount, if
any, due for the calendar quarter ended March 31, 1999 shall be delivered
by Oak to the Escrow Agent within thirty (30) days after the end of such
calendar quarter. All such Contingent Cash amounts delivered to the Escrow
Agent pursuant to this Section 3.2, together with interest earned thereon
(collectively, the "Contingent Cash Funds"), shall be held by the Escrow
Agent and released in accordance with the provisions of this Escrow
Agreement.
3.3 Escrow Account; Investment of Escrowed Funds. The Escrow Agent
shall open an account in the name of "Oak Technology, Inc./Xerographic
Laser Images Escrow Fund" (the "Account"), and, pending disposition of the
Merger Cash Funds and the Contingent Cash Funds (collectively, the
"Escrowed Funds") in accordance with this Escrow Agreement, the Escrow
Agent shall invest the Escrowed Funds as the Stockholder Representatives
shall direct. The Escrowed Funds may, at the direction of the Stockholder
Representatives, be invested by the Escrow Agent in (a) any obligation
issued or guaranteed by, or backed by the full faith and credit of, the
United States of America (including any certificates or any other evidence
of an ownership interest in any such obligation or in specified portions
thereof, which may consist of specified portions of the principal thereof
or the interest thereon), (b) certificates of deposit secured at all times
by direct obligations of the United States of America or obligations the
principal of and interest on which are unconditionally guaranteed by the
United States of America, (c) deposit accounts in, money market deposits or
certificates of deposit issued by, and bankers' acceptances of, any bank,
trust company or national banking association which is a member of the
Federal Reserve System (which may include the Escrow Agent and which may
include an SSgA money market account), having capital stock and surplus
aggregating not less than Fifty Million Dollars ($50,000,000), which are
fully insured by the Federal Deposit Insurance Corporation, (d) obligations
issued or guaranteed by any person controlled or supervised by and acting
as an instrumentality of the United States of America pursuant to the
authority granted by the Congress of the United States, (e) commercial
paper rated Prime-1 or A-1 by Moody's or Standard & Poors ("S&P"), or (f)
obligations rated not less than "A" or equivalent by Moody's or S&P issued
or guaranteed by any state of the United States or the District of
Columbia, or any political subdivision of any such state or District, or
obligations of a public housing authority fully secured by contracts with
the United States. In no event shall Oak or the Escrow Agent have any
liability under this Escrow Agreement for investment
B-2
<PAGE> 118
losses incurred on any investment or reinvestment made in accordance with
the terms of this Escrow Agreement.
3.4 Tax Reporting; Withholding. The parties hereto agree that, for
tax reporting purposes, all interest or other income earned from the
investment of the Escrowed Funds shall be allocable to Oak. Oak agrees to
provide the Escrow Agent with a certified tax identification number by
signing and returning a Form W-9 (or Form W-8, in case of non-U.S. persons)
to the Escrow Agent prior to the date on which any income earned on the
investment of the Escrowed Funds is credited to such Escrowed Funds. The
parties hereto understand that, in the event Oak's tax identification
number is not certified to the Escrow Agent, the Internal Revenue Code, as
amended from time to time, may require withholding of a portion of any
interest or other income earned on the investment of the Escrowed Funds.
Oak hereby agrees to assume any and all obligations imposed now or
hereafter by any applicable tax law with respect to the payment of Escrowed
Funds under this Escrow Agreement, and to indemnify and hold the Escrow
Agent harmless from and against any taxes, additions for late payment,
interest, penalties, governmental charges and other expenses (including
reasonable legal fees and expenses) that may be assessed against or may be
incurred by the Escrow Agent in connection with the making of any such
payments. Oak and the Stockholder Representatives undertake to instruct the
Escrow Agent in writing with respect to the Escrow Agent's responsibility
for withholding and other taxes, assessments or other governmental charges,
certifications and governmental reporting in connection with its acting as
Escrow Agent under this Escrow Agreement; provided, however, that
instructions with respect to the matters addressed by this Section 3.4
shall be required only in the event of a change in the terms set forth in
this Section 3.4.
3.5 Indemnity of Escrow Agent. Oak covenants and agrees to indemnify
the Escrow Agent and hold it harmless without limitation from and against
any loss, liability or expense of any nature incurred by the Escrow Agent
arising out of or in connection with this Escrow Agreement or with the
administration of its duties hereunder, including but not limited to
reasonable legal fees and other costs and expenses of defending or
preparing to defend against any such claim or liability, unless such loss,
liability or expense shall be caused by the Escrow Agent's gross
negligence, bad faith or willful misconduct. Except in the case of the
Escrow Agent's gross negligence, bad faith or willful misconduct, the
Escrow Agent shall not be liable for indirect, punitive, special or
consequential damages. The Escrow Agent shall have no more or less
responsibility or liability on account of any action or omission of any
book entry depository employed by the Escrow Agent than any such book entry
depository has to the Escrow Agent, provided such book entry depository is
liable in the case of such book entry depository's gross negligence, bad
faith or willful misconduct, except to the extent that such action or
omission of any book entry depository was caused by the Escrow Agent's own
gross negligence, bad faith or willful misconduct.
4. Release of Escrowed Funds. The Escrow Agent shall release the Escrowed
Funds as described in this Section 4, subject to the terms and conditions of
this Escrow Agreement. Determinations by the Escrow Agent or the Exchange Agent
of the Exercise Price Amount (which term is defined in Section 4.2 below) due in
connection with any XLI Warrant exercise pursuant to Section 4.2 of this Escrow
Agreement, and determinations by the Escrow Agent of the per share amount of
Merger Cash and the per share amount of Contingent Cash payable by the Escrow
Holder under this Escrow Agreement, shall be based on the information provided
to the Escrow Agent by the Stockholder Representatives and Oak, respectively,
pursuant to Section 4.4 of this Escrow Agreement. Determinations by the Escrow
Agent of the XLI Stockholders (including any holders of XLI Warrants who
exercised such XLI Warrants pursuant to Section 4.2 of this Escrow Agreement)
entitled to distributions of Escrowed Funds under this Escrow Agreement shall be
based on the information provided to the Escrow Agent by the Exchange Agent. The
Escrow Agent agrees to provide at least ten (10) days prior written notice to
the Exchange Agent, the Stockholder Representatives and Oak of any release of
Escrowed Funds pursuant to Sections 4.1, 4.2 or 4.3 of this Escrow Agreement,
which notice shall include a description of the calculations and allocations
made by the Escrow Agent in connection with such release of Escrowed Funds. Any
objection by Oak or the Stockholder Representatives to such calculations or
allocations must be delivered in writing to the Escrow Agent, with a copy to the
other party or parties hereto, within five (5) days following delivery by the
Escrow Agent of such notice.
B-3
<PAGE> 119
4.1 Initial Escrow Distribution. Subject to the provisions of the
immediately preceding paragraph, not later than fifteen (15) calendar days
following delivery to the Escrow Agent of the amount, if any, of Contingent
Cash payable by Oak for the calendar quarter ended March 31, 1999, the
Escrow Agent shall deliver to the Exchange Agent, for distribution to the
XLI Stockholders, the Escrowed Funds then held by the Escrow Agent, less
the sum of (i) Merger Cash Funds held in escrow with respect to any Private
Warrant that has not been exercised prior to March 31, 1999 and has not
otherwise terminated ("Unexpired Private Warrant"), (ii) Contingent Cash
Funds held in escrow with respect to any Unexpired Private Warrant and
(iii) any Exercise Price Amount then held in escrow under Section 4.2 below
(the "Initial Distribution Amount"). For purposes of calculating the amount
to be withheld from the Initial Distribution Amount, the Escrow Agent may
rely upon written instructions furnished to the Escrow Agent by the
Exchange Agent, by no later than April 5, 1999, identifying the Unexpired
Private Warrants outstanding at March 31, 1999, and the amounts of Merger
Cash and Contingent Cash payable with respect to such Unexpired Private
Warrants. Any interest earned on the Escrowed Funds that is otherwise
allocable to the funds required to be retained in escrow by the Escrow
Agent under this Section 4.1 shall be distributed to the XLI Stockholders
of record at March 31, 1999 (including any holders of XLI Warrants who
exercised such XLI Warrants prior to March 31, 1999) as part of the Initial
Distribution Amount. The Initial Distribution Amount shall be distributed
by the Exchange Agent in accordance with the provisions of the Exchange
Agreement and shall be allocated pro rata to (a) all outstanding shares of
XLI Common Stock held by XLI Stockholders at the Effective Time (excluding
any shares of XLI Common Stock into which outstanding shares of XLI
Preferred Stock were convertible at the Effective Time), (b) all
outstanding shares of XLI Preferred Stock held by XLI Stockholders at the
Effective Time, on an as converted basis, and (c) all shares of XLI Common
Stock (including shares of XLI Common Stock into which shares of XLI
Preferred Stock, that were issued upon exercise of the Underwriter's
Warrant, were converted) attributable to XLI Warrants exercised after the
Effective Time and prior to March 31, 1999.
4.2 Upon Exercise of XLI Warrants. Promptly following delivery to
the Exchange Agent of documentation evidencing exercise of any XLI Warrant,
in form and substance reasonably acceptable to the Exchange Agent, and
receipt by the Exchange Agent of the exercise price per share payable in
connection with the exercise of such XLI Warrant (the "Exercise Price
Amount"), the Exchange Agent shall deliver to the holder of such XLI
Warrant the sum of Merger Cash and Contingent Cash per share of XLI Common
Stock (including shares of XLI Common Stock into which shares of XLI
Preferred Stock have been converted) for which the Exercise Price Amount
has been paid to the Exchange Agent. Merger Cash payable to the holder of a
Private Warrant under this Section 4.2 shall be paid to the holder of such
Private Warrant from the Merger Cash Funds delivered to the Escrow Agent by
Oak pursuant to Section 3.1 of this Escrow Agreement, which funds shall be
delivered to the Exchange Agent by the Escrow Agent. Merger Cash payable to
the holder of any XLI Warrant, other than a Private Warrant, shall be paid
by the Exchange Agent to the holder of such XLI Warrant from the Exercise
Price Amount delivered by the holder of such XLI Warrant to the Exchange
Agent pursuant to this Section 4.2. Contingent Cash payable to the holder
of any XLI Warrant (including any Private Warrant), who exercises such XLI
Warrant (including any Private Warrant) prior to March 31, 1999, shall be
paid by the Escrow Agent, for the period commencing on January 1, 1998 and
ending on March 31, 1999, in accordance with the provisions of Section 4.1
of this Escrow Agreement. Contingent Cash payable to the holder of any
Private Warrant, who exercises such Private Warrant subsequent to March 31,
1999, shall be paid to the holder of such Private Warrant from the
Contingent Cash Funds retained in escrow by the Escrow Agent pursuant to
Section 4.1 of this Escrow Agreement and Contingent Cash Funds delivered by
Oak to the Escrow Agent pursuant to Section 3.2 of the Escrow Agreement
subsequent to June 30, 1999 and prior to delivery by Oak to the Exchange
Agent of any Contingent Cash Funds due for the calendar quarter in which
the exercise of such Private Warrant occurs. Any Contingent Cash Funds
payable by the Escrow Agent pursuant to the immediately preceding sentence
shall be delivered by the Escrow Agent to the Exchange Agent for
distribution to such holders of Private Warrants. Net exercises of XLI
Warrants shall not be permitted, and no XLI Warrant shall be exercisable
for shares of the capital stock of XLI or of Oak or any Oak Subsidiary,
including, without limitation, Pixel Magic, Inc. Within
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<PAGE> 120
five (5) business days following receipt by the Exchange Agent of the
Exercise Price Amount, the Exchange Agent shall deliver to Oak the Exercise
Price Amount, net of any amount of Merger Cash paid by the Exchange Agent
to the holder of an XLI Warrant, other than a Private Warrant, from such
Exercise Price Amount in accordance with the provisions of this Section
4.2. The Exchange Agent shall provide written notice to Oak and to the
Stockholder Representatives of any exercise of an XLI Warrant, including
the number of shares of XLI Common Stock (including shares of XLI Common
Stock into which shares of XLI Preferred Stock were converted), date of
exercise of such XLI Warrant, the Exercise Price Amount covered by such XLI
Warrant exercise and the amount of the Exercise Price Amount, if any,
utilized to pay Merger Cash pursuant to this Section 4.2. Such notice shall
also indicate whether any shares of XLI Stock remain available for purchase
under such XLI Warrant.
4.3 Upon Termination of Escrow Agreement. Upon termination of this
Escrow Agreement (which shall occur upon expiration or exercise of all
rights to purchase shares of XLI Stock under the XLI Warrants, including
the Private Warrants), all Escrowed Funds, if any, remaining in escrow upon
termination of this Escrow Agreement shall be paid out within fifteen (15)
business days following the termination of this Escrow Agreement. Such
amount shall be delivered by the Escrow Agent to the Exchange Agent for
distribution to the XLI Stockholders, and shall be allocated in accordance
with Section 4.1 of this Agreement as though it were an Initial Escrow
Distribution.
4.4 Delivery of Information to Escrow Agent.
4.4.1 Determination of Merger Cash and Contingent Cash
Amounts. Within one business day following the Effective Date, Oak and
the Stockholder Representatives shall provide joint written notice to
the Escrow Agent of the date which is the Effective Date and the per
share determination of Merger Cash, as calculated in accordance with the
provisions of Section 2.4.3 of the Plan of Reorganization. Within
forty-five (45) days after the close of each calendar quarter, Oak and
the Stockholder Representatives shall provide joint written notice to
the Escrow Agent of the per share determination of Contingent Cash as of
the end of such calendar quarter, calculated in accordance with the
provisions of Section 2.4.4 of the Plan of Reorganization. Oak and the
Stockholder Representatives agree to provide to the Escrow Agent such
other Merger Cash and Contingent Cash calculations as are required by
the Escrow Agent in order to fulfill its duties hereunder.
4.4.2 List of XLI Stockholders and Holders of XLI
Warrants. Within one business day following the Effective Date, the
Stockholder Representatives shall deliver or cause to be delivered to
the Escrow Agent, with a copy to Oak: (i) a list of the names, addresses
and number of shares of XLI Stock held by all XLI Stockholders at the
Effective Time, which list shall include the names of Dissenting
Stockholders and the number of shares of XLI Stock held by any
Dissenting Stockholder, and shall also include for each holder of XLI
Preferred Stock the number of shares of XLI Common Stock into which
shares of XLI Preferred Stock were convertible at the Effective Time,
including shares of XLI Preferred Stock held by any Dissenting
Stockholder; and (ii) a list of the names and addresses of all holders
of XLI Warrants outstanding at the Effective Time, which list shall
include the number of shares of XLI Common Stock into which each such
XLI Warrant is convertible upon exercise of such XLI Warrant, including
shares of XLI Common Stock into which shares of XLI Preferred Stock are
convertible, the Exercise Price Amount payable by the holder of such XLI
Warrant and the date of expiration of such XLI Warrant. Without limiting
the generality of the foregoing, the list of XLI Warrants outstanding at
the Effective Time shall indicate by individual holder the type or types
of XLI Warrants held by such holder, with the information required by
clause (ii) above presented separately for each XLI Warrant. The
Stockholder Representatives agree to provide to the Escrow Agent, with a
copy to Oak, such other information regarding the capital stock of XLI,
including any XLI Warrants, issued and outstanding, at the Effective
Time.
4.4.3 Notice of Expiration of XLI Warrants. Within ten (10)
business days prior to the expiration of all rights to purchase shares
of XLI Stock under the Class A Warrants, or the
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<PAGE> 121
Underwriter's Warrant, or the Private 1995 Warrants or the Private 1996
Warrants, the Stockholder Representatives shall deliver notice of same
to the Escrow Agent, the Exchange Agent and Oak.
4.5 Delivery of Information by Exchange Agent.
4.5.1 Letter of Instruction. As soon as practicable after the
Effective Time of the Merger, the Exchange Agent shall mail to each
holder of an XLI Warrant instructions for use in effecting the exercise
of any XLI Warrant. Oak and the Stockholder Representatives shall
cooperate with the Exchange Agent in furnishing such instructions.
4.5.2 Notice of Exercise of XLI Warrant. Within five (5) business
days following the exercise of any XLI Warrant and payment of the
Exercise Price Amount therefor, pursuant to and in accordance with the
provisions of this Escrow Agreement, the Exchange Agent shall provide
written notice to the Escrow Agent of the name and address of any holder
of XLI Warrants who exercised XLI Warrants subsequent to the Effective
Time of the Merger, which list shall include the number of shares of XLI
Common Stock (including shares of XLI Common Stock into which shares of
XLI Preferred Stock were converted) covered by the exercise of such XLI
Warrant. Written notice of any such XLI Warrant exercise shall be
delivered by the Exchange Agent to Oak and the Stockholder
Representatives pursuant to and in accordance with Section 4.2 of this
Escrow Agreement.
4.6 Lost, Stolen or Destroyed XLI Warrants. In the event any XLI
Warrant shall have been lost, stolen or destroyed, upon the making of any
affidavit of that fact by the person claiming such XLI Warrant to be lost,
stolen or destroyed, and upon delivery of a bond in such sum as the
Exchange Agent may reasonably direct, as indemnity against any claim that
may be made against the Exchange Agent with respect to the XLI Warrant
alleged to have been lost, the Exchange Agent or the Escrow Agent, as the
case may be, will issue, upon receipt by the Exchange Agent of the Exercise
Price Amount payable in connection with the exercise of such XLI Warrant,
the consideration as provided in this Section 4 in exchange for such lost,
stolen or destroyed XLI Warrant.
4.7 Abandoned Property. Notwithstanding anything to the contrary
contained in this Section 4 or elsewhere in this Escrow Agreement, neither
the Escrow Agent nor any other party to this Escrow Agreement shall be
liable to any holder of the capital stock of XLI, including any holder of
an XLI Warrant who has exercised all or a portion of such XLI Warrant, for
any amount properly paid to a public official pursuant to any applicable
abandoned property, escheat or similar law.
5. Duties of the Escrow Agent. It is agreed that the duties of the Escrow
Agent are only those specifically provided herein, which are purely ministerial
in nature. The Escrow Agent shall have no responsibility with respect to the
Escrowed Funds other than to follow the instructions contained herein. The
Escrow Agent shall incur no liability in connection with this Escrow Agreement
except for gross negligence, misconduct or bad faith in the performance of its
duties hereunder. The Escrow Agent shall not be required to defend any legal
proceedings which may be instituted against the Escrow Agent with respect to the
subject matter of this Escrow Agreement unless requested to do so by one or more
of the parties hereto and indemnified by the requesting party to the Escrow
Agent's satisfaction. If any action is threatened or instituted against the
Escrow Agent, the Escrow Agent may interplead the parties hereto and may deposit
the subject matter of this Escrow Agreement into court, and in such event the
Escrow Agent shall be relieved of and discharged from any and all obligations
and liabilities under this Escrow Agreement. The Escrow Agent may rely on and
shall be protected in acting or refraining from acting upon any written notice,
instruction, instrument, statement, request or document furnished to it
hereunder and believed by it to be genuine and to have been signed or presented
by the proper person, and shall have no responsibility for determining the
accuracy thereof. The Escrow Agent may also consult counsel satisfactory to it,
including in-house counsel, and may reasonably rely on the advice of such
counsel, provided the Escrow Agent acts in good faith and in accordance with the
advice of such counsel, and provided further that the Escrow Agent has no
independent knowledge of any material error or omission in such advice. The
Escrow Agent shall not be required to institute legal proceedings of any kind.
Without limiting the generality of the preceding sentence, if there is any
controversy in connection with the Escrowed Funds or any question as to the
construction of this Escrow
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Agreement or any action to be taken by the Escrow Agent, the Escrow Agent shall
not be required to resolve the controversy or take any action in connection
therewith and may await the settlement of any such controversy by final legal
proceedings or otherwise as the Escrow Agent may require. The Escrow Agent may
resign and be discharged from its duties hereunder by giving not less than
forty-five (45) days prior written notice of such resignation to Oak and the
Stockholder Representatives, which notice shall specify the date when such
resignation of such Escrow Agent shall take effect. Prior to the effective date
of the resignation as specified in such notice, Oak will issue to the Escrow
Agent a written instruction authorizing redelivery of the Escrowed Funds to a
bank or trust company that it selects as successor to the Escrow Agent
hereunder, subject to the reasonable consent of the Stockholder Representatives.
If, however, Oak shall fail to name such a successor escrow agent within thirty
(30) days after the notice of resignation from the Escrow Agent, the Stockholder
Representatives shall be entitled to name such successor escrow agent. If no
successor escrow agent is named by Oak or the Stockholder Representatives, the
Escrow Agent may apply to a court of competent jurisdiction for appointment of a
successor escrow agent. Any successor escrow agent appointed in accordance with
the foregoing procedures shall succeed as the Escrow Agent hereunder and Oak and
the Stockholder Representatives hereby consent to and approve such successor.
6. Actions and Instructions of Stockholder Representatives. Any action
required to be taken, or notice or instructions required to be given, to the
Escrow Agent, the Exchange Agent or Oak under this Escrow Agreement may be taken
or given by a majority of the Stockholder Representatives; provided, however,
that less than a majority of the Stockholder Representatives may take such
action or give such notice or instructions upon delivery to the Escrow Agent,
the Exchange Agent and Oak of a notice signed by a majority of the Stockholder
Representatives stating that any action may be taken and any notice or
instructions may be given to the Escrow Agent, the Exchange Agent and Oak by the
number of Stockholder Representatives specified in such notice. If for any
reason there is only one Stockholder Representative at any time, then the Escrow
Agent, the Exchange Agent and Oak shall be entitled to rely on any action taken
by, or notice or instructions given by, such Stockholder Representative. Written
notice of any resignation or removal of a Stockholder Representative, or any
appointment of a successor Stockholder Representative, shall be promptly
provided to the Escrow Agent, the Exchange Agent and Oak.
7. Miscellaneous.
7.1 Governing Laws. It is the intention of the parties hereto that
the internal laws of the Commonwealth of Massachusetts (irrespective of its
choice of law principles) shall govern the validity of this Escrow
Agreement, the construction of its terms, and the interpretation and
enforcement of the rights and duties of the parties hereto. The parties
hereto hereby absolutely and irrevocably consent and submit to the
jurisdiction of the court in the Commonwealth of Massachusetts and of any
Federal court located in said Commonwealth in connection with any actions
or proceedings brought against them by the Escrow Agent arising out of or
relating to this Escrow Agreement. In any such action or proceeding, the
parties hereto hereby absolutely and irrevocably waive personal service of
any summons, complaint, declaration or other process and hereby absolutely
and irrevocably agree that the service thereof may be made by certified or
registered first-class mail directed to such parties at their respective
addresses in accordance with the provisions hereof.
7.2 Other Provisions. This Escrow Agreement is binding upon and
inures to the benefit of the successors and assigns of the parties hereto.
This Escrow Agreement and the Plan of Reorganization, the exhibits and
schedules hereto and thereto, including the Exchange Agreement, and the
documents referenced herein and therein constitute the entire understanding
and agreement of the parties hereto with respect to the subject matter
hereof and thereof and supersede all prior and contemporaneous agreements
or understandings, inducements or conditions, express or implied, written
or oral, between the parties hereto and thereto. This Escrow Agreement may
only be amended or observance of any terms of this Escrow Agreement may be
waived only by a writing signed by the party to be bound thereby.
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7.3 Notices. Whenever any party hereto desires or is required to
give any notice, demand or request with respect to this agreement, each
such communication shall be in writing and shall be given or made by,
telecopy, telegraph, cable, mail or other delivery and telecopied,
telegraphed, cabled, mailed or delivered to the intended recipient at the
addresses specified below:
<TABLE>
<S> <C>
If to Oak: Oak Technology, Inc.
139 Kifer Court
Sunnyvale, CA 94086
Attn: Shawn M. Soderberg, General Counsel
Telecopier: (408) 774-5337
With a copy to: Tomlinson Zisko Morosoli & Maser LLP
200 Page Mill Road, Second Floor
Palo Alto, CA 94306
Attn: Timothy Tomlinson, Esq.
Telecopier: (650) 324-1808
If to the Stockholder Representatives: c/o Xerographic Laser Images
101 Billerica Avenue
5 Billerica Park
North Billerica, MA 01862
Attn: Mr. Anthony D. D'Amelio
Telecopier: (978) 670-8835
With a copy to: Warner & Stackpole LLP
75 State Street
Boston, MA 02109
Attn: Michael A. Hickey, Esq.
Telecopier: (617) 951-9151
If to the Escrow Agent: State Street Bank and Trust Company
Two International Place
Boston, MA 02110
Attn: Corporate Trust Division
Mr. Scott Knox
Telecopier: (617) 664-5365
If to the Exchange Agent: State Street Bank and Trust Company
150 Royal Street
Mail Stop 45-02-71
Canton, MA 02021
Attn: Mr. Joe McDavitt
Telecopier: (617) 575-2500
</TABLE>
Except as may be otherwise provided elsewhere in this Agreement, all such
communications shall be deemed to have been duly given when transmitted by
telecopier with verified receipt by the receiving telecopier, when delivered to
the telegraph or cable office, when personally delivered, or in the case of a
mailed notice, five (5) days after being deposited in the United States
certified or registered mail, postage prepaid. Any party may change its address
for such communications by giving notice thereof to the other parties in
conformance with this Section 7.3 (Notices).
7.4 Further Assurances. Each party agrees to cooperate fully with
the other parties and to execute such further instruments, documents and
agreements and to give such further written assurances, as may be
reasonably requested by any other party, to better evidence and reflect the
transactions described herein and contemplated hereby, and to carry into
effect the intents and purposes of this Escrow Agreement.
7.5 Severability. If any provision of this Escrow Agreement, or the
application thereof, shall for any reason and to any extent be invalid or
unenforceable, the remainder of this Escrow Agreement and
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application of such provision to other persons or circumstances shall be
interpreted so as best to reasonably effect the intent of the parties
hereto. The parties further agree to replace such void or unenforceable
provision of this Escrow Agreement with a valid and enforceable provision
which will achieve, to the extent possible, the economic, business and
other purposes of the void or unenforceable provision.
7.6 Remedies Cumulative. All rights and remedies of the parties
under this Escrow Agreement are cumulative and are in addition to and shall
not be deemed to exclude any other right or remedy allowed by law and all
rights and remedies may be exercised concurrently.
7.7 Non-Waiver. No condoning, excusing or waiver by any party of any
default, breach or non-observance by any other party at any time or times
in respect of any provision contained in this Escrow Agreement shall
operate as a waiver of that party's rights under this Escrow Agreement in
respect of any continuing or subsequent default, breach or non-observance,
or so as to defeat or affect in any way the rights of that party in respect
of any such continuing or subsequent default, breach or non-observance, and
no waiver shall be inferred from or implied by anything done or omitted to
be done by the party having those rights.
7.8 Counterparts. This Escrow Agreement may be executed in any
number of counterparts, each of which shall be an original, but all of
which together shall constitute one and the same instrument.
7.9 Attorneys' Fees. Should suit be brought to enforce or interpret
any part of this Escrow Agreement, the prevailing party shall be entitled
to recover, as an element of the costs of suit and not as damages,
reasonable attorneys' fees to be fixed by the court (including without
limitation, costs, expenses and fees on any appeal). The prevailing party
shall be the party entitled to recover its costs of suit, regardless of
whether such suit proceeds to final judgment. A party not entitled to
recover its costs shall not be entitled to recover attorneys' fees. No sum
for attorneys' fees shall be counted in calculating the amount of a
judgment for purposes of determining if a party is entitled to recover
costs or attorneys' fees.
7.10 Construction of Agreement. This Escrow Agreement has been
negotiated by the respective parties hereto and their attorneys and the
language hereof shall not be construed for or against any party. The
recital to this Escrow Agreement shall be deemed to be a part of this
Escrow Agreement. The titles and headings herein are for reference purposes
only and shall not in any manner limit the construction of this Escrow
Agreement, which shall be considered as a whole. Whenever required by the
context hereof, the singular number shall include the plural, and vice
versa, the masculine gender shall include the feminine and neuter genders,
and the neuter gender shall include the masculine and feminine genders.
7.11 Fees. Oak agrees to pay or reimburse the Escrow Agent for
reasonable legal fees incurred in connection with the preparation of this
Escrow Agreement and to pay the Escrow Agent's reasonable compensation for
its normal services hereunder in accordance with the attached fee schedule,
which may be subject to change hereafter on an annual basis. The Escrow
Agent shall be entitled to reimbursement on demand for all reasonable
expenses incurred in connection with the administration of this Escrow
Agreement or the escrow created hereby which are in excess of its
compensation for normal services hereunder, including without limitation,
payment of any reasonable legal fees and expenses incurred by the Escrow
Agent in connection with resolution of any claim by any party hereunder.
7.12 Succession. Any Stockholder Representative, or any successor to
any of them hereafter appointed, may resign and shall be discharged of his
duties. In case of such resignation, or the death or inability to act of
any Stockholder Representative, a successor or successors shall be named by
the remaining Stockholder Representatives or, if only one Stockholder
Representative remains, by such Stockholder Representative. Each such
successor Stockholder Representative shall have all the power, authority,
rights and privileges hereby conferred upon the original Stockholder
Representatives, and the Stockholder Representatives as used herein shall
be deemed to include such successor(s).
7.13 Force Majeure. The Escrow Agent shall not be responsible for
delays or failures in performance resulting from acts beyond its control.
Such acts shall include but not be limited to acts of God, strikes,
lockouts, riots, acts of war, epidemics, governmental regulations
superimposed after the fact, fire communication line failures, computer
viruses, power failures, earthquakes or other disasters.
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7.14 Reproduction of Documents. This Escrow Agreement and all
documents relating thereto, including, without limitation, (a) consents,
waivers and modifications which may hereafter be executed, and (b)
instructions, certificates and other information previously or hereafter
furnished, may be reproduced by any photographic, photostatic, microfilm,
optical disk, micro-card, miniature photographic or other similar process.
The parties agree that any such reproduction shall be admissible in
evidence as the original itself in any judicial or administrative
proceeding, whether or not the original is in existence, and that any
enlargement, facsimile or further reproduction of such reproduction shall
likewise be admissible in evidence.
IN WITNESS WHEREOF, the parties hereto have executed this Escrow Agreement
as of the date first hereinabove written.
STATE STREET BANK AND TRUST COMPANY
By:
- ------------------------------------
Its:
- ------------------------------------
OAK TECHNOLOGY, INC.
By:
------------------------------------
Its:
------------------------------------
STOCKHOLDER REPRESENTATIVES:
- ------------------------------------
Daniel J. Allen
- ------------------------------------
Adam L. Carley
- ------------------------------------
Anthony D. D'Amelio
------------------------------------
Joseph L. Katz
------------------------------------
Vincent J. Spoto
ACKNOWLEDGED AND AGREED WITH RESPECT
TO THE DUTIES OF THE EXCHANGE AGENT
UNDER SECTION 4 OF THE ESCROW
AGREEMENT.
EXCHANGE AGENT
STATE STREET BANK AND TRUST COMPANY
By:
- ------------------------------------
Its:
- ------------------------------------
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EXHIBIT C
EXCHANGE AGENT AGREEMENT
THIS EXCHANGE AGREEMENT (the "Exchange Agreement") is made and entered into
effective as of this ____ day of ______ , 1998, by and among OAK TECHNOLOGY,
INC. ("Oak"), DANIEL J. ALLEN, ADAM L. CARLEY, ANTHONY D. D'AMELIO, JOSEPH L.
KATZ and VINCENT J. SPOTO (each a "Stockholder Representative" and collectively,
the "Stockholder Representatives"), and STATE STREET BANK AND TRUST COMPANY (the
"Exchange Agent").
RECITALS
This Exchange Agreement is being entered into in accordance with the
provisions of that certain Plan of Reorganization and Agreement of Merger dated
as of January __, 1998 (the "Plan of Reorganization"), by and among Oak, Pixel
Magic, Inc., OTI Acquisition Corporation, Xerographic Laser Images Corporation
("XLI") and certain stockholders of XLI. Capitalized terms used but not defined
herein shall have the respective meanings assigned to such terms in the Plan of
Reorganization, a copy of which is appended hereto.
Oak desires the Exchange Agent to act as Exchange Agent pursuant to the
Plan of Reorganization, and the Exchange Agent has indicated its willingness to
do so.
NOW, THEREFORE, in consideration of the mutual agreements set forth below
and in the Plan of Reorganization, and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto agree as follows:
AGREEMENT
1. Appointment of Exchange Agent. Oak hereby confirms the appointment of
State Street Bank & Trust Co as Exchange Agent, and State Street Bank & Trust Co
hereby agrees to serve as such, upon the terms and conditions set forth herein.
2. Plan of Reorganization. The Exchange Agent hereby acknowledges receipt
of the copy of the Plan of Reorganization appended hereto, but except for
reference thereto for definitions of certain words or terms not defined herein,
or as otherwise provided in this Exchange Agreement, the Exchange Agent is not
charged with any duties or responsibilities with respect to the Plan of
Reorganization.
3. Exchange Procedures. Upon delivery to the Exchange Agent of a
certificate from Oak that the Merger has become effective, the Exchange Agent
shall as promptly as practicable, mail, by first class mail, postage prepaid to
each holder of record of a certificate or certificates which immediately prior
to the Effective Time of the Merger represented outstanding shares of XLI Stock
(the "Certificates"): (i) a letter of transmittal; and (ii) instructions for use
in effecting the surrender of the Certificates in exchange for the
Consideration, including an envelope addressed to the Exchange Agent for use by
such XLI Stockholder in exchanging his, her or its Certificates. Notwithstanding
anything to the contrary contained in this Section 3, no letter of transmittal
or instructions for use in effecting the surrender of Certificates for the
Consideration shall be mailed by the Exchange Agent to any Dissenting
Stockholder, nor shall the Exchange Agent accept surrender of a Certificate held
by a Dissenting Stockholder or pay the Consideration to such Dissenting
Stockholder. Any Certificates or other correspondence received from Dissenting
Stockholders shall be promptly forwarded to Oak by the Exchange Agent.
4. Lists of XLI Stockholders and Holders of XLI Warrants. Within one
business day following the Effective Date, the Stockholder Representatives shall
deliver or cause to be delivered to the Exchange Agent, with a copy to Oak: (i)
a list of the names, addresses and number of shares of XLI Stock held by all XLI
Stockholders at the Effective Time, which list shall include the names of
Dissenting Stockholders and the number of shares of XLI Stock held by any
Dissenting Stockholder, and shall also include for each holder of XLI Preferred
Stock the number of shares of XLI Common Stock into which outstanding shares of
XLI Preferred Stock were convertible at the Effective Time, including shares of
XLI Preferred Stock held by any
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Dissenting Stockholder; and (ii) a list of the names and addresses of all
holders of XLI Warrants outstanding at the Effective Time, which list shall
include the number of shares XLI Common Stock into which each such XLI Warrant
is convertible upon exercise of such XLI Warrant, including shares of XLI Common
Stock into which shares of XLI Preferred Stock are convertible, the exercise
price per share payable in connection with the exercise of any XLI Warrant and
the date of expiration of such XLI Warrant. Without limiting the generality of
the foregoing, the list of XLI Warrants outstanding at the Effective Time shall
indicate by individual holder the type or types of XLI Warrants held by such
holder, with the information required by clause (ii) above presented separately
for each XLI Warrant. The lists provided to the Exchange Agent pursuant to
clause (i) above shall also reflect the certificate numbers of the Certificates,
and include appropriate identification of all Certificates alleged to have been
lost, stolen or destroyed, all Certificates the transfer of which is restricted
and all "stops" notations in effect with respect to such Certificates. All such
lists when delivered to the Exchange Agent shall be certified as true and
correct.
5. DELIVERY OF FUNDS TO EXCHANGE AGENT.
5.1 Merger Cash Funds. Pursuant to the Plan of Reorganization, including
Section 2.5.2.1 thereof, Oak shall deliver to the Exchange Agent not later than
one business day following the Effective Date, by wire transfer of funds, an
amount equal to Merger Cash multiplied by the sum of (i) the total number of
shares of XLI Common Stock outstanding at the Effective Time, plus (ii) the
total number of shares of XLI Common Stock into which outstanding shares of XLI
Preferred Stock were convertible at the Effective Time. Oak shall deduct from
such amount, an amount equal to Merger Cash multiplied by the total number of
shares of XLI Stock (on an as converted basis) held by Dissenting Stockholders,
such amount to be retained by Oak.
5.2 Initial Distribution Amount. Pursuant to the Plan of Reorganization,
including Section 2.6 and 2.7 thereof, the Escrow Agent shall deliver to the
Exchange Agent, not later than fifteen (15) calendar days following delivery to
the Escrow Agent by Oak of the Contingent Cash payable by Oak for the calendar
quarter ended March 31, 1999, all funds, if any, held in escrow by the Escrow
Agent, less the sum of (i) Merger Cash paid into escrow by Oak pursuant to
Section 2.5.2.2 of the Plan of Reorganization with respect to any Private
Warrant that has not been exercised and has not otherwise terminated ("Unexpired
Private Warrant"), (ii) Contingent Cash paid into escrow by Oak pursuant to
Section 2.6.1.2 of the Plan of Reorganization with respect to any Unexpired
Private Warrant and (iii) any exercise price amounts held in escrow and required
to be delivered to Oak pursuant to the Escrow Agreement.
5.3 Contingent Cash Funds. Pursuant to the Plan of Reorganization,
including Section 2.6 thereof, Oak shall deliver to the Exchange Agent,
commencing with the calendar quarter ended June 30, 1999, an amount equal to the
amount of Contingent Cash, if any, due by Oak for such calendar quarter in
accordance with Section 2 of the Plan of Reorganization, subject to any
adjustments provided for in Sections 9 and 10 of the Plan of Reorganization, and
less any amount required to be delivered to the Escrow Agent by Oak pursuant to
Section 2.6.1.2 of the Plan of Reorganization. Oak shall deduct from such
amount, an amount equal to Merger Cash multiplied by the total number of shares
of XLI Stock (on an as converted basis) held by Dissenting Stockholders, such
amount to be retained by Oak. Quarterly amounts, if any, payable by Oak to the
Exchange Agent pursuant to the Plan of Reorganization and this Section 5.3 shall
be delivered by Oak to the Exchange Agent at least five (5) business days prior
to any distribution required to be made to the XLI Stockholders by the Exchange
Agent under this Exchange Agreement.
5.4 Final Escrow Funds. Pursuant to the Plan of Reorganization, including
Section 2.7.3 thereof, and Section 4.3 of the Escrow Agreement, the Escrow Agent
shall deliver to the Exchange Agent, promptly following termination of the
Escrow Agreement, all funds, if any, remaining in escrow upon termination of the
Escrow Agreement, less any exercise price amounts required to be delivered to
Oak pursuant to the Escrow Agreement.
5.5 Excess Exercise Price Amounts. Pursuant to the Plan of
Reorganization, including Section 2.7.4 thereof, Oak shall deliver to the
Exchange Agent, promptly following termination of the Escrow Agreement, the
amount, if any, by which the aggregate exercise price paid to Oak in connection
with any exercise of XLI Warrants under the Escrow Agreement, net of amounts, if
any, of Merger Cash payable with respect to any
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XLI Warrant (other than a Private Warrant) upon exercise of such XLI Warrant,
exceeds the aggregate costs and expenses incurred by Oak in connection with the
Escrow Agreement and the Exchange Agreement, including all costs and expenses
that Oak reasonably expects to incur prior to and in connection with termination
of the Exchange Agreement.
6. DETERMINATION OF MERGER CASH AND CONTINGENT CASH AMOUNTS. Within one
business day following the Effective Date, Oak and the Stockholder
Representatives shall provide joint written notice to the Exchange Agent of the
per share determination of Merger Cash, as calculated in accordance with the
provisions of Section 2.4.3 of the Plan of Reorganization. Within forty-five
(45) days after the close of each calendar quarter, Oak and the Stockholder
Representatives shall provide joint written notice to the Exchange Agent of the
per share determination of Contingent Cash as of the end of such calendar
quarter, calculated in accordance with the provisions of Section 2.4.4 of the
Plan of Reorganization. Oak and the Stockholder Representatives agree to provide
to the Exchange Agent such other Merger Cash and Contingent Cash calculations as
are reasonably requested by the Exchange Agent in order to fulfill its duties
hereunder.
7. PAYMENT FOR SHARES OF XLI STOCK.
7.1 Distribution of Merger Cash Funds. The Exchange Agent, upon receipt
of Certificates, accompanied by duly executed letters of transmittal, shall make
payments of Merger Cash in respect of such shares (on an as converted basis in
the case of any shares of XLI Preferred Stock outstanding at the Effective Time)
by issuance of its check. The Exchange Agent agrees to pay on presentment all
checks so issued by it until the expiration of this Exchange Agreement.
7.2 Distribution of Funds Other Than Merger Cash Funds. Funds delivered
to the Exchange Agent by Oak or the Escrow Agent pursuant to Sections 5.2, 5.3,
5.4 or 5.5 of this Exchange Agreement shall be allocated by the Exchange Agent
pro rata (a) to all outstanding shares of XLI Common Stock held by XLI
Stockholders at the Effective Time (excluding any shares of XLI Common Stock
into which shares of XLI Preferred Stock were convertible at the Effective
Time), (b) all shares of XLI Preferred Stock held by XLI Stockholders at the
Effective Time, on an as converted basis, and (c) all shares of XLI Common Stock
(including shares of XLI Common Stock into which shares of XLI Preferred Stock,
that were issued upon exercise of the Underwriter's Warrant, were converted)
attributable to XLI Warrants exercised after the Effective Time and prior to the
end of the calendar quarter for which such payment is being made. Any amount
delivered to the Exchange Agent pursuant to Sections 5.2 or 5.3 shall be
distributed by the Exchange Agent to the XLI Stockholders not later than
forty-five (45) days after the close of the calendar quarter to which the
distribution relates; any amount delivered to the Exchange Agent pursuant to
Section 5.4 shall be distributed by the Exchange Agent to the XLI Stockholders
not later than fifteen (15) business days following delivery of such amount to
the Exchange Agent; any amount delivered pursuant to the Exchange Agent pursuant
to Section 5.5 shall be distributed by the Exchange Agent to the XLI
Stockholders not later than thirty (30) business days following delivery of such
amount to the Exchange Agent. Any amounts payable by the Exchange Agent to the
XLI Stockholders pursuant to this Exchange Agreement shall be deposited by the
Exchange Agent in the United States mail, first class postage prepaid, to the
addresses as set forth in the stock and warrant records of XLI delivered to the
Exchange Agent pursuant to Sections 4 and 6.1 of this Exchange Agreement. The
Exchange Agent shall make payments of the amounts provided for in this Section
7.2 by issuance of its check. The Exchange Agent agrees to pay on presentment
all checks so issued by it until the expiration of this Exchange Agreement.
7.3 Lost, Stolen or Destroyed Certificates. In the event any Certificate
shall have been lost, stolen or destroyed, upon the making of any affidavit of
that fact by the person claiming such Certificate to be lost, stolen or
destroyed, and upon delivery of a bond in such sum as the Exchange Agent may
reasonably direct, as indemnity against any claim that may be made against the
Exchange Agent with respect to the Certificate alleged to have been lost, the
Exchange Agent will issue the consideration as provided in this Section 7 in
exchange for such lost, stolen or destroyed Certificate.
7.4 Abandoned Property. Notwithstanding anything to the contrary
contained in this Section 7 or elsewhere is this Exchange Agreement, neither the
Exchange Agent nor any other party to this Exchange Agreement shall be liable to
any holder of the capital stock of XLI, including any holder of an XLI Warrant
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who has exercised all or a portion of such XLI Warrant, for any amount properly
paid to a public official pursuant to any applicable abandoned property, escheat
or similar law.
8. ACTIONS AND INSTRUCTIONS OF STOCKHOLDER REPRESENTATIVES. Any action
required to be taken, or notice or instructions required to be given, to the
Exchange Agent or Oak under this Exchange Agreement may be taken or given by a
majority of the Stockholder Representatives; provided, however, that less than a
majority of the Stockholder Representatives may take such action or give such
notice or instructions upon delivery to the Exchange Agent and Oak of a notice
signed by a majority of the Stockholder Representatives stating that any action
may be taken and any notice or instructions may be given to the Exchange Agent
and Oak by the number of Stockholder Representatives specified in such notice.
If for any reason there is only one Stockholder Representative at any time, then
the Exchange Agent and Oak shall be entitled to rely on any action taken by, or
notice or instructions given by, such Stockholder Representative. Written notice
of any resignation or removal of a Stockholder Representative, or any
appointment of a successor Stockholder Representative, shall be promptly
provided to the Exchange Agent and Oak.
9. INDEMNIFICATION. The Exchange Agent shall be indemnified and held harmless
by Oak from and against any and all reasonable expenses, including reasonable
counsel fees and disbursements, or losses suffered by the Exchange Agent
hereunder, provided, however, that the Exchange Agent shall not be indemnified
and held harmless with respect to such expenses or losses which result from or
arise out of the Exchange Agent's gross negligence, misconduct or bad faith.
Promptly after the receipt by the Exchange Agent of notice of any demand or
claim or the commencement of any action, suit, proceeding or investigation, the
Exchange Agent shall, if a claim in respect thereof is to be made against Oak,
notify Oak in writing. Oak shall be entitled to participate in the defense of
any such claim or legal action or proceeding, and, if it so elects at any time
after receipt of such notice, it may assume the defense of any suit brought to
enforce any such claim or of any other legal action or proceeding. For the
purposes hereof, the term "expense or loss" means any amount paid or payable to
satisfy any claim, demand, action, suit or proceeding settled with the express
written consent of Oak, and all reasonable costs and expenses, including, but
not limited to, reasonable counsel fees and disbursements, paid or incurred in
investigating or defending against any such claim, demand, action, suit,
proceeding or investigation.
10. COMPENSATION OF EXCHANGE AGENT. The Exchange Agent shall be entitled to a
fee which shall be paid by Oak on presentation of monthly invoices for all
services rendered by it hereunder as referenced in Exhibit "A" hereto. The
Exchange Agent shall also be entitled to reimbursement from Oak for all
reasonable expenses paid or incurred by it in the administration of its duties
hereunder, including, but not limited to, all reasonable services rendered in
performing this Exchange Agreement.
11. FURTHER ASSURANCE. From time-to-time and after the date hereof, Oak and
the Stockholder Representatives shall deliver or cause to be delivered to the
Exchange Agent such further documents and instruments and shall do and cause to
be done such further acts as the Exchange Agent shall reasonably request (it
being understood that the Exchange Agent shall have no obligation to make any
such request) to carry out more effectively the provisions and purposes of this
Exchange Agreement, to evidence compliance herewith or to assure itself that it
is protected in acting hereunder.
12. CONSENTS TO SERVICE OF PROCESS. Each of the parties hereto hereby
irrevocably consents to the jurisdiction of the courts of the Commonwealth of
Massachusetts and of any Federal Court located in such Commonwealth, each as may
have competent jurisdiction, in connection with any action, suit or other
proceeding arising out of or relating to this Exchange Agreement or any action
taken or omitted hereunder and waives personal service of any summons, complaint
or other process and agrees that the service thereof may be made by certified or
registered mail directed to such person at such person's address for purposes of
notice hereunder.
13. TERM. The term of this Exchange Agreement shall be until the first to
occur of (a) the payment of all amounts required to be distributed under Section
7 of this Exchange Agreement or (b) the termination of the Exchange Agent's
appointment by written notice from Oak to the Exchange Agent or from the
Exchange Agent to Oak subject to the review time set forth in Exhibit "A".
Notwithstanding anything to the contrary contained in this Exchange Agreement,
this Exchange Agreement shall terminate no later than June 30, 2001.
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14. COUNTERPARTS. This Exchange Agreement may be executed in one or more
counterparts, each one of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.
15. APPLICABLE LAW. This Exchange Agreement shall be governed by and construed
in accordance with the laws of the Commonwealth of Massachusetts.
16. MISCELLANEOUS. All amounts referred to herein are expressed in United
States Dollars and all payments by the Exchange Agent hereunder shall be made in
such dollars. This Exchange Agreement and the rights and obligations hereunder
may not be assigned by the Exchange Agent without Oak's prior written consent.
This Exchange Agreement shall be binding upon and inure to the benefit of each
party's respective successors, heirs and permitted assigns. No other person
shall acquire or have any rights under or by virtue of this Exchange Agreement.
This Exchange Agreement may not be changed orally or modified, amended or
supplemented without an express written agreement executed by Oak and the
Exchange Agent; provided, however, that any modification, amendment or
supplement to this Exchange Agreement that affects the rights or obligations of
the Stockholder Representatives under this Exchange Agreement shall require the
express written agreement of the Stockholder Representatives or such lesser
number of Stockholder Representatives as is permitted under Section 8 of this
Exchange Agreement. This Exchange Agreement is intended to be for the sole
benefit of the parties hereto, and their respective successors, heirs and
permitted assigns, and none of the provisions of this Exchange Agreement are
intended to be, nor shall they be construed to be, for the benefit of any third
person.
17. CONCERNING THE EXCHANGE AGENT.
17.1 In the event that the Exchange Agent should at any time be confronted
with inconsistent claims or demands by the parties hereto, the Exchange Agent
shall have the right to interplead said parties in any court of competent
jurisdiction and request that such court determine such respective rights of the
parties with respect to this Exchange Agreement and upon doing so, the Exchange
Agent automatically shall be released from any obligations or liability as a
consequence of any such claims or demands.
17.2 The Exchange Agent may execute any of its powers or responsibilities
hereunder and exercise any rights hereunder either directly or by or through its
agents or attorneys. The Exchange Agent shall not be responsible for, and shall
not be under a duty to, examine into or pass upon the validity, binding effect,
execution or sufficiency of this Exchange Agreement or of any agreement
amendatory or supplemental hereto.
17.3 The Exchange Agent may act upon any instrument or other writing
believed by it in good faith to be genuine and to have been signed or presented
by the proper person and shall not be liable to any party hereto in connection
with the performance of its duties hereunder except for its own gross
negligence, misconduct or bad faith. The Exchange Agent's duties shall be
determined only with reference to this Exchange Agreement and applicable laws
and the Exchange Agent is not charged with knowledge of or any duties or
responsibilities in connection with any other document or agreement except as
otherwise provided in this Exchange Agreement, including, without limitation,
Section 2 hereof, or in the Escrow Agreement. If in doubt as to its duties and
responsibilities hereunder, the Exchange Agent may consult with counsel if its
choice and shall be protected in any action taken or omitted in connection with
the advice or opinion of such counsel.
17.4 The Exchange Agent shall have the right at any time to resign
hereunder by giving written notice of its resignation to the parties hereto at
the addresses set forth herein or at such other address as the parties shall
provide, at least ten (10) business days prior to the date specified for such
resignation to take effect. Upon the effective date of any such resignation, all
cash and other payments and all other property then held by the Exchange Agent
hereunder shall be delivered by it to such successor agent or as otherwise shall
be designated in writing by the parties hereto.
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18. NOTICES. Whenever any party hereto desires or is required to give any
notice, demand or request with respect to this agreement, each such
communication shall be in writing and shall be given or made by telecopy,
telegraph, cable, mail or other delivery and telecopied, telegraphed, cabled,
mailed or delivered to the intended recipient at the addresses specified below:
<TABLE>
<S> <C>
If to Oak: Oak Technology, Inc.
139 Kifer Court
Sunnyvale, CA 94086
Attn: Shawn M. Soderberg, General Counsel
Telecopier: (408) 774-5337
With a copy to: Tomlinson Zisko Morosoli & Maser LLP
200 Page Mill Road, Second Floor
Palo Alto, CA 94306
Attn: Timothy Tomlinson, Esq.
Telecopier: (650) 324-1808
If to the Stockholder Representatives: c/o Xerographic Laser Images
101 Billerica Avenue
5 Billerica Park
North Billerica, MA 01862
Attn: Mr. Anthony D. D'Amelio
Telecopier: (978) 670-8835
With a copy to: Warner & Stackpole LLP
75 State Street
Boston, MA 02109
Attn: Michael A. Hickey, Esq.
Telecopier: (617) 951-9151
If to the Exchange Agent: State Street Bank and Trust Company
150 Royal Street
Mail Stop 45-02-71
Canton, MA 02021
Attn: Mr. Joe McDavitt
Telecopier: (617) 575-2500
</TABLE>
Except as may be otherwise provided elsewhere in this Exchange Agreement,
all such communications shall be deemed to have been duly given when transmitted
by telecopier with verified receipt by the receiving telecopier, when delivered
to the telegraph or cable office, when personally delivered, or in the case of a
mailed notice, five (5) days after being deposited in the United States
certified or registered mail, postage prepaid. Any party may change its address
for such communications by giving notice thereof to the other parties in
conformance with this Section 18 (Notices).
19. XLI WARRANT EXERCISES. The Exchange Agent hereby acknowledges and agrees
that its duties with respect to the exercise of any XLI Warrants after the
Effective Date shall be governed by the terms of Section 4 of the Escrow
Agreement. Subject to the provisions set forth in the Escrow Agreement, the
Exchange Agent further agrees to promptly distribute to any holder of an XLI
Warrant who exercises such XLI Warrant any Merger Cash or Contingent Cash funds
received by the Exchange Agent in connection with such XLI Warrant exercise.
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IN WITNESS WHEREOF, the parties hereto have caused this Exchange Agreement
to be executed by their respective officers, hereunto duly authorized, as of the
day and year first above written.
OAK TECHNOLOGY, INC.
By:
- ------------------------------------
Its:
- ------------------------------------
STATE STREET BANK AND TRUST COMPANY
By:
------------------------------------
Its:
------------------------------------
STOCKHOLDER REPRESENTATIVES:
- ------------------------------------
Daniel J. Allen
- ------------------------------------
Adam L. Carley
- ------------------------------------
Anthony D. D'Amelio
------------------------------------
Joseph L. Katz
------------------------------------
Vincent J. Spoto
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<PAGE> 133
APPENDIX B
SECTION 262 OF THE DELAWARE GENERAL CORPORATION
LAW -- APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to sec.228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec.251 (other than a merger effected pursuant to
sec.251(g) of this title), sec.252, sec.254, sec.258, sec.263 or sec.264 of this
title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of sec.251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
sec.sec.251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing paragraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec.253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
<PAGE> 134
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to sec.228 or
sec.253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
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<PAGE> 135
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
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<PAGE> 136
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceedings may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorneys' fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation. (Last amended by Ch.
120, L. '97, eff. 7-1-97.)
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<PAGE> 137
APPENDIX C
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM 10-KSB
------------------------
(MARK ONE)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-11236
XEROGRAPHIC LASER IMAGES CORPORATION
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
------------------------
DELAWARE 51-0319174
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
101 BILLERICA AVENUE, 5 BILLERICA PARK 01862
NORTH BILLERICA, MA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (978) 670-5999
------------------------
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
Not Applicable
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT:
Title of Each Class
Common Stock, $.01 par value
Redeemable Common Stock Purchase Warrants
Series A Convertible Preferred Stock, $.01 par value
Class A Redeemable Common Stock Purchase Warrants
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirement for the past 90
days.
(1) Yes [X] No [ ] (2) Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [ ]
The issuer's revenues for its fiscal year ended December 31, 1997 were
$1,520,781.
As of March 27, 1998, 3,574,941 shares of Common Stock, $.01 par value per
share, and 315,238 shares of Series A Preferred Stock, $.01 par value per share,
were outstanding. The aggregate market value, held by non-affiliates, of shares
of the Common and Series A Convertible Preferred Stock, based upon the average
of the bid and ask prices for such stock on that date, were approximately
$857,765 and $194,429 respectively.
================================================================================
<PAGE> 138
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Founded in 1989, Xerographic Laser Images Corporation ("XLI" or the
"Company") designs, develops and markets high-performance hardware and software
products primarily for laser printing applications. XLI is a provider of high
technology enhancement products for printers, digital copiers, multi-function
devices, and fax systems.
XLI's proprietary precision dot positioning technology enables high-quality
text, line-art graphics and photographic images to be generated at low costs and
high speeds using standard and inexpensive printing devices.
XLI's technology is used in the following applications:
- High quality text and line art edge enhancement
- Life-like photographs with gray scale rendition
- Digital copier functions
- Hi-Definition Fax
- High Quality Color Images on inexpensive color laser printers
- High performance image enhancement and modulation for demand printing
applications
- Application Specific Integrated Circuits (ASIC) and Core Modules to meet
customer requirements and costs
PRODUCTS AND PRODUCT DEVELOPMENT
During the past two years XLI has changed its focus from a low-volume niche
market supplier of enhancement board products for VARs and end users toward a
supplier of mass-market integrated circuit technology for printer and printer
controller OEMs. During 1997, the sales of all board products were discontinued
due to diminishing sales caused by the introduction of higher resolution
printers, some with enhancement technology such as the new XLI integrated
circuit chip designed directly into the printer controller. XLI's first ASIC
(Application Specific Integrated Circuit) product, the XLI-2050 ImageChip, was
introduced to the market in 1997. This ASIC is a highly integrated laser printer
enhancement chip with fax, text and line-art edge enhancement plus single-bit
grayscale enhancement. Additional features in the chip are multi-bit modes for
digital copy functions. XLI is also selling the ImageChip technology used in the
XLI-2050 to customers in the form of VHDL Core Modules (design modules that can
be used by XLI customers to develop their own ASICs that incorporate multiple
applications, including XLI's). The ASICs developed using the XLI Core Modules
are incorporated by customers into printer controller boards that are imbedded
into the printing device as an integral component. Engineering samples of the
XLI-2050 ImageChip, with limited functionality (bugs in the first chip
fabrication), are now being sampled to developers with full functionality chips
planned for the second half of 1998. XLI believes that the XLI-2050 ImageChip
will be available in commercial quantities during the second half of fiscal
1998. To date the company has entered into six license agreements for its
ImageChip technology, including the recent licensing by Pixel Magic, Inc.
Licenses have been signed with both major printer controller suppliers and
printer OEMs.
XLI also has in development (funded through a licensee non-recurring
engineering development project) a scaling/enhancement ASIC for flat-panel
displays. Although this is an extension of the XLI's technology outside the
printer market, there are no current plans to market such a product and, if done
so, there is no assurance that this product would have market acceptance.
Although the new product developments around the ImageChip technology look
promising at this time, XLI is just beginning to enter the product life cycle
where significant technical and sales support will be necessary to succeed in
this highly competitive market. XLI will require additional funding and
resources in order to maximize the potential of its new products. XLI also
expects to continue development of subsequent
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<PAGE> 139
generations of its ImageChip products to incorporate additional features and
functions and also to reduce costs. No assurance can be given that these
products will be developed or, if developed, will be successfully marketed.
SALES AND MARKETING
In the fall of 1997, XLI added a full-time Vice President of Sales and
Marketing in charge of worldwide sales and marketing of its ASIC and VHDL
product offerings. This individual manages the sales and marketing efforts in
the US market and XLI currently has a sales agent in Japan to aid in covering
the Japanese market. To assist in the sales cycle, an evaluation test board with
the XLI-2050 ASIC is now available to customers. The XLI-2050 ImageChip is
expected to be the major source of income (through licensing, chip sales and
royalties) for the foreseeable future.
PATENTS AND PROPRIETARY INFORMATION
XLI relies on a variety of methods to protect its products and technology,
including patent, trademark, copyright and trade secret protection. Three
patents have been awarded (2 US patents and 1 Korean patent) which cover an
innovative method of modulating the laser devices found in laser printers for
the desktop as well as network printers. Additional patents have been filed on
edge enhancement technology applicable for both text and line graphics, a unique
all digital implementation of the modulator used in the XLI enhancement
technology capable of being implemented in integrated circuits and a single pass
color engine method. An additional patent application is in process for an
innovative grayscale enhancement method. This technology is applicable for both
monochrome and color laser printers. XLI protects its technical innovations both
domestically and internationally (Europe, Korea and Japan) through these patent
filings. To protect its trade secrets, proprietary software and know-how, XLI
requires that all employees, key resellers, consultants and licensees sign
nondisclosure agreements.
Although XLI believes that patent protection for its products is important
to its ultimate success, no assurance can be given that any patents granted will
be enforceable or provide XLI with meaningful protection from competitors. In
addition, there can be no assurance that XLI proposed products will not infringe
the patent rights of others. XLI may be forced to expend substantial resources
if XLI is required to defend against any such infringement claims. Furthermore,
there can be no assurance that XLI will be able to maintain the secrecy of any
of its proprietary technology, know-how or trade secrets or that others will not
independently develop substantially equivalent technology.
The core technology for XLI was invented by Dr. Adam L. Carley (the "Carley
Core Technology"), a founder, stockholder and director of XLI. Dr. Carley and
the Carley Corporation, a company controlled by Dr. Carley, have assigned to XLI
all printing rights to the Carley Core Technology held by him and the Carley
Corporation in return for XLI Common Stock and certain royalties based upon
revenues derived by XLI from the Carley Core Technology.
THE YEAR 2000 ISSUE
Certain computer programs and microprocessors use two digits rather than
four to define the applicable year. Any computer program that has date-sensitive
software and microprocessors may recognize a date using "00" as the year 1900
rather than 2000. This phenomenon could cause a disruption of the Company's
operations, including, among other things, a temporary inability to send
invoices, or engage in similar normal business activities. Management believes
the Company is substantially year 2000 compliant with respect to its selling,
administration and general operations. Prior to purchasing any new equipment or
software, it is Company policy to ensure that the specifications include year
2000 compliance. However, there can be no guarantee that the systems of other
companies on which the Company's systems will rely will be converted on a timely
basis, or that a failure to convert by another company, or a conversion that is
incompatible with the Company's systems, would not have a material impact on the
Company. Based on its current assessment, management believes that year 2000
compliance will not have a material adverse impact on the future operations of
the Company.
2
<PAGE> 140
PERSONNEL
As of March 27, 1998, XLI employed 14 people, 8 of whom were in research
and development, 2 in marketing and sales, 1 in manufacturing and product
service, and 3 in finance and administration. XLI uses part-time technical
contractors, as needed, to augment its full-time staff. Due to XLI's limited
cash flow, certain key personnel have been receiving reduced cash compensation
and have been issued stock options and shares of Common Stock of XLI in lieu of
cash compensation.
ITEM 2. DESCRIPTION OF PROPERTY
XLI's administrative, sales, marketing, research and development, and
product testing facility is located in North Billerica, Massachusetts. The
facility consists of approximately 4,850 square feet and is leased by XLI from
an unaffiliated party for $3,293 per month under a lease that expires in April
1999.
ITEM 3. LEGAL PROCEEDINGS
XLI is not presently involved in any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1997.
ITEM 5. MARKET PRICE FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
XLI Common Stock is currently traded on the NASDAQ Bulletin Board under the
symbol "XLCC", and XLI Preferred Stock is traded on NASDAQ Bulletin Board under
the symbol "XLCCP". On January 4, 1995, XLI stock was delisted from the NASDAQ
Small Cap market as it did not meet the minimum requirement for maintaining
listing.
The following table sets forth the range of high and low sales prices
quoted on NASDAQ for the Common Stock for the periods indicated. Such quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
do not necessarily represent actual transactions.
<TABLE>
<CAPTION>
COMMON STOCK
-------------------
HIGH LOW
-------- --------
<S> <C> <C>
1997
First Quarter.......................................... $0.37500 $0.09375
Second Quarter......................................... $0.28425 $0.09375
Third Quarter.......................................... $0.50000 $0.12500
Fourth Quarter......................................... $0.81250 $0.34375
1996
First Quarter.......................................... $ 0.10 $ 0.001
Second Quarter......................................... $ 0.1875 $ 0.001
Third Quarter.......................................... $ 0.4375 $ 0.125
Fourth Quarter......................................... $ 0.4375 $ 0.125
</TABLE>
On March 31, 1998, the closing sale price of the Company's Common Stock was
$.5625 per share and there were approximately 263 shareholders of record.
3
<PAGE> 141
DIVIDEND POLICY
The Company has never paid any cash dividends and does not anticipate
payment of cash dividends on the Company's Common Stock in the foreseeable
future. Under Delaware Corporation Law, dividends may be paid only out of
legally available funds as proscribed by statute, subject to the discretion of
the Company's Board of Directors.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 contains safe harbor
provisions regarding forward-looking statements. Except for historical
information contained herein, the matters discussed in the Liquidity and Capital
Resources section below contain potential risks and uncertainties, including,
without limitation, risks related to the ability of XLI (hereinafter referred to
in this section as the "Company") to successfully develop, test, produce and
market its proposed products, identify and attract partners to help market its
proposed products, identify and attract partners to help commercialize the
Company's products; attract and retain key employees; obtain meaningful patent
protection to cover the Company's proprietary technology; raise capital for
future operations and commercialization of its products; and successfully
respond to technological changes in the marketplace. The Company will need to
complete the pending merger or attract partners in order to exploit its
products, and there can be no assurance that the Company will be successful in
completing such transactions. Additional information regarding potential factors
which could affect the Company's financial results are included in the Company's
public filings with the Securities and Exchange Commission.
GENERAL
In 1997 the Company continued to focus on the design and development of
ASIC and VHDL (Virtual Hardware Description Language) enhancement product
offerings for the OEM printer and printer controller market. During 1997 the
Company delivered VHDL modules to OEMs and introduced the XLI-2050 ImageChip
ASIC (Application Specific Integrated Circuit) that incorporates all of the
Company's current enhancement technology into one chip design. The Company hopes
to increase revenue through additional licensing of the ImageChip technology and
through sales of its ImageChip ASIC to OEMs. The Company's strategy is to become
the primary distributor of its ImageChip ASICs rather than solely a licensor of
the ImageChip technology. The Company believes that its revenues and gross
margins will ultimately be greater from chip sales than from earning royalties
pursuant to technology licenses. Production quantities of the ImageChip are
planned for the second half of 1998. The Company also plans to add additional
engineering resources in 1998 in order to meet the demands from existing and
anticipated OEM agreements. This will result in increased research and
development costs that may negatively affect cash flow. For the fiscal year
ended December 31, 1997, the Company had a negative cash flow from operations of
$102,122.
On January 29, 1998 the Company entered into a Plan of Reorganization and
Agreement of Merger by and among Oak Technology, Inc., Pixel Magic, Inc., and
OTI Acquisition Corporation ("OTI") pursuant to which OTI will be merged with
and into the Company and the Company will become a wholly-owned subsidiary of
Pixel Magic, Inc., which is a wholly-owned subsidiary of Oak Technology, Inc.
The ASIC products of Pixel Magic and XLI are complementary to each other and are
targeted to the same printer/digital copier market. The Company believes that
the merger should enhance XLI's ability to bring its products to the OEM market.
The merger is subject to the approval of the Company's shareholders.
4
<PAGE> 142
The following table sets forth, for the periods indicated, statements of
operation data of the Company expressed as a percentage of revenues.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenue.......................................... 100 % 100 % 100 %
Cost of Revenue.................................. 18 % 29 % 45 %
Research and Development......................... 33 % 32 % 30 %
Selling and Marketing............................ 5 % 5 % 11 %
General and Administrative....................... 48 % 50 % 33 %
Loss from Operations............................. (4)% (16)% (19)%
Other Income (Expense)........................... (1)% (5)% (2)%
Net Loss......................................... (5)% (21)% (21)%
</TABLE>
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996.
Revenue. Revenue for the fiscal year ended December 31, 1997 was
$1,520,781 as compared to $898,618 for the fiscal year ended December 31, 1996,
an increase of $622,163 or 69%. Contract and license revenue for the fiscal year
ended December 31, 1997 was $1,422,990 as compared to $698,250 for the fiscal
year ended December 31, 1996. Product revenues for the fiscal year ended
December 31, 1997 were $97,791 as compared to $200,368 for fiscal year ended
December 31, 1996, a decrease of $102,577 or approximately 51%. There were no
product revenues from sales of ImageChip ASICs. License revenue attributable to
the ImageChip technology was $1,197,990, which represented 78.8% of total
revenues in 1997. The 104% increase in contract and license revenue is due to an
increase in the number and value of license agreements entered into by the
Company for its ImageChip technology, while the decrease in product revenue was
attributable to a reduction in revenues from sales of board products. XLI ceased
the production and promotion of its board products in the second half of 1996,
and is in the process of selling off its remaining board inventory. XLI expects
its board product revenues to continue to decrease in the future.
Cost of Revenue. Cost of revenue for the fiscal year ended December 31,
1997 was $281,123 or 18% of revenue, as compared to $258,440 or 29% of revenue
for the fiscal year ended December 31, 1996, an increase of $22,683. The
increase was due mostly to the foundry cost for manufacturing the prototype
XLI-2050 ImageChip partially offset by the decrease in board sales.
Research and Development. Research and development expense for the fiscal
year ended December 31, 1997 was $507,051 or 33% of revenue as compared to
$287,748 or 32% of revenue for the fiscal year ended December 31, 1996. The
increase in 1997 of $219,303 was primarily attributable to the hiring of
additional personnel and to associated expenses to support the increase in
development activity. The Company's ongoing engineering emphasis continued to be
on the development of ASICs.
Selling and Marketing. Selling and marketing expenses for the fiscal year
ended December 31, 1997 were $72,485 or 5% of revenue as compared to $42,942 or
5% of revenue for the year ended December 31, 1996. The increase of $29,543 was
primarily attributable to the hiring of a Vice President of Sales & Marketing in
late 1997 and expenses associated with the introduction of the XLI-2050
ImageChip.
General and Administrative. General and administrative expenses were
$718,832 or 48% of revenue for the fiscal year ended December 31, 1997 as
compared to $456,156 or 50% of revenue for the fiscal year ended December 31,
1996. The $262,678 increase in general and administrative expenses was
attributable to the increase in royalty expenses associated with increased
contract and license revenue, increased insurance costs, increased legal fees
associated with the merger, increased consulting fees and additional salary
costs. These increases were partially offset by a recovery of Korean taxes and
negotiated settlements with vendors.
Interest Expense. Net interest expense for the fiscal year ended December
31, 1997 was $19,361 or 1% of revenue as compared to $49,252 or 5% of revenue
for the fiscal year ended December 31, 1996. Interest
5
<PAGE> 143
expense for the fiscal year ended December 31, 1997 was primarily attributable
to interest on leased equipment.
Net Loss. The Company recorded a net loss of $72,283 for the fiscal year
ended December 31, 1997 as compared to a net loss of $192,588 for the fiscal
year ended December 31, 1996. The decrease in the net loss of $120,305 was
primarily the result of significantly higher contract and licensing revenues.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995.
Revenue. Revenue for the fiscal year ended December 31, 1996 was $898,618
as compared to $1,097,550 for the fiscal year ended December 31, 1995, a
decrease of $198,932 or 18%. Product board revenues for the fiscal year ended
December 31, 1996 were $200,368 as compared to $397,550 for fiscal year ended
December 31, 1995, a decrease of $197,182 or approximately 50%. Contract and
license revenue for the fiscal year ended December 31, 1996 was $698,250 as
compared to $700,000 for the fiscal year ended December 31, 1995. The decrease
in product revenue was primarily attributable to a reduction in revenues from
sales of board products. XLI ceased the production and promotion of its board
products in the second half of 1996, and is in the process of selling off its
remaining board inventory. XLI expects its board product revenues to continue to
decrease in the future.
Cost of Revenue. Cost of revenue for the fiscal year ended December 31,
1996 was $258,440 or 29% of revenue, as compared to $496,866 or 45% of revenue
for the fiscal year ended December 31, 1995, a decrease of $238,426. The
decrease was primarily due to the approximately 50% decrease in product revenue
and inventory write-offs of $30,516 in connection with the discontinuation of
the Company's board product lines.
Research and Development. Research and development expense for the fiscal
year ended December 31, 1996 was $287,748 or 32% of revenue as compared to
$331,279 or 30% of revenue for the fiscal year ended December 31, 1995. The
decrease in 1996 of $43,531 was primarily attributable to a decrease in
sub-contract work associated with the Company's agreement with Samsung
Electronics. The Company's ongoing engineering emphasis continued to be on the
development of ASICs.
Selling and Marketing. Selling and marketing expenses for the fiscal year
ended December 31, 1996 were $42,942 or 5% of revenue as compared to $117,896 or
11% of revenue for the year ended December 31, 1995. The decrease of $74,954 was
primarily attributable to use of commissioned personnel in lieu of salaried
personnel.
General and Administrative. General and administrative expenses were
$456,156 or 50% of revenue for the fiscal year ended December 31, 1996 as
compared to $358,040 or 33% of revenue for the fiscal year ended December 31,
1995. The $98,116 increase in general and administrative expenses was primarily
attributable to an increase in professional fees and expenses.
Interest Expense. Net interest expense for the fiscal year ended December
31, 1996 was $49,252 or 5% of revenue as compared to $24,655 or 2% of revenue
for the fiscal year ended December 31, 1995. Interest expense for the fiscal
year ended December 31, 1996 was primarily attributable to interest accrued on
subordinated notes issued by the Company and factoring charges associated with
receivables.
Net Loss. The Company recorded a net loss of $192,588 for the fiscal year
ended December 31, 1996 as compared to a net loss of $223,457 for the fiscal
year ended December 31, 1995. The decrease in the net loss of $30,869 was the
result of lower operating expenses partially offset by reduced revenues.
LIQUIDITY AND CAPITAL RESOURCES
For the fiscal year ended December 31, 1997, the Company had a negative
cash flow from operations of $102,122. This is primarily attributable to an
increase in personnel and expenses associated with the development and
introduction of the XLI-2050 ASIC. At December 31, 1997 the Company had current
assets of $116,001, current liabilities of $647,525 and a working capital
deficit of $531,524. The Company's cash balance at December 31, 1997 was
$112,401 as compared to $219,723 at December 31, 1996.
6
<PAGE> 144
The Company's working capital deficit in 1997, 1996 and 1995 was $531,524
$473,687 and $540,447, respectively. During these periods, the Company incurred
significant losses and expended significant amounts on research and development.
Additionally, the administrative costs and professional fees associated with
being a public company contributed to the working capital deficits.
During 1995, the Company entered into an agreement with the Silicon Valley
Bank to factor up to $500,000 against outstanding receivables. Silicon Valley
Bank has no obligation to provide funding and the factoring agreement may be
terminated at any time by Silicon Valley Bank or the Company. The agreement
calls for interest at a monthly rate of 2.5% and requires an administrative fee
of 1% of the receivables factored. Silicon Valley Bank has been granted a
security interest in all of the assets of the Company. As of December 31, 1997,
there were no outstanding loan amounts payable to Silicon Valley Bank.
The Company has no current plans to raise additional capital in 1998. The
Company hopes to fund its ongoing operations and development efforts from
ongoing and additional license and royalty fees as well as from funds generated
from ASIC sales. If the Company is unable to generate sufficient cash flow from
license agreements and ASIC sales, the Company's development efforts and ability
to continue as a going concern will be materially adversely affected. The
Company's auditors have included in their opinion a paragraph indicating that
there is substantial doubt about the Company's ability to continue as a going
concern.
In the year ended December 31, 1997, the Company funded its operations from
its available cash balance at the beginning of the year of $219,723. After
accounting for cash used by operating activities of $102,122 and cash expended
in connection with financing activities of $5,200, the Company had $112,401 of
available cash at December 31, 1997. In the fiscal year ended December 31, 1996,
the Company began the year with no cash available. However, the Company did
generate approximately $155,000 of cash from financing activities, primarily
through the sale of subordinated notes in 1996. This combined with approximately
$64,000 of cash provided from operations, resulting primarily from the
collection of approximately $259,000 of accounts receivable which offset an
approximately $193,000 net loss from operations, left the Company with
approximately $219,700 at December 31, 1996. In the fiscal year ended December
31, 1995, the Company began the year with approximately $75,900 in cash and
ended the year with no cash. Net cash used by operating activities was
approximately $60,000 due primarily to a $223,000 net loss from operations.
Additionally, the Company expended approximately $15,800 through financing
activities, with approximately $43,000 to meet capital lease obligations for
computer and office equipment. This amount was offset by approximately $26,000
of proceeds from the issuance of short-term promissory notes.
CAPITAL EXPENDITURES
The Company does not have any material commitments for capital expenditures
at this time.
EFFECTS OF INFLATION
The Company believes that the relatively moderate rate of inflation over
the past few years has not had a significant impact on the Company's sales or
operating results.
INCOME TAXES
The Company adopted Statement No. 109 "Accounting for Income Taxes" in 1993
and its implementation has had no effect on the Company's financial position and
results of operation.
FINANCIAL STATEMENTS
The Company's financial statements are shown on pages F-1 through F-15. The
accounting firm of Wolf & Company, P.C. has been engaged as the Company's
independent accountant for the past three years and its Report of Independent
Accountants for fiscal 1997 is shown on page F-2.
ITEM 7. FINANCIAL STATEMENTS
See pages F-2 through F-15.
7
<PAGE> 145
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On January 24, 1996, XLI received confirmation from Coopers & Lybrand of
the decision by XLI that Coopers & Lybrand would not be engaged as XLI's
independent accountants. The accounting firm of Wolf & Company, P.C. was
appointed and approved by the Board of Directors to replace Coopers & Lybrand.
There was no adverse opinion or disclaimer of opinion or disagreement on any
matter of accounting principles or practices in Coopers & Lybrand's report on
the financial statements for the fiscal years ended December 31, 1994 and
December 31, 1993.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The current directors, executive officers and key employees of the Company,
their ages and their positions held in the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Anthony D'Amelio............... 68 President, Chief Executive Officer and Chairman of
the Board
James L. Salerno............... 67 Chief Financial Officer, Treasurer and Secretary
Daniel J. Allen................ 37 Vice President of Research and Development
Roger F. Salava................ 61 Director of Strategic and Business Planning
Dr. Joseph L. Katz............. 55 Director and Vice President of Corporate Planning
Vincent J. Spoto............... 52 Director
Dr. Adam Carley................ 57 Director
</TABLE>
Each director is elected for a period of one year and serves until his
successor is duly elected by the stockholders. Officers are elected by and serve
at the discretion of the Board of Directors.
The following is a summary of the principal occupations during the past
five years of each of the directors, executive officers and key employees named
above:
Anthony D'Amelio is a founder of the Company and has served as Chairman of
the Board, President and Chief Executive Officer since July 1994. From March
1993 to July of 1994, Mr. D'Amelio served as a consultant to the Company and
from June 1989 to March 1993, Mr. D'Amelio was Treasurer, Chief Financial
Officer, and Director of the Company. From July 1988 to July 1990, Mr. D'Amelio
served as senior consultant to Alcan Corp., an aluminum and chemicals producer
in the areas of business development and joint ventures. Previously, Mr.
D'Amelio was Vice President, Computer Operations for Honeywell, Inc. and held
several executive positions at General Electric and Cie Bull.
James L. Salerno, Chief Financial Officer, Treasurer and Secretary since
March 1995. From 1991-1995 Mr. Salerno was Treasurer of Jem International. He is
a former V.P. of Finance at Preview Products Inc. from 1972-1991 and V.P. Group
Controller at AMF Inc. from 1952-1972. Mr. Salerno graduated from Pace
University with a BBA degree and holds a Master of Science degree from Long
Island University and Harvard Business School.
Daniel Allen, Vice President of Research and Development. Mr. Allen joined
the Company in May 1991. Prior to joining the Company, Mr. Allen was Chief
Engineer at Cirrus Technology, Inc., responsible for the design and
manufacturing of high resolution color laser film recorders and Senior Engineer
at Analogic Corp. Mr. Allen graduated from Penn State University and holds a
B.S. degree in Mathematics with a minor in Computer Science.
Roger Salava was appointed Director of Strategic and Business Planning in
August 1994. Mr. Salava joined XLI in 1991 as Vice President Engineering. Prior
to joining XLI, Mr. Salava was Senior Vice President of Kodak/EPPS, a subsidiary
of Eastman Kodak Corporation and former Vice President of Engineering for
AGFA/Compugraphic Corporation. He holds a B.S. degree from Marquette University
and an M.S. from Northwestern University, both in Electrical Engineering.
8
<PAGE> 146
Joseph L. Katz was appointed Vice President, Corporate Development,
November 1996 and has been a Director since September 30, 1996. From 1977 to
1996 Dr. Katz has held the positions of Group Leader, Department Head, Senior
Principal Engineer of Network and Systems Management at Mitre Corp. Dr. Katz
holds Ph.D. and M.S. degrees in Electrical Engineering from Purdue University.
Vincent J. Spoto, a founder of the Company; previously served as President,
Chief Executive Officer and Chairman of the Board of Directors from June 1989 to
November 10, 1993. Mr. Spoto was a consultant to the Company for November 1994
to 1996. Presently, Mr. Spoto is President of ImageLabs, Inc. On January 6,
1997, Mr. Spoto was appointed to fill a vacancy on the Board of Directors. Mr.
Spoto holds an Associates Degree in Electrical Engineering from the Wentworth
Institute of Technology.
Adam Carley, Chief Scientist, Director and founder of the Company. Dr.
Carley invented the laser printing technology that forms the basis of XLI's
imaging enhancement technology. For the past five years, Dr. Carley has been a
consultant to the Company and President of Carley Corporation, a developer of
advanced electronic circuitry for high quality laser image printing. Dr. Carley
received his Ph.D. in Electrical Engineering from the Massachusetts Institute of
Technology.
The members of the Board of Directors do not receive any cash compensation
for their services as Directors.
9
<PAGE> 147
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth all cash compensation paid by the Company to
its Chief Executive Officer. No executive officer received annual salary and
bonus exceeding $100,000 for their services in all capacities to the Company
during the fiscal year ending December 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-------------------------------
AWARDS PAYOUTS
--------------------- -------
ANNUAL COMPENSATION OTHER RESTRICTED
---------------------- ANNUAL STOCK LTIP ALL OTHER
SALARY BONUS COMPENSATION AWARDS OPTIONS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
- --------------------------- ---- ------- ----- ------------ ---------- ------- ------- ------------
(a) (b) (c) (d) (e) (f) (G) (h) (i)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Anthony D. D'Amelio........ 1997 $90,919 35,000
President, Executive 1996 $22,367 -- -- $2,000(1)
Officer and Chairman of 1995 $27,875 $3,750(2) 80,000 $1,562(3)
the Board
</TABLE>
- ---------------
(1) 200,000 Shares of Common Stock
(2) 120,000 Shares of Common Stock
(3) 50,000 Warrants
During 1995 investors who loaned money to the Company received warrants (3
warrants for each $1 loaned). Mr. D'Amelio received 88,000 warrants.
The following table sets forth individual grants of stock options made to
the Chief Executive Officer during the fiscal year ending December 31, 1997.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS/SARs
UNDERLYING GRANTED TO EXERCISE OF
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED(#) FISCAL YEAR ($/Sh) DATE
- ---- ------------ ------------------ ----------- ----------
(a) (b) (c) (d) (e)
<S> <C> <C> <C> <C>
Anthony D. D'Amelio............... 35,000 17% .1375 6/3/2002
</TABLE>
The following table sets forth information concerning each exercise of
stock options by the Chief Executive Officer during the fiscal year ending
December 31, 1997.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF
UNEXERCISED VALUE OF
SECURITIES UNEXERCISED
UNDERLYING IN-THE-MONEY
SHARES OPTIONS/SARS OPTION/SARS
ACQUIRED ON VALUE AT FY-END(#) AT FY-END($)
NAME EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ----------- ----------- ------------------------- -------------------------
(a) (b) (c) (d) (e)
<S> <C> <C> <C> <C>
Anthony D. D'Amelio........... 53,333 $5,000 0/61,667 0/$2,500
</TABLE>
10
<PAGE> 148
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF XLI
The following table sets forth, as of March 27, 1998, the ownership of XLI
Common Stock by (i) each person who is known by XLI to own of record or
beneficially more than five percent of XLI Common Stock, (ii) each of XLI's
directors and (iii) all directors and officers as a group. Except as otherwise
indicated, the stockholders listed in the table have sole voting and investment
powers with respect to the shares indicated. As of March 27, 1998, XLI had
approximately 263 stockholders of record.
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
BENEFICIALLY OWNED(1)(2) BENEFICIALLY OWNED
------------------------ -------------------
BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
---------------- ----------- --------- ------- --------
<S> <C> <C> <C> <C>
Anthony D. D'Amelio.................................... 634,554 17.7% 6,000 1.9%
101 Billerica Avenue, 5 Billerica Park
N. Billerica, MA 01862
Roger F. Salava........................................ 182,750 5.1% -- --
101 Billerica Avenue, 5 Billerica Park
N. Billerica, MA 01862
James L. Salerno....................................... 163,584 4.6% 50,000 15.9%
101 Billerica Avenue, 5 Billerica Park
N. Billerica, MA 01862
Daniel J. Allen........................................ 215,001 6.0% -- --
101 Billerica Avenue, 5 Billerica Park
N. Billerica, MA 01862
Joseph L. Katz, Trustee of Research
Investment Trust....................................... 186,422 5.2% -- --
101 Billerica Avenue, 5 Billerica Park
N. Billerica, MA 01862
Joseph L. Katz, Individually........................... 30,000 0.8% -- --
101 Billerica Avenue, 5 Billerica Park
N. Billerica, MA 01862
Vincent J. Spoto....................................... 97,108 2.7% -- --
50 Cypress Road
Wellesley, MA 02181
Adam L. Carley......................................... 104,917 2.9% -- --
6 Hillside Road
Windham, NH 03087
All directors and executive officers as a group (7
persons)............................................. 1,614,336 45.0% 56,000 17.8%
</TABLE>
- ---------------
(1) Pursuant to the rules of the Securities and Exchange Commission, shares of
Common Stock which an individual or group has a right to acquire within 60
days pursuant to the exercise of options or warrants are deemed to be
outstanding for the purpose of computing the percentage ownership of such
individual or group.
(2) Does not include 42,777 shares issuable upon exercise of a warrant issued to
Thomas James Associates, Inc. in connection with XLI's offering of Series A
Preferred Stock in February 1994; 254,765 shares issuable upon exercise of
the Underwriter's Warrant included in the offering in February 1994; and
427,758 shares issuable upon exercise of Class A Warrants.
11
<PAGE> 149
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January 1990, the Company entered into an Agreement (the "Carley
Agreement") with the Carley Corporation ("Carley Corporation"), a company
founded by Dr. Adam L. Carley, a co-founder of XLI, pursuant to which the
Company acquired an exclusive worldwide license to certain technology (the
"Carley Technology") for the printing of text, graphics and photographic images.
In consideration therefor, the Company issued 268,040 shares of Common Stock to
the two stockholders of Carley Corporation, Dr. Adam L. Carley and Leonard R.
Weisberg (also a co-founder of the Company), and agreed to pay royalties equal
to 5% of monetary receipts resulting from the sale by XLI of hardware or
software products or services based upon or associated with the Carley
Technology and 33 1/3% of monetary receipts from sublicensing the Carley
Technology to XLI. All royalty payments terminate upon payment of a cumulative
total of $2.4 million, at which time the Carley Corporation has agreed to assign
to the Company all rights, title and interest to the Carley Technology,
including any improvements to the Carley Technology or future developments based
on the Carley Technology. The Company has sublicensed on an exclusive and
royalty-free basis the Carley Technology to the Carley Corporation for retail
services including but not limited to stores, kiosks and booths for purposes
including but not limited to picture making and picture reproduction.
In December 1993, the Company and Carley Corporation amended the Carley
Agreement such that Carley Corporation was to be paid minimum royalties of (i)
$75,000 in fiscal year 1994; (ii) $82,500 in fiscal year 1995; and (iii) $90,000
in fiscal year 1996. Additionally, if Carley Corporation develops new Carley
Technology and such new Carley Technology were sublicensed by XLI and the total
sublicense fees received by XLI for such new Carley Technology exceeded $400,000
during the period from 1994 through 1996 (hereinafter called "excess fees"),
then XLI would pay Carley Corporation 25% of the excess fees. In the event that
XLI had a net loss before taxes and interest but after the receipt of such total
sublicense fees during the six month period ended in the month when any excess
fee payment was due, then no excess fee payment would be made by XLI for that
month and XLI would have no future obligation to pay that excess fee payment.
Based on the results for the period 1994 to 1996, no excess fees were payable to
the Carley Corporation.
Effective January 1, 1997, the Company and the Carley Corporation again
amended the Carley Agreement such that the Company will pay a royalty of 15% of
cash receipts generated from sales or licenses incorporating the Carley
Technology up to a cumulative total of $2.4 million, in lieu of the previous
royalty rate of 5% on sales of hardware and software products and 33 1/3% of
license fees.
EMPLOYMENT AGREEMENTS
Effective as of December 30, 1993, the Company entered into a consulting
agreement (the Spoto Consulting Agreement) with Vincent J. Spoto, the Company's
former President and Chief Executive Officer. Pursuant to the Spoto Consulting
Agreement, Mr. Spoto serves as a consultant to the Company's Chief Executive
Officer and Board of Directors at a consulting fee of $3,958.33 per month
through May 31, 1997. The Spoto Consulting Agreement includes a non-competition
provision which prevents Mr. Spoto from directly competing with the Company
during the term of the Spoto Consulting Agreement. The Spoto Consulting
Agreement also includes confidentiality provisions and provides for the
assignment by Mr. Spoto of any inventions or technology conceived or developed
by Mr. Spoto during the period of the Spoto Consulting Agreement which result
from or are suggested by any task assigned to or performed by Mr. Spoto as a
consultant to the Company.
On February 1, 1994, the Company entered into a Consulting Agreement (the
Salava Consulting Agreement) with Roger Salava. Pursuant to the Salava
Consulting Agreement, Mr. Salava currently serves as Director of Strategic &
Business Planning at the rate of $3,750 per month through November 30, 1997. The
Salava Consulting Agreement includes non-competition provisions which prevent
Mr. Salava from competing with the Company during the term of the Salava
Consulting Agreement and for six months thereafter. The Salava Consulting
Agreement also includes confidentiality provisions and requires the assignment
by Mr. Salava to the Company of any inventions or technology conceived or
developed by Mr. Salava during the period of the Salava Consulting Agreement
which relate to the business of the Company.
12
<PAGE> 150
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibits required to be filed herewith are
incorporated by reference to the filings previously made by the Company as noted
below (the number before each Exhibit indicates the number of the Exhibit as it
was filed in the document referenced below):
EXHIBIT
NUMBER TITLE
- ------- -----
1.1** Underwriting Agreement
1.2** Agreement Among Underwriters
3.1* Restated Certificate of Incorporation, as amended
3.2* By-laws of the Registrant
4.1** Certificate of Designations, Preferences and Rights of Series A
Cumulative Redeemable Convertible Preferred Stock
4.2** Specimen Series A Preferred Stock Certificate
4.3** Specimen Common Stock Purchase Warrant
4.4** Form of Warrant Agreement
4.5** Form of Warrant to be issued to the Representative
10.9* Equipment Lease Agreement between the Company and Alco Capital
Resources, Inc. dated February 26, 1992
10.11* Agreement between the Company and William T. Lundberg, d.b.a.
Alliance Associates dated February 11, 1992
10.12* Form of Stock Escrow Agreement among American Stock Transfer & Trust
Company, the Company and the stockholders of the Company
10.13* 1990 Stock Option Plan
10.14* 1992 Stock Option Plan
10.15* Form of Financial Consulting Agreement between the Company and the
Underwriter
10.16* Form of Investment Banking Agreement between the Company and the
Underwriter
10.17* Research and Development Agreement between the Company and Kroy, Inc.
dated October 26, 1990, as amended
10.18* Form of Employee Development and Confidential Information Agreement
10.19* Agreement between the Company, Carley Corporation and Informed
Decisions dated January 15, 1990, as amended
10.19.A Fifth Amendment Agreement between the Company, Carley Corporation
dated February 12, 1997. (Filed with Form 10-KSB December 31, 1996)
10.26** Second Amendment Agreement dated December 16, 1993 between the Company
and Carley Corporation
10.28** Agreement between the Company and TOP Alliance Consultants dated July
5, 1993
10.29** Form of Merger and Acquisition Agreement
10.32** Consulting Agreement between the Company and Roger Salava dated
February 1, 1994
10.33** Consulting Agreement between the Company and Vincent J. Spoto
effective as of December 30, 1993
10.37 Agreement between the Company and Analog Devices, Inc. dated February
22, 1995 (filed with December 31, 1994 10-KSB)
10.39 Development and Licensing Agreement dated April 26, 1995, between the
Company and Samsung Electronics, Ltd. (filed with September 30, 1995
Form 10-QSB)
10.40 Lease for premises at 101 Billerica Ave., N. Billerica, MA dated June
6, 1995 (filed with September 30, 1995 Form 10-QSB)
10.41 License and Royalty Agreement dated March 11, 1996, between the
Company and Pipeline Associate, Inc. (filed with March 30, 1996 Form
10-QSB)
13
<PAGE> 151
EXHIBIT
NUMBER TITLE
- ------- -----
10.42 License and Royalty Agreement dated November 13, 1996 between the
Company and Xionics Document Technologies, Inc. (filed on November
14, 1996)
10.43 Development and License Agreement dated May 30, 1997 by and between
the Company and SIS Microelectronics, Inc. (filed with June 30, 1997
Form 10-QSB).
10.44 Licensing and Royalty Agreement dated June 26, 1997 by and between the
Company and PCPI Technologies, Inc. (filed with June 30, 1997 10-QSB).
10.45 Technology License and Supply Agreement dated October 15, 1997 by and
between the Company and Pixel Magic, Inc. (filed with September 30,
1997 Form 10-QSB).
- ---------------
* Filed with the Commission on June 18, 1992; Registration Statement No.
33-48684.
** Filed with the Commission on August 31, 1992; Registration Statement No.
33-48684.
(b) Reports on Form 8-K. The Company has filed the following reports on
Form 8-K during the three months ended December 31, 1997.
1 -- November 17, 1997
The Company and Pixel Magic, Inc. announced on November 17, 1997 that the
companies signed a Letter of Intent for Pixel Magic, Inc. to acquire XLI by
merger.
14
<PAGE> 152
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant certifies that it has duly caused this
Amendment No. 1 to Form 10-KSB to be signed on its behalf by the undersigned,
thereunto duly authorized, on April 24, 1998.
XEROGRAPHIC LASER IMAGES CORPORATION
By: /s/ Anthony D. D'Amelio
---------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
NAME CAPACITY DATE
---- -------- ----
<C> <S> <C>
/s/ Anthony D. D'Amelio President, Chief Executive April 24, 1998
- --------------------------------------------------- Officer
and Chairman of the Board
(Principal Executive Officer)
/s/ James L. Salerno Chief Financial Officer, April 24, 1998
- --------------------------------------------------- Treasurer, Secretary
(Principal Financial Officer)
/s/ Dr. Joseph Katz Director April 24, 1998
- ---------------------------------------------------
/s/ Vincent J. Spoto Director April 24, 1998
- ---------------------------------------------------
/s/ Dr. Adam L. Carley Director April 24, 1998
- ---------------------------------------------------
</TABLE>
15
<PAGE> 153
XEROGRAPHIC LASER IMAGES CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE(S)
-----------
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheets as of December 31, 1997 and 1996............. F-3
Statements of Loss for the Years Ended December 31, 1997,
1996 and 1995............................................. F-4
Statements of Changes in Stockholders' Deficit for the Years
Ended December 31, 1997, 1996 and 1995.................... F-5
Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995....................................... F-6
Notes to Financial Statements............................... F-7 to F-14
Balance Sheets as of March 31, 1998 (unaudited) and December
31, 1997.................................................. F-15
Statements of Operations for the Three-Month Period Ended
March 31, 1998 and 1997 (unaudited)....................... F-16
Statements of Cash Flows for the Three-Month Period Ended
March 31, 1998 and 1997 (unaudited)....................... F-17
</TABLE>
F-1
<PAGE> 154
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Xerographic Laser Images Corporation:
We have audited the accompanying balance sheets of Xerographic Laser Images
Corporation as of December 31, 1997 and 1996 and the related statements of loss,
stockholders' deficit and cash flows for each of the years in the three-year
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Xerographic Laser Images
Corporation as of December 31, 1997 and 1996 and the results of its operations
and cash flows for each of the years in the three-year period ended December 31,
1997, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
Financial Statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters,
which include a merger for which they will be seeking shareholder approval, are
also discussed in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
WOLF & COMPANY, P.C.
Boston, Massachusetts
February 27, 1998
F-2
<PAGE> 155
XEROGRAPHIC LASER IMAGES CORPORATION
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(NOTE 1)
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 112,401 $ 219,723
Accounts receivable, less allowance for doubtful accounts
of $5,000 in 1996...................................... 3,600 20,314
----------- -----------
Total current assets.............................. 116,001 240,037
Property and equipment, net (Note 4)........................ 16,478 35,191
Other assets................................................ 3,499 4,432
----------- -----------
Total assets...................................... $ 135,978 $ 279,660
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 237,873 $ 352,346
Deferred revenue.......................................... 10,000 101,000
Accrued payroll........................................... 101,705 33,750
Accrued expenses (Note 7)................................. 286,216 146,193
Accrued severance costs (Note 8).......................... -- 68,704
Current portion of capital lease obligations (Note 6)..... 11,731 11,731
----------- -----------
Total current liabilities......................... 647,525 713,724
Capital lease obligations (Note 6).......................... 5,176 16,908
Subordinated notes payable (Note 13)........................ 283,688 283,688
----------- -----------
Total liabilities................................. 936,389 1,014,320
----------- -----------
Stockholders' deficit (Notes 5 and 9)
Series A Preferred stock, $.01 par value; authorized
1,000,000 shares; 315,238 issued and outstanding....... 3,152 3,152
Common stock, $.01 par value; 30,000,000 shares
authorized; 2,039,310 and 1,778,646 issued and
outstanding at December 31, 1997 and 1996,
respectively........................................... 20,393 17,786
Additional paid-in capital................................ 8,438,278 8,434,353
Accumulated deficit....................................... (9,262,234) (9,189,951)
----------- -----------
Total stockholders' deficit....................... (800,411) (734,660)
----------- -----------
Total liabilities and stockholders' deficit....... $ 135,978 $ 279,660
=========== ===========
</TABLE>
See accountants' report and accompanying notes to financial statements.
F-3
<PAGE> 156
XEROGRAPHIC LASER IMAGES CORPORATION
STATEMENTS OF LOSS
(NOTE 1)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues (Note 7):
Product revenues..................................... $ 97,791 $ 200,368 $ 397,550
Contract and license revenues........................ 1,422,990 698,250 700,000
---------- ---------- ----------
Total revenues............................... 1,520,781 898,618 1,097,550
---------- ---------- ----------
Costs and expenses:
Cost of product revenues............................. 29,358 176,886 294,851
Cost of contract and license revenue................. 251,765 81,554 202,015
Research and development............................. 507,051 287,748 331,279
Selling and marketing................................ 72,485 42,942 117,896
General and administrative........................... 718,832 456,156 358,040
---------- ---------- ----------
Total cost and expenses...................... 1,579,491 1,045,286 1,304,081
---------- ---------- ----------
Loss from operations................................... (58,710) (146,668) (206,531)
---------- ---------- ----------
Other income (expense):
Interest expense..................................... (19,361) (49,252) (24,655)
Interest income...................................... -- -- 396
Other income......................................... 5,788 3,332 7,333
---------- ---------- ----------
Total other expense, net..................... (13,573) (45,920) (16,926)
---------- ---------- ----------
Net loss............................................... $ (72,283) $ (192,588) $ (223,457)
========== ========== ==========
Net loss per common share -- basic..................... $ (0.04) $ (0.12) $ (0.18)
Weighted average common and common equivalent shares
outstanding -- basic................................. 1,799,999 1,565,105 1,255,314
</TABLE>
See accountants' report and accompanying notes to financial statements.
F-4
<PAGE> 157
XEROGRAPHIC LASER IMAGES CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
(NOTE 1)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------------- ---------------------
NUMBER OF NUMBER OF ADDITIONAL TOTAL
SHARES SHARES PAID-IN ACCUMULATED STOCKHOLDERS'
ISSUED PAR VALUE ISSUED PAR VALUE CAPITAL DEFICIT DEFICIT
--------- --------- --------- --------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994........... 331,558 $3,316 1,075,023 $10,750 $8,418,088 $(8,773,906) $(341,752)
Conversion of Series A Preferred Stock
into common stock.................... (16,320) (164) 13,623 136 28 -- --
Issuance of common stock to key
employees in lieu of full cash
compensation......................... -- -- 250,000 2,500 5,312 -- 7,812
Net loss............................... -- -- -- -- -- (223,457) (223,457)
------- ------ --------- ------- ---------- ----------- ---------
Balance at December 31, 1995........... 315,238 3,152 1,338,646 13,386 8,423,428 (8,997,363) (557,397)
Issuance of common stock to key
employees in lieu of full cash
compensation......................... -- -- 440,000 4,400 10,925 -- 15,325
Net loss............................... -- -- -- -- -- (192,588) (192,588)
------- ------ --------- ------- ---------- ----------- ---------
Balance at December 31, 1996........... 315,238 3,152 1,778,646 17,786 8,434,353 (9,189,951) (734,660)
Exercise of stock options.............. -- -- 260,664 2,607 3,925 -- 6,532
Net loss............................... -- -- -- -- -- (72,283) (72,283)
------- ------ --------- ------- ---------- ----------- ---------
Balance at December 31, 1997........... 315,238 $3,152 2,039,310 $20,393 $8,438,278 $(9,262,234) $(800,411)
======= ====== ========= ======= ========== =========== =========
</TABLE>
See accountants' report and accompanying notes to financial statements.
F-5
<PAGE> 158
XEROGRAPHIC LASER IMAGES CORPORATION
STATEMENTS OF CASH FLOWS
(NOTE 1)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................................. $ (72,283) $(192,588) $(223,457)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Inventory write-offs............................... -- 30,516 41,855
Write-offs of fixed assets......................... -- -- 3,471
Depreciation and amortization...................... 18,713 33,321 73,766
Issuance of common stock for services rendered..... -- 15,325 7,812
(Increase) decrease in operating assets:
Accounts receivable.............................. 16,714 258,957 (222,702)
Inventory........................................ -- 24,665 75,821
Other assets..................................... 933 11,469 6,281
Increase (decrease) in operating liabilities:
Accounts payable................................. (114,473) (86,882) 118,854
Deferred revenue................................. (91,000) 101,000 --
Accrued expenses................................. 207,978 (27,063) 186,467
Accrued severance costs.......................... (68,704) (104,404) (128,221)
--------- --------- ---------
Net cash provided (used) by operating activities........ (102,122) 64,316 (60,053)
--------- --------- ---------
Cash flows from financing activities:
Exercise of stock options............................. 6,532 -- --
Receipts of notes payable............................. -- 204,500 26,000
Payments of notes payable............................. -- (35,500) --
Payments under capital lease obligations.............. (11,732) (12,161) (43,253)
Increase (decrease) in cash overdraft................. -- (1,432) 1,432
--------- --------- ---------
Net cash provided (used) by financing activities........ (5,200) 155,407 (15,821)
--------- --------- ---------
Net increase (decrease) in cash......................... (107,322) 219,723 (75,874)
Cash at beginning of year............................... 219,723 -- 75,874
--------- --------- ---------
Cash at end of year..................................... $ 112,401 $ 219,723 $ --
========= ========= =========
Supplemental disclosure of cash flow information(1):
Interest paid......................................... $ 19,361 $ 45,616 $ 20,340
</TABLE>
- ---------------
(1) See Note 12 "Supplementary Cash Flow Information" for noncash investing and
financing activities.
See accountants' report and accompanying notes to financial statements.
F-6
<PAGE> 159
XEROGRAPHIC LASER IMAGES CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Xerographic Laser Images Corporation (the "Company") was founded in June
1989 to develop, manufacture and market a proprietary technology which improves
the quality of output from laser printers.
For the fiscal years ended December 31, 1997, 1996 and 1995, the Company
had net losses of $72,283, $192,588 and $223,457, respectively. The Company had
a working capital deficit of $531,524 and total stockholders' deficit of
$800,411 at December 31, 1997.
On January 29, 1998, certain stockholders of the Company executed a "Plan
of Reorganization and Agreement of Merger" (the "Merger Agreement") with OTI
Acquisition Corporation, a wholly-owned subsidiary of Pixel Magic, Inc.
("Pixel"). Under the terms of the Merger Agreement, the Company will become a
wholly-owned subsidiary of Pixel and the Company's stockholders will receive a
cash payment based on the number of shares outstanding at the time of the merger
and the conditional right to receive additional cash payments based on the
Company meeting certain milestones through December 31, 2000. A majority of the
Company's Preferred Stockholders and Common Stockholders, each voting as a
separate class, must vote in favor of the Merger Agreement in order for it to be
effective. Among other things, the Merger Agreement, once effective, appoints
stockholder representatives, adjusts the terms of the Carley Agreement (see note
7), requires the execution of employment agreements and provides for unexercised
stock options and warrants. Please refer to the Proxy Statement filed pursuant
to Section 14(a) of the Securities Exchange Act of 1934 which accompanies these
financial statements.
Should the Merger Agreement not be consummated, there would be substantial
doubt regarding the Company's ability to continue as a going concern. The
financial statements do not include any adjustments that may be necessary should
the Company be unable to continue as a going concern.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the balance
sheet date and the amounts of revenues and expenses recorded during the
reporting period. Actual results could differ from those estimates. Such
estimates primarily relate to accrued expenses and the valuation allowance on
deferred taxes.
Revenue Recognition
Revenues from product sales are recognized at the time of shipment or in
accordance with contractual acceptance terms. Research, development and
licensing contract revenues are recognized when the related costs are incurred
and performance criteria in the contract are met. The Company defers revenue
associated with future services over the term of the related services.
Inventory
Inventory was stated at the lower of cost (first in, first out) or market.
During 1996, all remaining board product inventory became obsolete due to
changing technology, and was written off.
Property and Equipment
Purchased property and equipment are recorded at cost. Depreciation is
recorded using the straight-line method over the estimated useful lives of the
related assets, which is generally five years. Property and
F-7
<PAGE> 160
XEROGRAPHIC LASER IMAGES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
equipment leased under capital leases are stated at cost and are amortized over
the lesser of the lease term or estimated useful life.
Maintenance and repairs are charged to expense as incurred. When assets are
retired or otherwise disposed of, the assets and related allowances for
depreciation and amortization are eliminated from the accounts and any resulting
gain or loss, if any, is reflected in the results of operations.
Research and Development
Research and development costs are expensed as incurred.
Product Warranty Costs
The Company's warranty period on sales of its board products is generally
one year. The Company warrants that its board products are free from defects in
workmanship and materials and conform in all material respects to
specifications. In the event of a warranty claim, the Company may elect to
replace the defective board product or refund to the customer the amount paid
for such product. Estimated future costs for initial product warranties are
considered immaterial.
Income Taxes
Deferred tax assets and liabilities are recorded for temporary differences
between the financial statement and tax bases of assets and liabilities using
the currently enacted income tax rates expected to be in effect when the taxes
are actually paid or recovered. A deferred tax asset is also recorded for net
operating loss and tax credit carryforwards to the extent their realization is
more likely than not. The deferred tax expense for the period represents the
change in the deferred tax asset or liability from the beginning to the end of
the period.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123, "Accounting for Stock-Based Compensation." This Statement
encourages all entities to adopt a fair value based method of accounting for
stock compensation, whereby compensation cost is measured at the grant date
based on the value of the award and is recognized over the service period, which
is usually the vesting period. However, it also allows an entity to continue to
measure compensation cost for employee plans using the intrinsic value based
method of accounting prescribed by Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," whereby compensation cost is
the excess, if any, of the quoted market price of the stock at the grant date
(or other measurement date) over the amount an employee must pay to acquire the
stock. Entities electing to continue to apply APB Opinion No.25 for employee
stock-based compensation must make pro forma disclosures of net income and
earnings per share, as if the fair value based method of accounting had been
applied.
Generally, stock options issued under the Company's stock option plan have
no intrinsic value at the grant date, and under APB Opinion No. 25 no
compensation cost is recognized. The Company will continue its current
accounting treatment for employee stock options and make the pro forma
disclosures proscribed by this Statement.
Net Income (Loss) Per Share
In February 1997, FASB issued SFAS No. 128, "Earnings per Share" which
requires that earnings per share be calculated on a basic and dilutive basis.
Basic earnings per share represents income available to common stock divided by
the weighted-average number of common shares outstanding during the period.
Diluted earnings per share reflects additional common shares that would have
been outstanding if dilutive potential common shares had been issued, as well as
any adjustment to income that would result from the
F-8
<PAGE> 161
XEROGRAPHIC LASER IMAGES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
assumed conversion. Potential common shares that may be issued by the Company
relate solely to outstanding stock options and warrants, and are determined
using the treasury stock method. The assumed conversion of outstanding dilutive
stock options and warrants would increase the shares outstanding but would not
require an adjustment to income as a result of the conversion. For the years
ended December 31, 1997 and 1996, options and warrants applicable to 3,410,584
shares and 3,469,790 shares, respectively were anti-dilutive and excluded from
the diluted earnings per share computation. The statement is effective for
interim and annual periods ending after December 15, 1997, and requires the
restatement of all prior period earnings per share data presented. No
restatement was necessary as the adoption of SFAS No. 128 did not impact the
Company's earnings per share calculations.
3. INCOME TAXES
The Company has generated operating loss carryforwards for federal and
state income tax and federal alternative minimum tax purposes of approximately
$9,110,000 for the period June 9, 1989 (inception) through December 31, 1997.
These net operating losses will expire at various dates through 2012. The
Company has also generated research and development credits of approximately
$268,000 through December 31, 1997, which expire at various dates through 2012.
Utilization of these net operating loss carryforwards and research and
development credits will be subject to annual limitations based on Internal
Revenue Code provisions relating to changes in the Company's ownership.
The approximate tax effect of each type of temporary difference before
allocation of the valuation allowance is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................ $ 3,655,000 $ 3,484,000
Tax credit carryforwards........................ 268,000 211,000
Allowance for doubtful accounts................. -- 2,000
Accrued severance costs......................... -- 27,500
----------- -----------
Total deferred tax asset.......................... 3,923,000 3,724,500
Valuation allowance............................... (3,923,000) (3,724,500)
----------- -----------
Net deferred tax asset............................ $ -- $ --
=========== ===========
</TABLE>
Due to the uncertainty surrounding the timing of realizing the benefits of
its favorable tax attributes in future tax returns, the Company has placed a
100% valuation allowance against deferred tax assets.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
--------- ---------
<S> <C> <C>
Equipment............................................ $ 121,740 $ 121,740
Capitalized lease equipment.......................... 368,964 368,964
--------- ---------
490,704 490,704
Less accumulated depreciation and amortization....... (474,226) (455,513)
--------- ---------
Property and equipment, net.......................... $ 16,478 $ 35,191
========= =========
</TABLE>
F-9
<PAGE> 162
XEROGRAPHIC LASER IMAGES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. STOCK OPTION PLANS
The Company maintains two stock option plans (the "1990 Stock Option Plan"
and the "1992 Stock Option Plan") whereby the Board of Directors, at their
discretion, may issue either incentive stock options or nonqualified options to
employees and nonqualified options to consultants, directors or other
non-employees.
Incentive stock options may not be granted at a price less than the fair
market value of the shares at the grant date (or less than 110% of fair market
value in the case of employees or officers holding 10% or more of the voting
stock) while the nonqualified options may not be granted at a price lower than
the lesser of 50% of the fair market value of the shares at the grant date or
the book value of the shares as of the end of the fiscal year of the Company
immediately preceding the date of the grant. All grants as of December 31, 1997
were at fair market value or greater. The options generally vest ratably over a
period of zero to five years. Incentive stock options granted under the plan
must expire not more than 10 years from the date of grant and not more than five
years in the case of incentive stock options granted to an employee or officer
holding 10% or more of the voting stock of the Company. All options not
exercised prior to the expiration date automatically expire.
The following table summarizes all stock option activity:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- --------
<S> <C> <C>
Outstanding at December 31, 1994........................ 137,986 $1.99
Granted............................................... 287,000 0.03
Canceled.............................................. (74,381) 1.50
Terminated............................................ (25,638) 1.50
--------
Outstanding at December 31, 1995........................ 324,967 $0.41
Granted............................................... 125,500 0.02
Canceled.............................................. (10,417) 0.03
Terminated............................................ (1,176) 1.50
--------
Outstanding at December 31, 1996........................ 438,874 $0.30
Granted............................................... 205,000 0.127
Exercised............................................. (260,664) 0.025
Terminated............................................ (3,542) 0.75
--------
Outstanding at December 31, 1997........................ 379,668 $0.39
========
</TABLE>
In January 1998, all options became exercisable in connection with the
Merger Agreement. All options will terminate once the merger is completed.
Information pertaining to options outstanding at December 31, 1997 is as
follows:
<TABLE>
<CAPTION>
RANGE OF NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISE PRICE
- --------------- ----------- ----------------
<S> <C> <C>
$ .01-$.1375 344,169 $ 0.09
$ 1.50 29,500 $ 1.50
$10.50-$22.50 5,999 $12.16
-------
379,668 $ 0.39
</TABLE>
At December 31, 1997, 59,143 shares are available for future grants. In
January and February 1998, 334,169 options were exercised.
The Company applies APB Opinion 25 and related interpretations in
accounting for its employee option and warrant grants. Accordingly, no
compensation cost has been recognized. Had compensation cost been determined
based on the fair value at the grant dates for awards under those plans
consistent with the method
F-10
<PAGE> 163
XEROGRAPHIC LASER IMAGES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
prescribed by SFAS No. 123, the Company's net loss and net loss per common share
would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
-------- --------- ---------
<S> <C> <C> <C> <C>
Net loss: As reported.... $(72,283) $(192,588) $(223,457)
Pro Forma...... (98,318) (194,138) (251,426)
Net loss per common share: As reported.... (0.04) (0.12) (0.18)
Pro Forma...... (0.05) (0.12) (0.20)
</TABLE>
The fair value of each option or warrant granted is estimated on the grant
date using the Black-Scholes option pricing model. Due to the historical
volatility of the Company's stock price, the fair value of the option or warrant
is generally equal to the fair value of the underlying stock. The weighted
average fair value of options granted as of the grant dates was $.13 and $.01
for 1997 and 1996, respectively.
6. COMMITMENTS
The Company leases its facilities and certain equipment under operating
lease agreements which expire on various dates through 1999. Rental expense
incurred under these agreements was $38,558, $36,100 and $56,179 during 1997,
1996, and 1995, respectively. The Company has entered into various capital
leases for office equipment, the net book value of which were $16,478 and
$28,638 at December 31, 1997 and 1996, respectively.
The future minimum annual lease obligations under these leases for the
respective years ending December 31 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
1998................................................... $ 18,528 $42,234
1999................................................... 8,249 17,014
2000................................................... -- 2,936
-------- -------
Total obligation............................. 26,777 62,184
Less amount representing interest...................... (9,870)
--------
Present value of minimum lease payments................ 16,907
Less current portion................................... (11,731)
--------
Long-term obligation................................... $ 5,176
========
</TABLE>
7. RELATED PARTY TRANSACTIONS
In July 1989, the Company entered into an Agreement (the "Carley
Agreement") with the Carley Corporation, a company founded by Dr. Adam L.
Carley, a founder of the Company, pursuant to which the Company acquired an
exclusive worldwide license to certain technology (the "Carley Technology") for
the printing of text, graphics and photographic images. In consideration
therefore, the Company issued 268,040 shares of common stock valued at $.0l per
share to the two stockholders of the Carley Corporation and agreed to pay
royalties equal to 5% of cash received in connection with sales of hardware or
software products incorporating the Carley Technology and 33 1/3% on all related
technology sublicensed to third parties, up to $2,400,000. The Carley
Corporation has agreed that upon payment of the total royalty amount it will
assign all rights, title and interest to the Carley Technology, including any
improvements or future developments on the Carley Technology, to the Company.
Upon the assignment the Company has agreed to sublicense the Carley Technology
to the Carley Corporation, on an exclusive and royalty-free basis, for retail
services including but not limited to stores, kiosks and booths for purposes of
picture making and picture reproduction.
F-11
<PAGE> 164
XEROGRAPHIC LASER IMAGES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In December 1993, the Company and Carley Corporation amended the Carley
Agreement such that Carley Corporation shall be paid minimum royalties of: (i)
$75,000 in fiscal year 1994; (ii) $82,500 in fiscal year 1995; and (iii) $90,000
in fiscal year 1996. Additionally, Carley Corporation will be entitled to
additional royalties not to exceed $225,000 in each of these years based on a
percentage of net profit after interest, taxes and the minimum royalty payments.
Effective January 1, 1997, the Company and the Carley Corporation again
amended the Carley Agreement to provide a royalty of 15% of cash receipts from
sales and licenses of products incorporating the Carley Technology, in lieu of
the previous royalty rate of 5% on boards and 33 1/3% of license fees.
Royalties expensed under the Carley Agreement were approximately $222,644,
$90,000 and $82,500 for the years ended December 31, 1997, 1996 and 1995
respectively. Cumulative royalties expensed in connection with this agreement
were $740,229 through December 31, 1997. Accrued expenses at December 31, 1997
includes $222,094 due under the Carley Agreement. (See Note 1).
8. SEVERANCE CHARGES
On November 11, 1993, the Company recorded approximately $380,000 for
severance charges relating to the resignation of the Company's President and
Vice President of Engineering. The cash payments associated with these charges
were completed in November 1997.
9. CAPITAL STOCK
Series A Preferred Stock
On February 22, 1994, the Company completed an offering of 850,000 units,
each consisting of one share of Series A Convertible Preferred Stock and one
Class A redeemable Common Stock Purchase Warrant (see "Warrants"). Through
December 31, 1997, 534,762 shares of Series A Convertible Preferred Stock have
been converted into 445,635 shares of Common Stock. To date, there have been no
dividends paid or accrued on Series A Preferred Stock. Series A Preferred
stockholders are entitled to an annual cumulative dividend of 9% provided net
income exceeds 150% of the aggregate dividend payable, and in any year in which
the Company does not have net earnings after taxes in excess of 150% of the
aggregate dividend payable, no dividend shall be paid.
The number of shares of Common Stock that the Series A Convertible
Preferred Stock is convertible into is subject to adjustment based upon the
occurrence of certain events. Each share of convertible preferred stock is
currently convertible into approximately 2.5 shares of the Company's Common
Stock. At December 31, 1997 the 315,238 shares of Series A Preferred Stock are
convertible into 784,429 shares of Common Stock.
Common Stock
On January 20, 1993, the Company completed an initial public offering of
775,000 units, each consisting of two shares of Common Stock and one redeemable
Common Stock Purchase Warrant. On November 29, 1994, the Company held a Special
Meeting of the Stockholders and authorized a 1-for-6 reverse stock split of the
Company's Common Stock. At December 31, 1997 and 1996 there were 2,039,310 and
1,778,646 shares of Common Stock outstanding, respectively. During 1996 and 1995
the Company awarded 440,000 and 250,000 shares of Common Stock, respectively, to
key employees in lieu of cash compensation.
Warrants
In connection with the Company's initial public offering in January 1993,
the Company issued 775,000 Common Stock Purchase Warrants ("IPO Warrants") at a
price of $5.00 per share if exercised prior to July 12, 1995, and at $7.00 per
share if exercised thereafter until January 12, 1998. The Company also issued
F-12
<PAGE> 165
XEROGRAPHIC LASER IMAGES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
to Thomas James Associates, Inc., a warrant (the "Underwriter's IPO Warrant") to
purchase 77,500 Units, each Unit consisting of two shares of Common Stock, and
one IPO Warrant. The Underwriter's IPO Warrant is exercisable for a four year
period commencing January 20, 1994, at an exercise price of $8.45 per unit.
In connection with the Company's offering of Series A Preferred Stock in
February 1994, the Company issued 850,000 Class A Warrants, each warrant
allowing for the purchase of one share of Common Stock, at a price of $1.1375
per share if exercised prior to August 22, 1997, and at $1.3125 per share if
exercised thereafter until February 22, 1999. The Company also issued to Thomas
James Associates, Inc., a warrant (the "Underwriter's Class A Warrant") to
purchase 85,000 Class A Units, each Class A Unit consisting of one share of
Series A Preferred Stock, and one Class A Warrant. The Underwriter's Class A
Warrant is exercisable for a five year period commencing February 22, 1994, at
an exercise price of $4.80 per Class A Unit.
The exercise price and the number of shares of Common Stock purchasable
upon the exercise of the IPO, Class A, Underwriter's IPO and Underwriter's Class
A Warrants are subject to adjustment upon the occurrence of certain events,
including stock dividends, stock splits, combinations or reclassifications of
the Common Stock, or sale by the Company of shares of its Common Stock at a
price below the then applicable exercise price of the Warrants. Additionally, an
adjustment would be made in the case of a reclassification or exchange of Common
Stock, consolidation or merger of the Company with another corporation or sale
of all or substantially all of the assets of the Company in order to enable
Warrant holders to acquire the kind and the number of shares of stock or other
securities or property receivable in such event by a holder of the number of
shares of Common Stock that might otherwise have been purchased upon the
exercise of the Warrant. No adjustment to the exercise price of the Warrants
will be made for dividends (other than stock dividends), if any, paid on the
Common Stock or for securities issued pursuant to the Company's Stock Option
Plans or other employee benefit plans of the Company.
As a result of certain events, at December 31, 1997 the holders of the IPO
Warrants were entitled to purchase 845,329 shares of Common Stock at a price of
$6.42 per share and the Underwriter's IPO Warrant entitled the holder to
purchase 301,602 shares of Common Stock and one Common Stock Purchase Warrant
for $4.34 per share. These Warrants expired in January, 1998. Additionally, as
of December 31, 1997 the holders of Class A Warrants are entitled to purchase
427,758 shares of Common Stock at $2.61 per share and the Underwriter's Class A
Warrant entitles the Underwriter to purchase 254,765 Class A Units at a price of
$1.60 per Unit. These Warrants expire on February 22, 1999. (See Note 1).
At December 31, 1997, the Company had outstanding 818,462 warrants to the
lenders, including insiders, for financings in 1995 and 1996 and 383,000 other
warrants. These warrants were exercised and 1,201,462 shares of Common Stock
were issued for $31,810 in January and February 1998.
10. EXPORT REVENUES
The Company currently operates in one industry segment. Export product
revenues are generated predominantly from Europe and accounted for approximately
6%, 19% and 16% of total revenues in fiscal years 1997, 1996 and 1995,
respectively.
11. SIGNIFICANT CUSTOMERS
For the year ended December 31, 1997, 1996 and 1995, the Company did not
have any customers that accounted for greater than 10% of total product revenue.
In 1997, three customers accounted for 43%, 33% and 16% of total contract and
license revenue. One customer accounted for 72% of total contract and license
revenues in 1996 and 59% in 1995.
F-13
<PAGE> 166
XEROGRAPHIC LASER IMAGES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
12. SUPPLEMENTARY CASH FLOW INFORMATION
Noncash financing and investing activities are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996 1995
----- ------- ------
<S> <C> <C> <C>
Issuance of common stock for services rendered.... -- 15,325 7,812
Accrued interest converted to subordinated
notes payable................................... -- 13,688 --
</TABLE>
13. SUBORDINATED NOTES PAYABLE
On May 31, 1996, the Company raised $283,688 in a limited private offering
to accredited investors of subordinated nonrecourse promissory notes. Included
in this amount was $13,688 of accrued interest and $75,000 of outstanding debt.
In addition to a note, each subscriber received for each dollar invested a five
year warrant to purchase two shares of the Company's Common Stock at an exercise
price of $.0l per share. Principal and interest will be repaid, if at all,
solely from the Company's pre-tax earnings for each of the five fiscal years
commencing with the fiscal year ending December 31, 1996. Payments, if any, will
be made annually to the holders of the notes within thirty days after the
Company files its Form 10-KSB or its then equivalent form with the Securities
and Exchange Commission. Such annual payments shall not exceed, in the
aggregate, approximately 14% of the Company's pre-tax earnings, and shall not
exceed over the five year term of the notes, three times the principal amount of
the notes.
In January, 1998 the holders of the notes agreed that if the Merger
Agreement (see Note 1) were consummated, the notes could be repaid at face
value.
14. FACTORING AGREEMENT
On December 21, 1995, the Company entered into a financing arrangement with
Silicon Valley Financial Services, a division of Silicon Valley Bank, to borrow
against the Company's outstanding receivables. The advances bear interest at a
monthly rate of 2.5% and require an advance fee of 1%. As of December 31, 1997
and 1996, there were no receivables factored with Silicon Valley Bank.
15. SIGNIFICANT RISKS AND UNCERTAINTIES
In the normal course of business, the Company is exposed to certain risks
and uncertainties which could have an impact on the Company's operations.
Patent protection
The Company protects its products and technology through the use of
patents. There can be no assurance that any patent granted will be enforceable
or provide meaningful protection from competitors.
Foreign customers
The Company derives a portion of its revenues from international sales (See
Note 10). The Company could be adversely affected by changes in foreign laws,
regulations, tariffs, and taxes.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
Pursuant to an amendment to the subordinated notes payable, the notes are
expected to be repaid at face value (see Note 13), therefore, the fair value of
the instruments is considered to be their face value. The fair value of capital
lease obligations approximates their carrying value as they bear interest at
market rates.
F-14
<PAGE> 167
XEROGRAPHIC LASER IMAGES CORPORATION
FINANCIAL STATEMENTS FOR THE QUARTER ENDED MARCH 31, 1998
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 39,832 $ 112,401
Accounts receivable....................................... 21,627 3,667
----------- -----------
Total current assets...................................... 61,459 116,069
----------- -----------
Property and equipment, net................................. 15,465 16,478
Other assets................................................ 3,432 3,432
----------- -----------
Total assets.............................................. 80,356 135,979
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable............................................. $ 110,000 $ --
Accounts payable.......................................... 363,019 237,873
Deferred revenue.......................................... -- 10,000
Accrued expenses.......................................... 276,914 286,216
Accrued payroll........................................... 85,133 101,705
Current portion of capital leases......................... 11,731 11,731
----------- -----------
Total current liabilities................................. 846,798 647,525
----------- -----------
Capital lease obligations................................... 1,049 5,176
Subordinated notes payable.................................. 283,688 283,688
----------- -----------
Total liabilities......................................... 1,131,535 936,390
----------- -----------
Stockholders' equity (deficit)
Series A Preferred stock, $.01 par value; authorized
1,000,000 shares; 315,238 issued and outstanding at
March 31, 1998 and December 31, 1997................... 3,152 3,152
Common stock, $.01 par value; 30,000,000 shares
authorized; 3,574,941 issued and outstanding at March
31, 1998 and 2,039,310 outstanding at December 31,
1997................................................... 35,749 20,393
Additional paid-in capital................................ 8,484,033 8,438,278
Accumulated deficit....................................... (9,574,114) (9,262,234)
----------- -----------
Total stockholders' equity (deficit)...................... (1,051,180) (800,411)
----------- -----------
Total liabilities and stockholders' equity................ $ 80,356 $ 135,979
=========== ===========
</TABLE>
F-15
<PAGE> 168
XEROGRAPHIC LASER IMAGES CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1998 MARCH 31, 1997
------------------ ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Product revenues........................................ $ 2,739 $ 20,054
Contract and license revenues........................... 141,603 241,667
--------- ---------
Total revenues........................................ 144,341 261,721
--------- ---------
Cost and expenses:
Cost of product revenues.............................. 2,052 10,795
Cost of contract and license revenues................. 34,923 40,932
Research and development.............................. 158,401 112,491
Sales and marketing................................... 41,707 7,330
General and administrative............................ 211,342 145,268
--------- ---------
Total cost and expenses....................... 448,426 316,816
--------- ---------
Loss from operations.................................... (304,085) (55,095)
--------- ---------
Other income............................................ 100 4,739
Net interest expense.................................... 7,810 1,725
Provision for taxes..................................... 85 --
--------- ---------
Net loss................................................ $(311,880) $ (52,081)
========= =========
Net loss per common share -- basic...................... $ (0.11) $ (0.03)
Weighted average common and common equivalent shares
outstanding -- basic.................................. 2,807,125 1,778,646
</TABLE>
F-16
<PAGE> 169
XEROGRAPHIC LASER IMAGES CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1998 MARCH 31, 1997
------------------ ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss.............................................. $(311,880) $ (52,081)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization......................... 1,013 4,678
Increase (decrease):
Accounts receivable................................ (17,960) 13,743
Increase (decrease):
Accounts payable................................... 125,147 (3,142)
Deferred revenues.................................. (10,000) (41,667)
Accrued expenses................................... (9,302) (94,929)
Accrued payroll.................................... (16,571) --
Accrued severance costs............................ -- (22,144)
--------- ---------
Net cash used in operating activities................... (239,553) (195,542)
--------- ---------
Cash flows from financing activities:
Issuance of common stock.............................. 61,111
Payments under capital lease obligations.............. (4,127) (2,933)
Issuance of Note Payable.............................. 110,000 --
--------- ---------
Net cash provided (used) in investing activities........ 166,984 (2,933)
--------- ---------
Net increase (decrease) in cash......................... (72,569) (198,475)
Cash at beginning of period............................. 112,401 219,723
--------- ---------
Cash at end of period................................... $ 39,832 $ 21,248
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest................................ $ 7,810 $ 1,725
</TABLE>
F-17
<PAGE> 170
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998.
--------------
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-11236
XEROGRAPHIC LASER IMAGES CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 51-0319174
- - ------------------------------ ----------------------------------
State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
101 Billerica Avenue, 5 Billerica Park, North Billerica, MA 01862
- - ------------------------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
(978) 670-5999
--------------------------------------------------
(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 requirement for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of Stock, as of the latest practicable date.
Class Outstanding at May 6, 1998
------- --------------------------
Common Stock, $.01 par value
per share 3,574,941 *
Series A Convertible Preferred
Stock, $.01 par value
per share 315,238
*Common stock assuming conversion of the outstanding Series A
convertible preferred shares equals 4,359,370 shares.
Transitional Small Business Disclosure Format:
Yes No X
----- -----
<PAGE> 171
XEROGRAPHIC LASER IMAGES CORPORATION
INDEX
PAGES
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Balance Sheets as of March 31, 1998
(unaudited) and December 31, 1997 4
Statements of Operations for the three
month period ended March 31, 1998 and
1997 (unaudited) 5
Statements of Cash Flows for the three month
period ended March 31, 1998 and 1997
(unaudited) 6
Notes to Financial Statements
(unaudited) 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8-10
PART II OTHER INFORMATION
Item 1 Legal Proceedings
Item 2 Changes in Securities
Item 3 Defaults Upon Senior Securities
Item 4 Submission of Matters to a Vote of Security-Holders
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K 11
Signature 12
<PAGE> 172
Xerographic Laser Images Corporation
Balance Sheets
<TABLE>
<CAPTION>
March 31 December 31
1998 1997
---------- -----------
<S> <C> <C>
ASSETS
- - ------
Current assets:
Cash $39,832 $112,401
Accounts receivable 21,627 3,667
---------- ---------
Total current assets 61,459 116,069
---------- ---------
Property and equipment, net 15,465 16,478
Other assets 3,432 3,432
---------- ---------
Total assets 80,356 135,979
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- - ----------------------------------------------
Current liabilities:
Notes payable $110,000 $ -
Accounts payable 363,019 237,873
Deferred revenue - 10,000
Accrued expenses 276,914 286,216
Accrued payroll 85,133 101,705
Current portion of capital leases 11,731 11,731
---------- ---------
Total current liabilities 846,798 647,525
---------- ---------
Capital lease obligations 1,049 5,176
Subordinated notes payable 283,688 283,688
---------- ---------
Total liabilities 1,131,535 936,390
Stockholder's equity (deficit)
Series A Preferred stock, $.01 par value;
authorized 1,000,000 shares; 315,238
issued and outstanding at March 31, 1998
and December 31, 1997 3,152 3,152
Common stock, $.01 par value; 30,000,000
shares authorized: 3,574,941 issued and
outstanding at March 31, 1998 and
2,039,310 outstanding at December 31, 1997. 35,749 20,393
Additional paid-in capital 8,484,033 8,438,278
Accumulated deficit (9,574,114) (9,262,234)
---------- ----------
Total stockholders' equity (deficit) (1,051,180) (800,411)
---------- ----------
Total liabilities and stockholders' equity $80,356 $135,979
========== ==========
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE> 173
<TABLE>
Xerographic Laser Images Corporation
Statements of Operations
<CAPTION>
Three Months Ended Three Months Ended
March 31 March 31
1998 1997
(unaudited) (unaudited)
----------------- ------------------
<S> <C> <C>
Product revenues $2,739 $20,054
Contract and license revenues 141,603 241,667
---------- ----------
Total revenues 144,341 261,721
Cost and expenses:
Cost of product revenues 2,052 10,795
Cost of contract and license revenues 34,923 40,932
Research and development 158,401 112,491
Sales and marketing 41,707 7,330
General and administrative 211,342 145,268
---------- ----------
Total cost and expenses 448,426 316,816
Loss from operations (304,085) (55,095)
Other income 100 4,739
Net interest expense 7,810 1,725
Provision for Taxes 85 -
---------- ----------
Net loss ($311,880) ($52,081)
========== ==========
Net loss per common share - basic ($0.11) ($0.03)
Weighted average common and common
equivalent shares outstanding-basic 2,807,125 1,778,646
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE> 174
<TABLE>
Xerographic Laser Images Corporation
Statements of Cash Flows
<CAPTION>
Three Months Ended Three Months Ended
March 31 March 31
1998 1997
(unaudited) (unaudited)
------------------ -----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($311,880) ($52,081)
Adjustments to reconcile net loss to net cash
Used in operating activities:
Depreciation and amortization 1,013 4,678
(Increase) decrease:
Accounts receivable (17,960) 13,743
Increase (decrease):
Accounts payable 125,147 (3,142)
Deferred revenues (10,000) (41,667)
Accrued expenses (9,302) (94,929)
Accrued payroll (16,571) -
Accrued severance costs - (22,144)
---------- ----------
Net cash used in operating activities (239,553) (195,542)
---------- ----------
Cash flows from financing activities:
Issuance of common stock 61,111 -
Payments under capital lease obligations (4,127) (2,933)
Issuance of Note Payable 110,000 -
---------- ----------
Net cash provided (used) in investing activities 166,984 (2,933)
---------- ----------
Net increase (decrease) in cas (72,569) (198,475)
Cash at beginning of period 112,401 219,723
---------- ----------
Cash at end of period $39,832 $21,248
========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest $7,810 $1,725
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE> 175
XEROGRAPHIC LASER IMAGES CORPORATION
Notes to Financial Statements
March 31, 1998
1. Nature of Business and Basis of Presentation
---------------------------------------------
In the first quarter of 1998, the Company continued to focus on the design and
development of ASIC and VHDL (Virtual Hardware Description Language)
enhancement product offerings for the OEM printer and printer controller market.
During 1997 the Company delivered VHDL modules to OEMs and introduced the XLI-
2050 ImageChip ASIC (Application Specific Integrated Circuit) that incorporates
all of the Company's current enhancement technology into one chip design. The
Company hopes to increase revenue through additional licensing of the ImageChip
technology and through sales of its ImageChip ASICs to OEMs. The Company's
strategy is to become the primary distributor of its ImageChip ASICs rather
than solely a licensor of the ImageChip technology. The Company believes that
its revenues and gross margins will ultimately be greater from chip sales than
from royalties earned pursuant to technology licenses. Production quantities
of the ImageChip are planned for the second half of 1998. The Company also
plans to add additional engineering resources in 1998 in order to meet the
demands from existing and anticipated OEM agreements. This will result in
increased research and development costs that may negatively affect cash flow.
On January 29, 1998 the Company entered into a Plan of Reorganization and
Agreement of Merger by and among Oak Technology, Inc., Pixel Magic, Inc., and
OTI Acquisition Corporation ("OTI") pursuant to which OTI will be merged with
and into the Company and the Company will become a wholly-owned subsidiary of
Pixel Magic, Inc., which is a wholly-owned subsidiary of Oak Technology, Inc.
The ASIC products of Pixel Magic and XLI are complementary to each other and
are targeted to the same printer/digital copier market. The Company believes
that the merger should enhance XLI's ability to bring its products to the OEM
market. The merger is subject to the approval of the Company's shareholders.
During the first quarter or 1998, the Company continued working with a licensee
on the design and development for a scaling/enhancement ASIC for flat-panel
displays. Although this technology is an extension of the Company's
Technology outside the printer market, there are no current plans to market
such a product and, if done so, there is no assurance that this product would
have market acceptance.
In February 1998, the Company entered into a license agreement with QMS, Inc.,
(a provider of printing products to end users and printer controllers to OEMs)
for the purchase of ImageChips. Including the agreement with QMS, the Company
has entered into seven license agreements for its ImageChip Technology to
date. The information furnished has been prepared from the Company's accounts
without audit. In the opinion of management, all adjustments and accruals
(consisting only of normal recurring adjustments), which are necessary for a
fair presentation of operating results, are reflected in the accompanying
financial statements. Certain information and footnote disclosures normally
included in the Company's annual financial statements have been condensed or
omitted. These interim financial statements should be read in conjunction
with the audited financial statements for the year ended December 31, 1997,
which are contained in the Company's 1997 Form 10-KSB filed with the
Securities and Exchange Commission.
<PAGE> 176
2. Net Loss per Common Share
-------------------------
Net loss per share is computed based upon the weighted average number of
common shares outstanding. Common equivalent shares are not included in the
per share calculations as the effect of their inclusion would be nondilutive.
3. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
- - ---------------------
The Private Securities Litigation Reform Act of 1995 contains safe harbor
provisions regarding forwarding-looking statements. Except for historical
information contained herein, the matters discussed in this section contain
potential risks and uncertainties, including, without limitation, risks
related to the ability of XLI (hereinafter referred to in this section as the
"Company") to successfully develop, test, product and market its proposed
products, identify and attract partners to help market its proposed products,
identify and attract partners to help commercialize the Company's products;
attract and retain key employees; obtain meaningful patent protection to
cover the Company's proprietary technology; raise capital for future
operations and commercialization of its products; and successfully respond to
technological changes in the marketplace. The Company will need to complete
the pending merger to attract partners in order to exploit its products, and
there can be no assurance that the Company will be successful in completing
such transactions. Additional information regarding potential factors which
could affect the Company's financial results are included in the Company's
public filings with the Securities and Exchange Commission.
Results of Operations
The Company's strategy is to develop core ideas derived from XLI's current
technology, then design products incorporating such ideas for production in
collaboration with strategic partners.
Revenues for the first quarter of 1998, which ended March 31, 1998 were
$144,341, a decrease of approximately 45% from 1997's first quarter revenues
of $261,721. Product revenues were $2,739 and contract and license revenues
were $141,603 for the first quarter of 1998, as compared to product revenues
of $20,054 and contract and license revenues of $241,667 for the same period
in 1997. The decrease in product revenues of $17,315 or approximately 86% was
attributable to a reduction in revenues from sales of board products. XLI
ceased the production and promotion of its board products in the second half of
1996, and is in the process of selling off its remaining board inventory. XLI
expects its board product revenues to continue to decrease in the future.
The decrease in contract and license revenues of $100,064 or approximately 41%
was attributable to a reduction in license fees as the Company pursues its
strategy to become the primary distributor of its ImageChip ASICs rather than
solely a licensor of its technology.
Cost of product revenues for the quarter ended March 31, 1998 was $2,052 as
compared to $10,795 for the quarter ended March 31, 1997. The decrease of
$8,743 or approximately 81% was attributable to the decrease in product revenue
resulting from fewer sales of board products. Cost of contract and license
revenues for the quarter ended March 31, 1998 was $34,923 as compared to
$40,932 for the quarter ended March 31, 1997. The decrease of $6,009 or
approximately 15% was attributable to the decrease in contract and license
revenues. The cost of contract and license revenues for the quarter ended March
31, 1998 represents a higher percentage of contract and license revenues than
for the quarter ended March 31, 1997 because of increased engineering costs
associated with the generation of contract revenues combined with the decrease
in license revenue.
The Company recorded a net loss of $311,880 for the first quarter of 1998, as
compared to a net loss of $52,081 for the same period in 1997. The increase
is attributable primarily to the decrease in contract and license revenues of
$100,064 and the increase in cost and expenses of $131,610.
The Company's gross margin on total revenue was 75% for the first quarter of
fiscal year 1998 compared to 81% for the same period in 1997. The decrease
in gross margin was mostly due to the decrease in contract and license
revenue of $100,064.
Research and development costs for the three month period ended March 31, 1998
were $158,401 or approximately 110% of revenues as compared to $112,491 or
approximately 43% of revenues for the three month period ended March 31, 1997.
The increase in 1998 of $45,910 was primarily attributable to the hiring of
additional personnel and to associated expenses to support the increase in
ASIC and VHDL development activity. The Company's ongoing engineering
emphasis continues to be on the development of image enhancement ASICs.
Selling and marketing expenses for the three month period ended March 31, 1998
were $41,707 or approximately 29% of revenues as compared to $7,330 or
approximately 3% of revenues for the three month period ended March 31, 1997.
The increase of $34,377 is primarily attributable to the hiring of a vice
president of marketing and sales in late 1997 and expenses associated with
the introduction of the XLI-2050 ImageChip.
General and administrative expenses for the three month period ended March 31,
1998 were $211,342 or approximately 147% of revenues as compared to $145,268
or approximately 50% of revenues for the three month period ended March 31,
1997. The increase of $66,074 is primarily attributable to costs incurred in
connection with the proposed merger with OTI Acquisition Corporation.
<PAGE> 177
Liquidity and Capital Resources
At March 31, 1998 the Company had current assets of $61,459, current
liabilities of $846,798 and cash of $39,832, resulting in a working capital
deficit of $785,339. For the quarter ended March 31, 1998, the Company had
a negative cash flow from operations of $239,553.
In connection with the Merger Agreement, XLI and Oak entered into a Promissory
Note and Agreement on April 24, 1998 (the "Note and Agreement") pursuant to
which Oak Technology, Inc. ("Oak") agrees to advance to XLI such amounts as
XLI may request for working capital purposes, up to $500,000. XLI promises
to pay to Oak the principal sum of $500,000, or such lesser principal amount,
as the case may be, at an interest rate equal to the Prime Rate plus one-half
percent. All principal and accrued interest shall be due on August 31, 1998.
If the Reorganization Agreement has not closed on or before August 31, 1998,
then the principal and accrued interest shall at the option of the Lender
either convert to a prepaid royalty under that Technology License and Supply
Agreement entered into on October 15, 1997 by and between Pixel Magic, Inc.,
a Massachusetts corporation and wholly owned subsidiary of Lender, and
Borrower or be immediately due and payable. Lender shall provide written
notification to Borrower on August 31, 1998, indicating the form of repayment
it has chosen.
The Company plans to finance its operations from its available cash and
through the working capital line provided by Oak.
Capital Expenditures
The Company does not have any material commitments for capital expenditures
at this time.
<PAGE> 178
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not currently involved in any material
legal proceedings.
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security-Holders
No matters were submitted to a vote of security-holders
During the period covered by this report.
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibit is filed herewith:
Exhibit Number Title
-------------- -------
10.47 Promissory Note and Agreement
dated April 24, 1998 between
Oak Technology, Inc. and XLI
(b) Form 8-K filed by the Company on February 3, 1998 to announce
the signing of the Plan of Reorganization and Agreement of Merger
by and among Oak Technology, Inc., Pixel Magic, Inc., OTI
Acquisition Corporation and Xerographic Laser Images
Corporation.
<PAGE> 179
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Xerographic Laser Images Corporation
(Company)
Date: May 13, 1997 By: /s/ James L. Salerno
------------ -----------------------------
James L. Salerno, Chief Financial
Officer (Principal Financial and
Accounting Officer)
<PAGE> 180
Exhibit 10.47
PROMISSORY NOTE AND AGREEMENT
("Note and Agreement")
$500,000.00 Sunnyvale, California
April 24, 1998
FOR VALUE RECEIVED, Xerographic Laser Images, a Delaware Corporation
("Borrower"), hereby promises to pay to the order of Oak Technology, Inc., a
Delaware corporation ("Lender"), the principal sum of FIVE HUNDRED THOUSAND
DOLLARS ($500,000.00) or such lesser amount as shall equal the outstanding
principal amount of all sums advanced to Borrower hereunder and to pay
interest on the outstanding balance of said sum at a rate per annum equal to
the Prime Rate (as defined below) plus one-half percent (0.50%), such rate of
interest to change as the Prime Rate shall change. The "Prime Rate" shall be,
for any day, the rate of interest in effect for such day as published by the
Federal Reserve Board from time to time in its Statistical Release H.15 (519)
under the heading "Bank prime loan". Any change in the Prime Rate shall take
effect at the opening of business on the day specified in the publication
of such change. All principal and accrued interest hereunder shall be due
and payable on August 31, 1998. If the Reorganization Agreement (defined
below) has closed on or before August 31, 1998, then the principal and
accrued interest shall become an intercompany debt and be eliminated in the
purchase accounting related to the Reorganization Agreement and this Note and
Agreement shall terminate. If the Reorganization Agreement has not closed on
or before August 31, 1998, then the principal and accrued interest shall at
the option of the Lender either convert to a prepaid royalty under that
Technology License and Supply Agreement entered into on October 15, 1997 by
and between Pixel Magic, Inc. a Massachusetts corporation and wholly owned
subsidiary of Lender, and Borrower or be immediately due and payable. Lender
shall provide written notification to Borrower on August 31, 1998, indicating
the form of repayment it has chosen.
All computations of interest under this Note and Agreement shall be
based on a year of 365 or 366 days, as applicable, for actual days elapsed.
In the event that, contrary to the intent of Lender and Borrower, Borrower
pays interest under this Note and Agreement and it is determined that such
interest rate was in excess of the then legal maximum rate, then that portion
be deemed a payment of principal and applied against the principal then due
under this Note and Agreement.
Reorganization Agreement:
This Note and Agreement is being entered into in connection with the
Plan of Reorganization and Agreement of Merger dated as of January 29, 1998
(as the same may be amended, restated, supplemented or otherwise modified
pursuant to the terms thereof, the"Reorganization Agreement") by and between
Borrower, Lender, OTI Acquisition Corporation and certain party stockholders
of Borrower. Capitalized terms used herein and not otherwise defined shall
have the respective meanings set forth in the Reorganization Agreement.
<PAGE> 181
Conditions to Advances, Use of Proceeds, Covenants:
Amounts shall be advanced to Borrower under this Note and Agreement
solely in accordance with the terms and conditions set forth in this Note
and Agreement, including Schedule A attached hereto and incorporated herein
by this reference. Borrower shall use the proceeds of any amount advanced
under this Note and Agreement solely for its normal working capital in the
ordinary course of business. Until the termination of this Note and
Agreement or payment in full by Borrower of all amounts outstanding under
this Note and Agreement, Borrower agrees that it shall comply with and duly
perform all of its covenants, obligations and agreement set forth in the
Reorganization Agreement, which are hereby incorporated herein by reference
as if fully set forth herein.
Borrower agrees to pay on demand: (i) all reasonable costs and
expenses of Lender, and the reasonable fees and disbursements of counsel, in
connection with the enforcement or attempted enforcement of, and preservation
of any rights or interests under, this Note and Agreement, including in any
out-of-court workout or other refinancing or restructuring or in any
bankruptcy case. Any amounts payable to Lender pursuant to this paragraph if
not paid upon demand shall bear interest from the date of such demand until
paid in full, at the rate of interest set forth herein in respect of
principal outstanding hereunder.
If at any time any provision of this Note and Agreement is or become
illegal, invalid or unenforceable in any respect, neither the legality,
validity nor enforceability of the remaining provisions shall in any way be
affected or impaired thereby.
Any term, covenant, agreement or condition of this Note and Agreement
may be amended or waived if such amendment or waiver is in writing and is
signed by Borrower and Lender. No failure or delay by Lender in exercising
any right or remedy hereunder shall operate as a waiver thereof or of any
other right or remedy nor shall any single or partial exercise of any such
right or remedy preclude any other further exercise thereof or of any other
right or remedy. The acceptance at any time by Lender of any past due amount
hereunder shall not be deemed to be a waiver of the right to require prompt
payment when due of any other amounts then or thereafter due and payable.
Unless otherwise specified in such waiver or consent, a waiver of consent
given hereunder shall be effective only in the specific instance and for the
specific purpose for which given.
This Note and Agreement shall be binding upon and inure to the benefit
of Borrower, Lender, and their respective successors and permitted assigns,
except that Borrower may not assign or transfer any of its rights or
obligations under this Note and Agreement without the prior written consent
of Lender.
Nothing expressed in or to be implied from this Note and Agreement is
intended to give, or shall be construed to give, any person or entity, other
than the parties hereto and their permitted successors and assigns hereunder,
any benefit or legal or equitable right, remedy or claim under or by virtue
of this Note and Agreement or under or by virtue of any provisions herein.
The words "hereof", "herein", "hereunder" and similar words refer to
this Note and Agreement as a whole (including the Schedules attached hereto)
and not to any particular provision of this Note and Agreement.
Borrower hereby waives presentment, demand, protest, notice of
dishonor and all other notices, except as expressly provided herein, any
release or discharge other than actual payment in full hereof.
This Note and Agreement shall be construed in accordance with and
governed by the laws of the State of California, excluding conflict of laws
principles.
All notices and other communications hereunder shall be given as
provided in Section 12.9 of the Reorganization Agreement.
IN WITNESS WHEREOF, the undersigned duly authorized officer of
Borrower has executed this Note and Agreement as of the date set forth above.
By: /s/ Anthony D. D'Amelio
--------------------------
Name: Anthony D. D'Amelio
Title: President & CEO, XLI
By: /s/ William L. Siddall
-------------------------
William L. Siddall
Vice President, Operations
Pixel Magic, Inc.
<PAGE> 182
APPENDIX D
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended June 30, 1997 Commission File No. 0-25298
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
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 of organization) Identification No.)
139 KIFER COURT 94086
SUNNYVALE, CALIFORNIA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 737-0888
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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 past 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference to Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $393,381,158 as of August 29, 1997, based upon the
closing price of the Registrant's Common Stock on the Nasdaq National Market
reported for August 29, 1997. Shares of Common Stock held by each executive
officer and Director and by each person who beneficially owns more than 5% of
the outstanding Common Stock have been excluded in that such persons may under
certain circumstances be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination of affiliate
status for any other purpose.
41,732,212 shares of the Registrant's $.001 par value Common Stock were
outstanding at August 29, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents (or portions thereof) are incorporated by reference into
the Parts of this Form 10-K noted:
Part III incorporates by reference from the definitive proxy statement for the
Registrant's 1997 Annual Meeting of Stockholders to be filed with the Commission
pursuant to Regulation 14A not later than 120 days after the end of the fiscal
year covered by this Form.
1
<PAGE> 183
PART I
ITEM 1. BUSINESS
Except for the historical financial information contained herein, the
matters discussed in this Annual Report on Form 10-K 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. Among the important factors that
could cause actual results to differ materially from those indicated by such
forward-looking statements are: (i) that the information is of a preliminary
nature and may be subject to further adjustment, (ii) variability in the
Company's quarterly operating results, (iii) general conditions in the
semiconductor industry, (iv) risks related to pending legal proceedings, (v)
development by competitors of new or superior products or the entry of new
competitors into the Company's markets, (vi) the Company's ability to diversify
its product and market base by developing and introducing new products within
designated market windows at competitive price and performance levels, (vii)
willingness of prospective customers to design the Company's products into their
products, (viii) availability of adequate foundry capacity and access to process
technologies, (ix) the Company's ability to protect its proprietary information
and obtain adequate licenses of third party technology on acceptable terms, (x)
risks related to use of independent manufacturers and third party assembly and
test vendors, (xi) dependence on key personnel, (xii) reliance on a limited
number of large customers, (xiii) dependence on sales of CD-ROM controller
products, (xiv) risks related to international business operations, (xv) ability
of the Company to maintain adequate price levels and margins with respect to its
products, (xvi) management of changing operations related to the Company's
attempt to diversify its product and market base, (xvii) risks related to
product defects, (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.
GENERAL
Oak Technology, Inc. (the "Company") designs, develops and markets
high-performance integrated semiconductors and related software solutions to
original equipment manufacturers (OEMs) worldwide that serve the PC, consumer
electronics and digital office equipment markets. The Company provides
semiconductor products for these markets by leveraging its expertise in five
core technologies: optical storage, MPEG imaging, video/graphics,
audio/communications and digital imaging. The Company's products typically
consist of hardware, firmware, and software to provide a complete solution for
customers.
The Company was incorporated in California on July 2, 1987 and
reincorporated in Delaware on February 8, 1995. The Company's principal
executive offices are located at 139 Kifer Court, Sunnyvale, California 94086
and its telephone number is (408) 737-0888. The Company has wholly owned
subsidiaries in Japan (Oak Technology K.K.), Taiwan (Oak Technology Taiwan) and
Andover, Massachusetts (Pixel Magic, Inc.). Except where otherwise indicated,
references to the "Company" refer to Oak Technology, Inc., a Delaware
corporation, its California predecessor and their subsidiaries.
BUSINESS STRATEGY
The Company's objective is to be a leading supplier of
high-performance, integrated semiconductors and related software that address
segments of the PC, consumer electronics, and digital office equipment markets.
The Company's strategy for achieving this objective includes the following
elements:
Maintain and Leverage Leadership Position in CD-ROM Market and Expand into
Additional Optical Storage Market Segments
The Company pioneered the IDE/ATAPI CD-ROM controller chip in 1993 and
is one of the industry's largest merchant suppliers of CD-ROM controllers. The
Company has established customer relationships with many of the leading CD-ROM
drive manufacturers and, through these relationships, seeks to obtain input
directly from its customers regarding the optimal features for its next
generation of optical storage controllers. Based on such input, the Company has
invested substantial resources in developing and introducing to market CD-ROM
controllers with advanced features and higher levels of integration. During the
fiscal year ended June 30, 1997 ("fiscal 1997"), the Company began to expand
into additional optical storage market segments with the introduction of optical
storage semiconductors for use in CD-Recordable (CD-R) and CD-ReWritable (CD-RW)
drives. The Company is seeking to leverage its current leadership position in
the CD-ROM and CD-R/RW controller markets by pursuing the development of
additional optical storage semiconductors for use in such emerging markets as
DVD-ROM drives and DVD players.
2
<PAGE> 184
Diversify Product Offerings and Geographic Markets
The Company's revenue during the last three fiscal years has consisted
primarily of sales of CD-ROM controllers to CD-ROM drive manufacturers in Asia.
In addition to introducing optical storage products for the CD-R/RW markets,
during fiscal 1997, the Company increased its presence in both the consumer
electronics market with its MPEG-1 product and the introduction of its MPEG-2
product and in the emerging digital office equipment market with the
introduction of the PM-44 and PM-35 through its Pixel Magic subsidiary. In
addition, in fiscal 1997, the Company announced new audio/communications and
video/graphics products. If these new products are successfully designed-in,
brought to production, and the Company's customers are successful with their
products utilizing the Company's products, the Company's overall business should
become diversified among a broader spectrum of customers, geographic regions,
and markets.
Use the Company's Five Core Technologies to Develop Integrated Products
The Company uses its five core technologies - optical storage, MPEG
imaging, video/graphics, audio/communications and digital imaging - to develop
products for three market segments: PC, consumer electronics, and digital office
equipment. In these market segments, the Company has seen an increased demand
for multiple functionalities to be contained in a single product. The Company
believes leading-edge technology in multiple areas is required for the
development of integrated, high-performance, low-cost solutions for these
markets. The Company has several integrated products under development which
leverage a combination of its core technologies.
Provide Comprehensive Solutions
The Company's multimedia semiconductor products are subsystems that
include both hardware and software to provide a complete solution for customers.
The Company has committed substantial resources to the development of its
software technology and believes that this technology provides it with a
significant competitive advantage. The Company maintains software compatibility
for each successive generation of its products. As a result, its firmware and
device drivers are easily upgraded to include support for the enhanced features
of the Company's next-generation semiconductor products. The Company's device
drivers are designed to simplify installation and end-user operation, enabling
its customers to offer products with "plug and play" capabilities.
Accelerate Customers' Time to Market
Being early to market is critical to capturing market share and
profits. The Company builds relationships with key customers and seeks to
provide them with early access to the Company's product technologies, thereby
assisting customers in reaching their markets quickly. By providing integrated
hardware and software as well as engineering reference boards complete with
device drivers and firmware, the Company can assist a customer in shortening the
design time required prior to volume production. Furthermore, by providing a
comprehensive hardware and software solution, the Company enables its customers
to concentrate on system differentiation.
PRODUCTS
The Company offers or has introduced products based on five core
technologies: optical storage, MPEG imaging, video/graphics,
audio/communications, and digital imaging.
Optical Storage
The Company began shipping its proprietary interface CD-ROM controller,
the OTI-012, in January 1993. In October 1993, the Company began production
shipments of an IDE/ATAPI CD-ROM controller, the OTI-011C followed by the
OTI-011D. Today, the Company is supplying the industry's fastest controller in
production volume, the OTI-912, supporting transfer rates up to 40X. Recently
the Company introduced the OTI-9220, the first device to integrate four major
CD-ROM functions for a single-chip solution. The Company has also expanded into
new optical storage market segments with its CD-R/W and CD-R products.
- OTI-910 IDE/ATAPI CD-ROM Controller. The OTI-910 provides a
significantly faster data throughput than the OTI-011 by transferring data
across the IDE interface in ATAPI Mode 3. The OTI-910 also supports multi-block
transfer across the IDE bus, which allows the controller to increase data
transfer rates as well as system performance. In addition, the OTI-910 provides
Direct Memory Access (DMA) support. The Company has experienced and will
continue to experience a sharp decline in sales of this product as the Company's
customers require optical storage controllers with faster transfer rates and
higher performance and advance features such as those exhibited in the Company's
OTI-911 and OTI-912 products.
- OTI-911 IDE/ATAPI CD-ROM Controller. Based upon the OTI-011 and
OTI-910, this controller allows for increased disc speed and reduces CPU
utilization. In addition, the firmware for this controller takes advantage of
improvements made in device drivers included in the latest versions of Microsoft
Windows 95, NT, and IBM OS/2. This firmware increases performance and lowers
system cost by supporting lower speed DRAM. Sales of the OTI-911 have begun to
decline and the Company expects that sales will continue to decline as the
Company's customers
3
<PAGE> 185
require optical storage controllers with faster transfer rates, higher
performance and advance features such as exhibited by the Company's OTI-912
product.
- OTI-912 IDE/ATAPI CD-ROM Controller. This high-performance block
decoder supports a transfer rate of 40X enabling 16X pure constant angular
velocity ("CAV") CD-ROM drives. These CAV drives provide higher average transfer
rates and faster seek times, and their constant speed produces less motor
stress. The chip also includes an industry first known as "nX-to-1X" audio
playback, which allows the device to read audio data at an 8X rate, buffer the
data, and play the data back at a 1X rate.
- OTI-9220 IDE/ATAPI Four-in-One CD-ROM Controller. The OTI-9220
combines four major functions of a CD-ROM drive (CD-DSP, servo, block decoder,
and 1Mb of DRAM) to deliver an industry-first single-chip solution.
Manufacturers of CD-ROM drives for notebook computers and desktop systems will
now be able to utilize an "all-in-one" solution combining proven discrete
components from a single source while also reducing system cost, size, and power
requirements.
- OTI-975 CD-Recordable, Rewritable Controller. The OTI-975 is a
high-performance block decoder/encoder device for IDE CD-R/RW subsystems. The
OTI-975's read functions include CD data descrambling, real-time error
correction and data transfer to the host interface. The OTI-975's write
functions include block encoding, data scrambling, C3 error correction byte
generation and data transfer from the host interface.
MPEG Imaging
The Company believes compression/decompression technology will be
required in many of its future multimedia products targeted for the PC and
consumer electronics markets. The Company currently offers two imaging
decompression products: an integrated MPEG-1 audio/video decoder with CD-ROM
interface, and an MPEG-2 video/Dolby Digital audio decoder. In addition, the
Company has developed a software DVD environment with its Interactive DVD
Browser(TM).
- OTI-207 MPEG-1 Audio/Video Decoder. The OTI-207 is a single chip
MPEG-1 audio and video decoder with an integrated CD-ROM controller. Targeted
for use in Video CD players, it reduces the design complexity and implementation
cost compared to non-integrated solutions.
- Troika(TM) MPEG-2 Video/Dolby Digital Audio Decoder. The Troika
integrated circuit is a single-chip solution for DVD and DVD-PC systems that
require MPEG decompression. The Troika chip provides real-time MPEG-2 and MPEG-1
video decompression, incorporated with Dolby Digital (AC-3), and Linear PCM
(LPCM) audio decompression. Sub-picture decoding, DCC, Closed Caption, DSI, PCI,
and HLI parsing are provided for graphical interface to full-motion video, and
OSD and Digest functions are provided for user-interface graphics. Full-motion
video editing formats such as letterbox, pan & scan, and unaided 3:2 pull-down
are supported by Troika.
- Interactive DVD Browser(TM). The Interactive DVD Browser (IDB(TM))
software product provides a complete DVD environment for the PC. It is fully
compliant with Windows 95 ActiveMovie 1.0. The Interactive DVD Browser is
capable of supporting software, hardware, and hybrid DVD implementations on the
PC.
Video/Graphics
Video/graphics accelerators complement the CPU by relieving it of the
graphics processing tasks that it would otherwise be required to perform. The
Company's graphics controllers deliver powerful video/graphics acceleration
capabilities to consumer and business PCs. The Company's most recent
introduction to this market, the Warp (TM) 5 integrated circuit, is a 64-bit 3D
graphics accelerator that sets a new benchmark in image quality for 3D game
applications. The Company currently offers the following video/graphics
accelerators:
- Eon(TM) OTI-64217. The Eon integrated circuit is a 64-bit
video/graphics accelerator with an integrated 170Mhz RAMDAC and supports both
EDO memory as well as higher performance SGRAM memory. The device's
single-clocked, pipelined GrafixPump(TM) architecture provides maximum
performance from display memory and features acceleration for the Microsoft
Direct3D(TM) specification. Its integrated VMI-compliant (VESA Multimedia
Interface) bus provides an interface to industry-standard multimedia components.
- OTI-64017. The OTI-64017 is based upon the OTI-64217 but does not
include the 64217's external bus interfaces to other multimedia devices. The
OTI-64017 is ideally suited for business PCs and entry-level consumer PCs which
require high-performance 2D graphics with support for DirectX applications.
To date, the Company has failed to achieve any design wins with either
the OTI-64217 or the OTI-64017 product and consequently, has made extremely
limited sales of these products. As 2D graphic accelerators are rapidly becoming
obsolete due to the availability and competitive pricing of high performance 3D
graphics accelerators, the Company does not expect any significant sales from
these products.
- WARP 5 (Windows Accelerator and Rendering Processor). Utilizing
several innovative industry-first techniques, the WARP 5 integrated circuit sets
a new benchmark in image quality, delivering flight simulator-like 3D
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graphics to mainstream PCs. A highly integrated solution, the WARP 5 integrated
circuit is a full-featured 3D graphics accelerator that combines a
high-performance 2D GUI accelerator, VGA, dual-clock generator, and RAMDAC
functions on a single chip. The WARP 5 chip is fully pin-compatible with Oak's
OTI-64217 Eon 2D GUI accelerator.
Audio/Communications
The growth of multimedia PCs and the ability to connect to the Internet
have increased the need for audio and communication capabilities on the PC as
standard features. The Company offers the following audio/communications
products:
- TelAudia3D(TM) OTI-611. The TelAudia integrated circuit is a
programmable DSP (digital signal processor) audio accelerator with an integrated
PCI bus master interface. Audio features provided by downloadable microcode
include: wavetable synthesis, multichannel digital and MPEG-decoded audio
mixing, hardware acceleration for Microsoft DirectSound(TM) 2D, and true
head-related transfer function (HRTF) 3D sound. The TelAudia chip also provides
complete PC communication capabilities with hardware support for a Host Signal
Processing (HSP)-based V.34 fax/modem. It includes transmit and receive buffers
for the modem, in addition to the modem codec and DAA interfaces.
- Audia3D(TM) OTI-610. The Audia3D integrated circuit is an audio-only
version of the TelAudia chip.
Digital Imaging
With the Company's acquisition of Pixel Magic in 1995, the Company now
offers compression/decompression and image processing technology for digital
office equipment products, such as scanners, printers, fax machines, and
multifunction peripherals. The Company currently offers the following digital
imaging products:
- PM-1V (OTI-95C71). The PM-1V is a high speed bi-tonal image processor
which provides single-pass compression or decompression of image data in G3 and
G4 formats.
- PM-2m. The PM-2m is a high-speed bi-tonal image processor with
multitasking capability. It provides single pass compression or decompression,
scaling and rotation of image data in G3, G4 and JBIG formats.
- PM-2mc. This is a compression-only version of the PM-2m.
- PM-44. The PM-44 is a programmable high-speed image processing device
specifically designed for use in imaging applications. Based on a single
instruction, multiple data path (SIMD) architecture, the PM-44 is designed to
handle image data of any pixel depth. Programmable via downloadable microcode,
the PM-44 can execute scanner, printer, copier and fax imaging algorithms. A
library of imaging algorithms and a development kit for custom algorithm
creation are available.
- PM-35. The PM-35 is a fixed function JPEG (Joint Photographic Experts
Group) compression and decompression processor designed to sustain a data rate
of up to 70Mbytes/second. It is suited for peripheral-based applications such as
color copiers, scanners, and multifunction peripherals.
Software Technology
The Company's products typically include software in addition to
semiconductors. The Company typically provides related software with its
hardware as part of its comprehensive solutions. Substantial engineering
resources have been committed to the development of the Company's software.
The Company's software technology consists of its firmware, device
drivers, BIOS and end-user oriented installation and control software. The
Company maintains software compatibility for each successive generation of its
products. As a result, its firmware and device drivers are more easily upgraded
to include support for the enhanced features of next-generation products.
Software is a key factor in the performance of the Company's products.
Through close cooperation between the Company's software and hardware engineers,
new products are designed to allow the software and hardware to complement each
other. Specific hardware functions are often added to designs to allow the
software engineers to develop software to optimize these functions and therefore
increase overall performance. For example, the Company's CD-ROM firmware
provides low CPU utilization, which improves the overall performance of the
CD-ROM drive.
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MANUFACTURING AND DESIGN METHODOLOGY
Manufacturing
The Company contracts with independent foundries to manufacture all of
its semiconductor products, enabling the Company to focus on its design
strengths, minimize fixed costs and capital expenditures and gain access to
advanced manufacturing facilities. The Company's primary suppliers under such
arrangements during fiscal 1997 were Taiwan Semiconductor Manufacturing Company
("TSMC") and LG Semicon Co. Ltd. in Korea. The Company also uses wafer
fabrication facilities at United Integrated Circuits Corporation ("UICC"),United
Microelectronics Corporation, Chartered Semiconductor Manufacturing Pte. Ltd.
("Chartered"), Rohm, NEC, and Sony. Except as described in the paragraphs below,
the foundries generally are not obligated to supply products to the Company for
any specific period, in any specific quantity or at a specific price, except as
may be provided in a particular purchase order.
In June and November 1995, the Company entered into agreements with
TSMC and Chartered to obtain certain additional wafer capacity through the year
2001 (see Note 7 of Notes to Consolidated Financial Statements). The agreements
call for the Company to commit to certain future wafer purchases and to deposit
funds with the suppliers as either a portion of the price of the additional
wafers in advance of their delivery or as a non-interest bearing deposit to
secure the availability of additional wafers. The price of such wafers will be
determined in the future periods in which specific orders are actually placed.
If the Company is not able to use, assign, or sell the additional wafer
quantities, all or a portion of the deposits may be forfeited.
In October 1996, the Company amended its previous agreement with TSMC
resulting in a reduction of approximately $73 million of the Company's future
wafer purchases required under the original agreement. Under the amended
agreement, no additional prepayment is required; however, the Company must
utilize the entire amount of the prepayment paid to date through a certain
committed amount of wafer purchases in the calendar years 1997, 1998, and 1999
or the prepayment will be forfeited.
In September 1996 and April 1997, the Company amended its agreement
with Chartered. The amendments resulted in a reduction of the Company's future
wafer purchase commitments and the elimination of required future cash deposits
under the original agreement of approximately $36 million. Under the amended
agreement, the required future cash deposits of approximately $36 million could
be reinstated if certain conditions are not met. The Company currently believes
the terms and conditions of the agreement as amended will be met and that these
commitments will not be reinstated although no assurance can be given in this
regard.
The Company recorded $3.0 million in cost of sales during fiscal 1996
associated with manufacturing cost adjustments related to its wafer foundry
agreements as a result of lower forecasted capacity usage during the calendar
year ending December 31, 1996. The execution of these amendments reduced the
Company's wafer purchase commitments during the remainder of calendar 1996 and
thereafter and resulted in a favorable manufacturing cost adjustment recorded to
cost of revenues of $3.0 million. The remaining deposits and prepayments under
the amended foundry agreements described above are recorded at cost and total
approximately $34.2 million as of June 30, 1997. The Company currently
anticipates being able to utilize and fully recover the value of all foundry
prepayments and deposits under the terms of the amended agreements.
Additionally, in October 1995, the Company entered into a series of
agreements with United Microelectronics Corporation to form, along with other
investors, a separate Taiwanese company, UICC, for the purpose of building and
managing a semiconductor manufacturing facility in the Science Based Industrial
Park in Hsin Chu City, Taiwan, Republic of China. The Company has agreed to
invest approximately $60 million for a 10% equity position in the venture. In
January 1996, the Company made an initial payment of $13.7 million under this
agreement. In January 1997, the Company made a second payment of $25.9 million
under this agreement. Cash payments due under these agreements in fiscal 1998
are approximately $15.0 million. As an investor in this venture, the Company
will have rights to a portion of the total wafer capacity for the manufacture of
its proprietary products. However, there can be no assurance that a market will
develop for the shares representing the Company's equity investment at any time
in the future.
The Company is dependent on its foundries to allocate to the Company a
portion of their foundry capacity sufficient to meet the Company's needs to
produce products of acceptable quality and with acceptable manufacturing yields
and to deliver products to the Company in a timely manner. These foundries
fabricate products for other companies and some manufacture products of their
own design. The loss of any of these foundries as a supplier, the inability of
the Company in a period of increased demand for its products to expand the
foundry capacity of its current suppliers or qualify other wafer manufacturers
for additional foundry capacity, any inability to obtain timely and adequate
deliveries from the Company's current or future suppliers or any other
circumstances that would require the Company to seek alternative sources of
supply could delay shipments of the Company's products, which could damage
relationships with its current and prospective customers, provide an advantage
to the Company's competitors and have a material adverse effect on the Company's
business, financial condition and results of operations. Most of the Company's
devices are currently fabricated using complementary metal oxide semiconductor
("CMOS") process technology with 0.5 micron and 0.35 micron feature sizes. The
Company expects to design products for .25 micron
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feature sizes in the future. All of the Company's semiconductor products are
assembled and tested by independent subcontractors.
The Company's reliance on independent manufacturers and third party
assembly and testing vendors involves a number of additional risks, including
the unavailability of, or interruption in access to, certain process
technologies and reduced control over delivery schedules, quality assurance and
costs. In addition, as a result of the Company's dependence on foreign
subcontractors, the Company is subject to the risks of conducting business
internationally, including foreign government regulation and general political
risks, such as political and economic instability, potential hostilities,
changes in diplomatic and trade relationships, currency fluctuations, unexpected
changes in, or imposition of, regulatory requirements, tariffs, import and
export restrictions, and other barriers and restrictions, potentially adverse
tax consequences, the burdens of complying with a variety of foreign laws and
other factors beyond the Company's control. Substantially all of the Company's
agreements with its offshore wafer fabrication and assembly facilities provide
for pricing and payment in U.S. dollars.
The manufacture of semiconductors is a highly complex and precise
process. Minute levels of contaminants in the manufacturing environment, defects
in the masks used to print circuits on a wafer, difficulties in the fabrication
process or other factors can cause a substantial percentage of wafers to be
rejected or a significant number of die on each wafer to be nonfunctional. Many
of these problems are difficult to diagnose, time consuming and expensive to
remedy, all of which can affect the Company's time to market with a particular
product. The Company's products are particularly complex and difficult to
manufacture. There can be no assurance that the Company's foundries will not
experience irregularities or adverse yield fluctuations in their manufacturing
processes. Any yield or other production problems or shortages of supply
experienced by the Company or its foundries could have a material adverse effect
on the Company's business, financial condition and results of operations.
Design Methodology
The Company's products compete in markets that are characterized by
rapidly-developing technology and evolving industry standards. The Company
addresses these issues with a design environment based on workstations,
dedicated product simulators, system simulation with hardware and software
modeling, and use of a high level design description language in order to
define, develop and deliver new and enhanced products more rapidly. The
Company's engineering and design capabilities are significant to its future
performance, and the Company has invested regularly in new advanced equipment
and software tools in an effort to keep these tools updated with the latest
technology. The Company's library of core cells is key to its ability to reduce
the time needed to design new products. Examples of core cells include a VGA
core, a graphics co-processor engine and related graphics functions, a 32-bit
RISC engine, host bus interface technology, a .5 and .35 micron memory compiler
and a .5 and .35 micron I/O library. Design methodology, including equipment and
software tools, is a critical factor with respect to the Company's ability to
successfully develop technology and products, and there can be no assurance that
the Company will be able to obtain the equipment, software tools and other
resources needed to develop technically advanced products in a timely manner.
MARKETING AND CUSTOMERS
From its inception, the Company has been committed to a worldwide
marketing strategy. The Company utilizes a direct sales force in the United
States, Japan and Taiwan and a worldwide network of manufacturers'
representatives and distributors in North America, Europe and Asia. While
customers around the world have many needs in common, each region has its own
requirements. In order to support customers in key geographic markets, the
Company has established sales and support offices in Japan and Taiwan, in
addition to its corporate headquarters in Sunnyvale, California. The Company
believes that sales and technical support personnel based in the Company's
regional offices understand the technical needs, business philosophy and culture
of their respective customers. On-site personnel are trained to respond to
customer needs efficiently and effectively. Additionally, two general managers
of the Company are located in the Company's Asian subsidiaries in Taipei, Taiwan
and Tokyo, Japan to manage local operations and maintain relationships with
their Asian customers.
Sales of the Company's products are made pursuant to purchase orders
and the Company has no long-term sales agreements with any of its customers.
Purchase orders are subject to price renegotiations and to changes in quantities
of products and delivery schedules in order to reflect changes in the customers'
requirements. In addition, in certain circumstances, orders may be canceled at
the discretion of the buyer without penalty. The Company's business, consistent
with that of others in the semiconductor industry, is generally characterized by
short lead time orders. The Company's actual shipments depend on the
manufacturing capacity of the Company's foundries. Therefore, as foundry
capacity tightens, as it has recently, the Company may not be able to meet the
customer's requested delivery date or the Company may have to put its customers
on allocation. Accordingly, due to its dependence on third party manufacturing
capacity, the Company believes that backlog at any particular date may not be
indicative of actual net revenues for any future period.
Sales of the Company's CD-ROM controller products comprised 84%, 91%
and 74% of the Company's net revenues in fiscal 1997, 1996 and 1995,
respectively. Sales of CD-ROM controller products are expected to continue to
account for a substantial majority of the Company's total revenues for the
foreseeable future. The Company expects that as the market for CD-ROM controller
products matures or becomes obsolete due to the
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introduction of DVD-ROM products, sales of such products will decline. Although
the Company is currently pursuing the development of optical storage
semiconductors for use in DVD-ROM drives, there can be no assurance that the
Company will have a DVD-ROM product, that such product will be available within
an acceptable market window or that with such product the Company will be able
to sustain the current level of optical storage product sales. In addition,
there can be no assurance that the market for CD-ROM controller products in
general, or the Company's CD-ROM controller products in particular, will support
the Company's planned operations in the future. Any decrease in the overall
level of sales of, or the prices for, the Company's CD-ROM controller products,
due to introductions of products by present or future competitors, a decline in
demand for CD-ROM controller products, product obsolescence or any other reason
would have a material adverse effect on the Company's business, financial
condition and results of operations. Although the Company has recently
introduced several new products in its attempt to diversify its product and
market base, there can be no assurance that these products will be successfully
designed, accepted by the Company's customers, and brought to production or that
the Company's customer's products will be accepted in the marketplace.
The Company believes that customer service and technical support are
important competitive factors in the PC, consumer electronics and digital office
equipment markets. The Company provides technical support to its customers
worldwide. Using its headquarters and subsidiary offices in Japan, Taiwan and
Andover, Massachusetts, the Company is able to provide prompt technical support
to its customers. In addition, the Company's representatives travel frequently
to customer sites to assist in design-in activity. The Company provides several
other types of technical support, including software distribution through an
electronic bulletin board, evaluation boards, product demonstration software,
engineering design kits and application notes. The Company works closely with
its customers in qualification of its products and providing needed quality and
reliability data. In addition, the Company makes the latest revision of its
software available to its customers and can customize the Company's software to
a customer's specific requirements.
A substantial majority of the Company's revenues in fiscal 1997, 1996
and 1995 were derived outside of the United States, primarily in Asia. The
geographical areas accounting for the Company's net revenues in fiscal 1997,
1996, and 1995 are as follows:
<TABLE>
<CAPTION>
June 30,
-------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Japan ................................... 40.3% 66.1% 51.3%
Other international ..................... 56.1 31.5 41.4
North America ........................... 3.6 2.4 7.3
</TABLE>
Accordingly, the Company is subject to the risks of conducting business
outside of the United States. These risks include unexpected changes in, or
impositions of, legislative or regulatory requirements, delays resulting from
difficulty in obtaining export licenses for certain technology, tariffs, quotas
and other trade barriers and restrictions, longer payment cycles, greater
difficulty in accounts receivable collection, potentially adverse taxes, the
burdens of complying with a variety of foreign laws and other factors beyond the
Company's control. The Company is also subject to general geopolitical risks in
connection with its international operations, such as political, social and
economic instability, potential hostilities and changes in diplomatic and trade
relationships. There can be no assurance that such factors will not adversely
affect the Company's operations in the future or require the Company to modify
its current business practices. In addition, the laws of certain foreign
countries in which the Company's products are or may be developed, manufactured
or sold, including various countries in Asia, may not protect the Company's
products or intellectual property rights to the same extent as do the laws of
the United States and thus make the possibility of piracy of the Company's
technology and products more likely. Most of the Company's foreign sales are
negotiated in U.S. dollars; however, invoicing is often done in local currency.
As a result, the Company may be subject to the risks of currency fluctuations.
There can be no assurance that one or more of the foregoing factors will not
have a material adverse effect on the Company's business, financial condition or
operating results or require the Company to modify its current business
practices.
The Company sells its products principally to manufacturers of CD-ROM
drives, PCs and add-in boards. CD-ROM drives, in turn, are sold to PC OEMs such
as Acer, AST Research, Compaq, Dell, Gateway 2000, IBM, NEC and Packard Bell.
Add-in boards are in turn sold to PC manufacturers or distributors for the
distribution or retail channel.
A limited number of customers historically has accounted for a
substantial portion of the Company's net revenues. In fiscal 1997, 1996 and
1995, sales to the Company's top ten customers accounted for approximately 78%,
80% and 76%, respectively, of the Company's net revenues. These customers were
all purchasers of the Company's CD-ROM products. In fiscal 1997, Mitsumi
accounted for 14% and LG Electronics accounted for 13% of the Company's net
revenues. In fiscal 1996, Mitsumi accounted for 26%, Kanematsu accounted for 19%
and NEC accounted for 13% of the Company's net revenues. Kanematsu, a Japanese
trading company, purchases product from the Company and resells the product to
Japanese manufacturers. In fiscal 1995, Mitsumi accounted for 29% and Kanematsu
accounted for 13% of the Company's net revenues. Although the Company is
currently
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attempting to diversify its products, markets, and customers base, the Company
expects that sales to a limited number of customers will continue to account for
a substantial portion of its net revenues for the foreseeable future. The
Company has experienced significant changes from year to year in the composition
of its major customer base and believes this pattern will continue. The Company
does not have long-term purchase agreements with any of its customers. Customers
generally purchase the Company's products subject to cancelable short-term
purchase orders. The loss of, or a significant reduction in, purchases by
current major customers such as Mitsumi or LG Electronics would have a material
adverse effect on the Company's business, financial condition and results of
operations. There can be no assurance that the Company's current customers will
continue to place orders or that existing orders will not be canceled. If sales
to current customers cease or are reduced, there can be no assurance that the
Company will be able to continue to obtain the orders from new customers
necessary to offset any such losses or reductions. Moreover, there can be no
assurance that the Company could qualify its foundries for potential new
customers or that it could do so in a timely manner.
The Company currently places noncancelable orders to purchase its
products from independent foundries on an approximately three month rolling
basis and is currently committed with two of its foundries for certain minimum
amounts of capacity for the next several years while its customers generally
place purchase orders with the Company less than four weeks prior to delivery
that may be rescheduled or under certain circumstances may be canceled without
penalty. Consequently, if anticipated sales and shipments in any quarter are
rescheduled, canceled or do not occur as quickly as expected, expense and
inventory levels could be disproportionately high and the Company's business,
financial condition and results of operations for that quarter or for the year
would be materially adversely affected.
COMPETITION
The markets in which the Company competes are intensely competitive and
are characterized by rapid technological change, declining unit average selling
prices ("ASPs") and rapid product obsolescence. The Company experiences intense
competition and expects competition to increase in the future from existing
competitors and from other companies that may enter the Company's existing or
future markets with solutions that may be less costly or provide higher
performance or additional features. The Company's existing and potential
competitors include many large domestic and international companies that have
substantially greater financial, manufacturing, technical, marketing,
distribution and other resources, broader product lines and longer standing
relationships with customers than the Company. The Company's competitors also
include a number of emerging companies. Certain of the Company's principal
competitors maintain their own semiconductor foundries and may therefore benefit
from certain capacity, cost, quality control and technological advantages. In
its effort to diversify its customer and market base, the Company is currently
attempting to enter several new markets in which the Company has not operated
previously. These markets are intensely competitive and the Company will have to
compete with large domestic and international companies that have long standing
relationships with the Company's targeted customers. The Company believes that
its ability to compete successfully depends on a number of factors, both within
and outside of its control, including the price, quality and performance of the
Company's and its customers' products, the timing and success of new product
introductions by the Company, its customers and its competitors, the emergence
of new industry standards, the development of technical innovations, the ability
to obtain adequate foundry capacity and sources of raw materials, the efficiency
of production, the rate at which the Company's customers design the Company's
products into their products, the market acceptance of the products of the
Company's customers, the assertion of intellectual property rights and general
market and economic conditions. There can be no assurance that the Company will
be able to compete successfully in the future.
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, particularly
the PC market and the consumer electronics market, are characterized by intense
price competition. As the markets for the Company's products mature and
competition increases, the Company anticipates that ASPs on its products will
decline. 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 business, financial condition and
result of operations will be materially adversely affected. If the Company
experiences yield or other production problems or shortages of supply that
increase its manufacturing costs, or fails to reduce its manufacturing costs,
the result could have a materially adverse effect on the Company's business,
financial condition and operating results.
Prior to the Company's entry into the optical storage market, merchant
suppliers such as Sanyo and captive suppliers such as Panasonic, Sony and
Toshiba supplied semiconductor solutions for proprietary and SCSI drivers.
Although the Company was the first company to sell a single-chip IDE/ATAPI
CD-ROM controller, competitors including Cirrus Logic, Adaptec and Sanyo now
offer single-chip solutions. Furthermore, Toshiba has developed its own
IDE/ATAPI CD-ROM controller and is using it internally. Companies such as
Panasonic and Sony could develop their own IDE/ATAPI CD-ROM controllers and, in
addition to using them internally, could sell these controllers to the merchant
market in competition with the Company's products. As the Company integrates
more functionality into its products, companies which had previously supplied
complementary products may also become competitors.
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In the MPEG imaging market, the Company competes primarily with C-Cube
Microsystems, ESS Technology, SGS-Thomson Microelectronics and LSI Logic. The
Company's primary competitors for video/graphic accelerators include 3DFX,
nVidia, NEC, ATI Technologies, Cirrus Logic, Tseng Labs, S3 and Trident
Microsystems. In the audio/communications market, the Company's competitors
include Analog Devices, Cirrus Logic, Creative Technology, ESS Technology, OPTI
and Yamaha. In the digital office equipment market, the Company's competition
does not offer directly competitive products. In some cases, the competition
offers a subset of the Company's product features. In other cases, the
competition offers a software alternative to the Company's hardware solution.
The Company expects direct competition in the digital office equipment market to
emerge in the near future.
RESEARCH AND DEVELOPMENT
The Company currently invests substantial resources in its product
development efforts. During fiscal 1997, 1996 and 1995, the Company spent
approximately $34.7 million, $30.7 million and $14.6 million, respectively, on
research and development activities. The Company intends to continue to invest
in the development of products in each of its core technologies and in products
that integrate its core technologies.
The Company's performance is highly dependent upon the successful
development and timely introduction of new products at competitive price and
performance levels. There can be no assurance that products currently under
development or any other new products will be successfully developed or will
achieve market acceptance. The failure of the Company to introduce new products
successfully or the failure of new products to achieve market acceptance would
have a material adverse effect on the Company's business, financial condition
and results of operations. The success of new product introductions is dependent
on several factors, including recognition of market requirements, product cost,
timely completion and introduction of new product designs, quality of new
products and achievement of acceptable manufacturing yields from the Company's
contract manufacturers. Due to the design complexity of its products, the
Company has experienced delays in completing development and introduction of new
products, and there can be no assurance that the Company will not encounter such
delays in the development and introduction of future products. There can be no
assurance that the Company will successfully identify new product opportunities
and develop and bring new products to market in a timely manner, that the
Company's products will be selected for design into the products of its targeted
customers or that products or technologies developed by others will not render
the Company's products or technologies obsolete or noncompetitive. The failure
of the Company's new product development efforts or the failure of the Company
to achieve market acceptance of its new products would have a material adverse
effect on the Company's business, financial condition and results of operations.
PROPRIETARY RIGHTS AND LICENSES
The Company's ability to compete is affected by its ability to protect
its proprietary information. The Company considers its technology to be
proprietary and relies on a combination of patents, trademarks, copyrights,
trade secret laws, confidentiality procedures and licensing arrangements to
protect its intellectual property rights. The Company currently has three
patents granted, fourteen patents pending, seventeen patents in preparation in
the United States, and two international patents pending. The Company intends to
seek additional international patents and additional United States patents on
its technology. There can be no assurance that additional patents will issue
from any of the Company's pending applications or applications in preparation,
or be issued in all countries where the Company's products can be sold, or that
any claims allowed from pending applications or applications in preparation will
be of sufficient scope or strength to provide meaningful protection or any
commercial advantage to the Company. Additionally, competitors of the Company
may be able to design around the Company's patents. 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. In fiscal 1997, the Company filed a complaint with the
International Trade Commission ("ITC") against certain Asian manufacturers of
optical storage controller devices based on the Company's belief that such
devices infringed one or more of the Company's patents. The complaint seeks a
ban on the importation into the United States of any infringing CD-ROM
controller or products containing such infringing CD-ROM controllers. (See
"Legal Proceedings"). There can be no assurance that the steps taken by the
Company to protect its proprietary information will be adequate to prevent
misappropriation of its technology or that the Company's competitors will not
independently develop technologies that are substantially equivalent or superior
to the Company's technology.
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights, which has resulted in significant,
often protracted and expensive litigation. Although there is currently no
pending intellectual property litigation against the Company, the Company or its
foundries may, from time to time, be notified of claims that the Company may be
infringing patents or other intellectual property rights owned by third parties.
If it is necessary or desirable, the Company may seek licenses under such
patents or other intellectual property rights. However, there can be no
assurance that licenses will be offered or that the terms of any offered
licenses will be acceptable to the Company. The failure to obtain a license from
a third party for technology used by the Company could cause the Company to
incur substantial liabilities and to suspend the manufacture of products or the
use by the Company's foundries of processes requiring the technology.
Furthermore, the Company may initiate claims or litigation against third parties
for infringement of the Company's proprietary rights or to establish the
10
<PAGE> 192
validity of the Company's proprietary rights. The Company recently initiated
such litigation by filing a complaint with the International Trade Commission.
Litigation by or against the Company could result in significant expense to the
Company and divert the efforts of the Company's technical and management
personnel, whether or not such litigation results in a favorable determination
for the Company. In the event of an adverse result in any such litigation, the
Company could be required to pay substantial damages, cease the manufacture, use
and sale of infringing products, expend significant resources to develop
non-infringing technology, discontinue the use of certain processes or obtain
licenses to the infringing technology. There can be no assurance that the
Company would be successful in such development or that such licenses would be
available on reasonable terms, or at all, and any such development or license
could require expenditures by the Company of substantial time and other
resources. Patent disputes in the semiconductor industry have often been settled
through cross-licensing arrangements. Because the Company has a limited
portfolio of patents, the Company may not be able to settle an alleged patent
infringement claim through a cross-licensing arrangement. If a successful claim
is made against the Company or its customers and a license is not made available
to the Company on commercially reasonable terms or the Company is required to
pay substantial damages or awards, the Company's business, financial condition
and results of operations would be materially adversely affected.
The Company generally enters into confidentiality agreements with its
employees and confidentiality and license agreements with its customers and
potential customers, and limits access to and distribution of the source and
object code of its software and other proprietary information. Under some
circumstances, the Company grants licenses that give its customers limited
access to the source code of the Company's software which increases the
likelihood of misappropriation or misuse of the Company's technology.
Accordingly, despite precautions taken by the Company, it may be possible for
unauthorized third parties to copy certain portions of the Company's technology
or to obtain and use information that the Company regards as proprietary. There
can be no assurance that the steps taken by the Company will be adequate to
prevent misappropriation of its technology or to provide an adequate remedy in
the event of a breach or misappropriation by others.
Certain technology used in the Company's products is licensed from
third parties. In 1990, the Company entered into an agreement with Advanced
Micro Devices, Inc. ("AMD") relating to a video compression/expansion processor
("VCEP") developed by AMD. Pursuant to this agreement, AMD granted to the
Company a perpetual, worldwide, non-exclusive license to make, use, distribute
and sell products resulting from the VCEP and certain related patents and
software. The Company has paid AMD a technology license fee pursuant to this
agreement and is obligated to pay a royalty based on a percentage of net
revenues derived from its PM-1V product. The agreement has no specified term and
may be terminated in the event either party breaches the agreement and such
breach is not cured within 30 days after delivery of notice of the breach.
The Company has licensed technology from third parties for use in its
MPEG, optical storage, video/graphics, audio/communications, and digital imaging
technologies, and pursuant thereto is required to fulfill confidentiality
obligations and in certain cases pay royalties. Certain of the Company's
products require that certain copy protection software or other software be
obtained if the products are to be marketable and exportable. 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 MPEG and
optical storage products geared for the DVD market. In the future, it may be
necessary or desirable for the Company to seek additional licenses to
intellectual property rights held by third parties with respect to some or all
of its product offerings. There can be no assurance that such licenses will be
available on terms acceptable to the Company, if at all. The inability of the
Company to enter such license arrangements on acceptable terms or to maintain
its current licenses on acceptable terms could have a material adverse effect on
the Company's business, financial condition and results of operations.
EMPLOYEES
As of June 30, 1997, the Company had 430 full-time employees, including
268 in research and development, 64 in sales and marketing, and 98 in finance,
administration and operations. The Company believes that its future performance
will depend, in part, on its ability to continue to attract and retain qualified
technical and management personnel, particularly highly skilled design engineers
and software programmers involved in new product development, for whom
competition is intense. In addition, the Company is currently seeking to acquire
additional senior management personnel. Accordingly, the Company expects there
to be an increase in its general and administrative expenses. The Company's
employees are not represented by any collective bargaining unit and the Company
has never experienced a work stoppage. The Company believes that its employee
relations are good.
11
<PAGE> 193
ITEM 2. PROPERTIES
The Company's executive offices and its principal marketing, sales and
product development operations are located in approximately 80,000 square feet
of leased space in Sunnyvale, California under a noncancelable operating lease
that expires in December 2001. The Company is currently seeking additional space
in which to move all or a portion of the Company's employees located in
Sunnyvale. The Company believes that suitable additional or alternative space
will be available on commercially reasonable terms, although no assurance can be
given in this regard. In the event the Company relocates all the employees in
Sunnyvale to a new location, it will be required to find a subtenant for its
current location. If the Company fails to find a suitable subtenant or fails to
locate a subtenant who will pay the entire amount of the Company's current lease
rate, the Company may have to pay all or a portion of the rent on its current
leased space as well as rent on its new leased space. Accordingly, the Company
expects there to be an increase in its general and administrative expenses
related to the cost of additional leased space and associated moving expenses.
The Company owns a portion of a building in Taipei, Taiwan, and leases
facilities, primarily for sales, product development, and technical support, in
Andover, Massachusetts; Boca Raton, Florida; Austin, Texas and Tokyo, Japan.
ITEM 3. LEGAL PROCEEDINGS
The Company and various of its current and former officers and
Directors are parties to several lawsuits which purport to be class actions
filed on behalf of all persons who purchased or acquired the Company's stock
(excluding the defendants and parties related to them) for the period July 27,
1995 through May 22, 1996. The first, a state court proceeding designated In re
Oak Technology Securities Litigation, Master File No. CV758510 pending in Santa
Clara County Superior Court in Santa Clara, California, consolidates five
putative class actions. This lawsuit also names as defendants several of the
Company's venture capital fund investors, two of its investment bankers and two
securities analysts. The plaintiffs allege violations of California securities
laws and statutory deceit provisions as well as breaches of fiduciary duty and
abuse of control. On December 6, 1996, the state court Judge sustained the Oak
defendants' demurrer to all causes of action alleged in plaintiffs' First
Amended Consolidated Complaint, but allowed plaintiffs the opportunity to amend.
The plaintiff's Second Amended Consolidated Complaint was filed on August 1,
1997.
The Company and various of its current and former officers and
Directors are also parties to four putative class action lawsuits pending in the
U.S. District Court for the Northern District of California. These actions have
been consolidated as In re Oak Technology, Inc. Securities Litigation, Case No.
C-96-20552-SW(PVT). This action alleges certain violations of federal securities
laws and is brought on behalf of purchasers of the Company's stock for the
period July 27, 1995 through May 22, 1996. This action also names as a defendant
one of the Company's investment bankers. On July 29, 1997, the federal court
Judge granted the Oak defendants Motion to Dismiss the plaintiff's First Amended
Consolidated Complaint, but granted plaintiffs leave to amend most claims. The
plaintiff's Second Amended Consolidated Complaint was filed on September 4,
1997.
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. This lawsuit, which asserts a claim for breach of
fiduciary duty and a claim under California securities law based upon the
officers' and Directors' trading in securities of the Company, has been stayed
pending resolution of the class actions.
In all of the putative state and federal class actions, the plaintiffs
are seeking monetary damages and equitable relief. In the derivative action, the
plaintiffs are also seeking an accounting for the defendants' sales of Company
stock and the payment of monetary damages to the Company.
All of these actions are in the early stages of proceedings and the
Company is currently investigating the allegations. Based on its current
information, the Company believes the suits to be without merit and will defend
its position vigorously. No provision for any liability that may result upon
adjudication has been made in the Company's Consolidated Financial Statements.
In connection with these legal proceedings, the Company has incurred,
and expects to continue to incur, substantial legal and other expenses.
Shareholder suits of this kind are highly complex and can extend for a
protracted period of time, which can substantially increase the cost of such
litigation and divert the attention of the Company's management.
On July 21, 1997, the Company filed a complaint with the International
Trade Commission ("ITC") based on the Company's belief that certain CD-ROM
controllers infringed one or more of the Company's patents. The complaint seeks
a ban on the importation into the United States of any infringing CD-ROM
controller or product containing such infringing CD-ROM controller. A formal
investigative proceeding was instituted by the ITC on August 19, 1997, naming as
respondents: Winbond Electronics Corporation; Winbond Electronics North America
Corporation; Wearnes Technology (Private) Ltd.; and Wearnes Electronics Malaysia
Sendirian Berhad. Discovery proceedings are now ongoing and a full hearing of
the matter has not yet been scheduled, but is expected to occur in mid-1998. In
connection with this legal proceeding, the Company expects to incur substantial
legal and other expenses.
12
<PAGE> 194
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. The Company and UMC entered into a settlement
agreement, effective July 31, 1997, pursuant to which UMC agreed to cease and
desist manufacture of its specified CD-ROM controllers, except under certain
limited conditions which expire 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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<PAGE> 195
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company has paid no cash dividends on its Common Stock since its
incorporation and anticipates that for the foreseeable future it will continue
to retain any earnings for use in its business. In addition, the Company's bank
arrangements currently prohibit the Company from issuing cash dividends.
The Company's Common Stock commenced trading on the Nasdaq National
Market on February 14, 1995 under the symbol OAKT. The following table indicates
the range of the high and low closing prices as reported by Nasdaq.
<TABLE>
<CAPTION>
High Low
------------ -----------
<S> <C> <C>
FISCAL 1995
Third Quarter (commencing February 14, 1995)......................... $ 15-5/8 $ 10-1/4
Fourth Quarter....................................................... $ 19-1/4 $ 11-7/8
FISCAL 1996
First Quarter........................................................ $ 23-5/8 $ 18-1/4
Second Quarter....................................................... $ 29-1/8 $ 17-1/2
Third Quarter........................................................ $ 30 $ 17-1/2
Fourth Quarter....................................................... $ 22-3/4 $ 8-7/8
FISCAL 1997
First Quarter........................................................ $ 11 $ 5-1/2
Second Quarter....................................................... $ 13-3/4 $ 8-11/16
Third Quarter........................................................ $ 14-9/16 $ 9-1/2
Fourth Quarter....................................................... $ 10-1/2 $ 7-9/16
FISCAL 1998
First Quarter (through August 29, 1997).............................. $ 12 $ 9-5/16
</TABLE>
On August 29, 1997, the closing price of the Common Stock on the Nasdaq
National Market was $10 7/8 per share. As of August 29, 1997, there were 330
holders of record of the Common Stock of the Company.
Pursuant to a shareholder rights plan, adopted in August 1997, the
Company distributed one right per share of common stock which becomes
exercisable in certain events involving the acquisition of 15% or more of Oak
common stock. Upon the occurrence of such an event, each right entitles its
holder to purchase for $60.00 the economic equivalent of common stock of Oak or,
in certain circumstances, of the acquirer, worth twice as much. In connection
with the plan, 400,000 shares of preferred stock were reserved for issuance. The
rights expire on August 19, 2007.
All share and per share information in this Annual Report on Form 10-K
give effect to a two-for-one split of the Company's Common Stock, which was
effected on March 28, 1996.
14
<PAGE> 196
ITEM 6. SELECTED FINANCIAL DATA
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues (1) ............ $167,395 $247,984 $110,982 $42,562 $ 30,058
Gross profit ................ 94,181 109,485 54,616 16,572 4,524
Operating income (loss) ..... 32,848 57,147 29,440 4,200 (5,324)
Net income (loss) ........... $ 23,719 $ 37,133 $ 21,222 $ 3,823 $ 5,425)
Net income (loss) per share . $ 0.55 $ 0.87 $ 0.67 $ 0.15 $ (0.55)
Shares used in per share
calculations (2) ....... 42,757 42,614 31,474 25,756 9,940
</TABLE>
<TABLE>
<CAPTION>
As of June 30,
------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments.. $145,269 $113,284 $150,943 $ 3,738 $ 2,606
Working capital ............ 168,168 134,686 156,258 7,723 1,224
Total assets ............... 287,595 256,308 193,953 27,413 15,864
Long-term debt, excluding
current portion ........ 2,496 2,858 2,227 1,950 2,106
Total stockholders' equity.. $238,697 $210,827 $162,643 $11,736 $ 3,449
</TABLE>
(1) Net revenues include nonrefundable technology license fees. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(2) Computed on the basis described in Note 2 of Notes to Consolidated
Financial Statements.
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<PAGE> 197
SELECTED QUARTERLY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------------------------------------------------
June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30,
1997 1997 1996 1996 1996 1996 1995 1995
-------- ------- ------- -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues (1) ....... $ 50,224 $50,634 $47,611 $ 18,926 $ 19,418 $88,359 $83,735 $56,472
Gross profit (deficit).. 25,280 27,805(3) 32,386(4) 8,710(5) (15,059)(6) 48,395 44,813 31,336
Operating income ....... 3,553(8) 13,533 19,439 (3,677) (27,424) 35,524 27,355(7) 21,692
(loss)
Net income (loss) ...... $ 2,644 $ 9,540 $13,188 $ (1,653) $(16,500) $22,183 $18,217 $13,233
Net income (loss)
per share (2) ..... $ (0.06) $ 0.22 $ 0.31 $ (0.04) $ (0.41) $ 0.52 $ 0.43 $ 0.31
Shares used in per
share calculations (2).. 42,347 42,801 42,701 40,297 40,100 42,755 42,694 42,682
</TABLE>
(1) Net revenues include nonrefundable technology license fees. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(2) Computed on the basis described in Note 2 of Notes to Consolidated
Financial Statements.
(3) Gross profit in the third quarter of fiscal 1997 includes the impact of
adjustments of approximately $5.1 million to cost of revenues
associated with the sale of products which had been fully reserved in
prior periods. See Note 3 and Note 7 of Notes to Consolidated Financial
Statements.
(4) Gross profit in the second quarter of fiscal 1997 includes the impact
of adjustments of approximately $13.0 million to cost of revenues
associated with the sale of products which had been fully reserved in
prior periods as well as favorable manufacturing cost adjustments of
$1.5 million related to foundry agreements. See Note 3 and Note 7 of
Notes to Consolidated Financial Statements.
(5) Gross profit in the first quarter of fiscal 1997 includes the impact of
adjustments of approximately $0.6 million to cost of revenues
associated with the sale of products which had been fully reserved in
prior periods as well as favorable manufacturing cost adjustments of
$1.5 million related to foundry agreements. See Note 3 and Note 7 of
Notes to Consolidated Financial Statements.
(6) Gross (deficit) in the fourth quarter of fiscal 1996 includes
inventory-related charges of $24.0 million to cost of sales. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 3 of Notes to Consolidated Financial
Statements.
(7) Operating income in the second quarter of fiscal 1996 includes a charge
for in-process research and development related to the acquisition of
Pixel Magic. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 5 of Notes to
Consolidated Financial Statements.
(8) Operating income for the fourth quarter of fiscal 1997 includes the
impact of a $5.0 million compensation related expense to the contingent
amount associated with the acquisition of Pixel Magic, Inc. as
described in Note 5 of Notes to Consolidated Financial Statements.
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<PAGE> 198
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the historical financial information contained herein, the
matters discussed in this Annual Report on Form 10-K 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. Among the important factors that
could cause actual results to differ materially from those indicated by such
forward-looking statements are: (i) that the information is of a preliminary
nature and may be subject to further adjustment, (ii) variability in the
Company's quarterly operating results, (iii) general conditions in the
semiconductor industry, (iv) risks related to pending legal proceedings, (v)
development by competitors of new or superior products or the entry of new
competitors into the Company's markets, (vi) the Company's ability to diversify
its product and market base by developing and introducing new products within
designated market windows at competitive price and performance levels, (vii)
willingness of prospective customers to design the Company's products into their
products, (viii) availability of adequate foundry capacity and access to process
technologies, (ix) the Company's ability to protect its proprietary information
and obtain adequate licenses of third party technology on acceptable terms, (x)
risks related to use of independent manufacturers and third party assembly and
test vendors, (xi) dependence on key personnel, (xii) reliance on a limited
number of large customers, (xiii) dependence on sales of CD-ROM controller
products, (xiv) risks related to international business operations, (xv) ability
of the Company to maintain adequate price levels and margins with respect to its
products, (xvi) management of changing operations related to the Company's
attempt to diversify its product and market base, (xvii) risks related to
product defects, (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.
The Company designs, develops and markets high performance integrated
semiconductors and related software to original equipment manufacturers
worldwide that serve the PC, consumer electronics and digital office equipment
markets. The Company provides semiconductor products for these markets by
leveraging its expertise in five core technologies: optical storage, MPEG
imaging, video/graphics, audio/communications and digital imaging. The Company's
products typically consist of hardware, firmware and software to provide a
complete solution for customers.
The Company contracts with independent foundries to manufacture all of
its products, enabling the Company to focus on its design strengths, minimize
fixed costs and capital expenditures and gain access to advanced manufacturing
facilities. Except as described in the paragraphs below, the foundries generally
are not obligated to supply products to the Company for any specific period, in
any specific quantity or at a specific price.
In June and November 1995, the Company entered into agreements with
TSMC and Chartered to obtain certain additional wafer capacity through the year
2001 (see Note 7 of Notes to Consolidated Financial Statements). The agreements
call for the Company to commit to certain future wafer purchases and to deposit
funds with the suppliers as either a portion of the price of the additional
wafers in advance of their delivery or as a non-interest bearing deposit to
secure the availability of additional wafers. The price of such wafers will be
determined in the future periods in which specific orders are actually placed.
If the Company is not able to use, assign, or sell the additional wafer
quantities, all or a portion of the deposits may be forfeited.
In October 1996, the Company amended its previous agreement with TSMC
resulting in a reduction of approximately $73 million of the Company's future
wafer purchases required under the original agreement. Under the amended
agreement, no additional prepayment is required; however, the Company must
utilize the entire amount of the prepayment paid to date through a certain
committed amount of wafer purchases in the years 1997, 1998, and 1999 or the
prepayment will be forfeited.
In September 1996 and April 1997, the Company amended its agreement
with Chartered. The amendments resulted in a reduction of the Company's future
wafer purchase commitments and the elimination of required future cash deposits
under the original agreement of approximately $36 million. Under the amended
agreement, the required future cash deposits of approximately $36 million could
be reinstated if certain conditions are not met. The Company currently believes
the terms and conditions of the agreement as amended will be met and that these
commitments will not be reinstated although no assurance can be given in this
regard.
The Company recorded $3.0 million in cost of sales during fiscal 1996
associated with manufacturing cost adjustments related to its wafer foundry
agreements as a result of lower forecasted capacity usage during the calendar
year ending December 31, 1996. The execution of these amendments reduced the
Company's wafer purchase commitments during the remainder of calendar 1996 and
thereafter and resulted in a favorable manufacturing cost adjustment recorded to
cost of revenues of $1.5 million during each of the quarters ended December 31,
1996 and September 30, 1996 based on an estimate of the wafers purchased during
those quarters. The remaining deposits and prepayments under the amended foundry
agreements described above are recorded at cost and total approximately
17
<PAGE> 199
$34.2 million as of June 30, 1997. The Company currently anticipates being able
to utilize and fully recover the value of all foundry prepayments and deposits
under the terms of the amended agreements.
The markets in which the Company competes are intensely competitive and
are characterized by rapid technological change, declining ASPs and rapid
product obsolescence. In addition, a limited number of customers have
historically accounted for a substantial portion of the Company's net revenues.
In fiscal 1997, 1996 and 1995, sales to the Company's top ten customers
accounted for approximately 78%, 80% and 76%, respectively, of the Company's net
revenues. The Company is also heavily dependent on the market for CD-ROM
controller products. In fiscal 1997, 1996 and 1995, the Company's CD-ROM
controller products accounted for 84%, 91% and 74%, respectively, of net
revenues. The Company expects that, for the foreseeable future, its CD-ROM
controller products will account for a substantial majority of its net revenues.
Any decrease in the demand for such products or the loss of one or more key
customers would have a material adverse effect on the Company's business,
financial condition and results of operations.
In addition, in fiscal 1997, 1996 and 1995, 96%, 98% and 93%,
respectively, of net revenues were derived from international sales. A
substantial portion of the Company's international revenues in fiscal 1997, 1996
and 1995 were derived from Japanese, Taiwanese, Korean and Singapore
manufacturers of CD-ROM drives. The Company's international sales are subject to
a number of risks, including the effect of currency fluctuations, state-imposed
restrictions on repatriation of funds and import and export duties and
restrictions. There can be no assurance that such risks will not have a material
adverse effect on the Company's business, financial condition and results of
operations.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net revenues,
certain consolidated statement of operations data for the periods indicated:
<TABLE>
<CAPTION>
June 30,
----------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net revenues ................................. 100.0% 100.0% 100.0%
Cost of revenues ............................. 43.7 55.8 50.8
------ ------ ------
Gross margin ............................ 56.3 44.2 49.2
Research and development expenses ............ 20.7 12.4 13.2
Selling, general and administrative expenses.. 12.9 6.8 9.5
Acquisition-related charges .................. 3.0 2.0 --
------ ------ ------
Operating income ........................ 19.7 23.0 26.5
Nonoperating income, net ..................... 3.2 2.5 1.5
------ ------ ------
Income before income taxes .............. 22.9 25.5 28.0
Income taxes ................................. 8.7 10.5 8.9
====== ====== ======
Net income .............................. 14.2% 15.0% 19.1%
====== ====== ======
</TABLE>
FISCAL 1997 COMPARED TO FISCAL 1996
Net Revenues. The Company's net revenues in the comparison periods were
primarily derived from product sales. Net revenues decreased 32% to $167.4
million in fiscal 1997 from $248.0 million in fiscal 1996. This decrease was
primarily attributable to a reduction in the unit sales and average selling
prices of CD-ROM controllers in fiscal 1997 compared to fiscal 1996. The
decrease in unit sales resulted from the Company receiving substantially fewer
orders for its CD-ROM controller products in fiscal 1997 than in fiscal 1996.
The Company believes the decline in orders is primarily attributable to a change
in the ordering patterns of CD-ROM drive manufacturers and the continued
maturation of the CD-ROM industry. (See "Factors That May Affect Future Results"
below.) International sales, principally to Japan, Taiwan, Korea and Singapore
accounted for approximately 96% and 98% of the Company's net revenues in fiscal
1997 and fiscal 1996, respectively. Sales of the Company's CD-ROM controller
products accounted for 84% and 91% of net revenues in fiscal 1997 and fiscal
1996, respectively. The Company expects that international sales of its CD-ROM
controller products will continue to represent a substantial majority of its net
revenues for the foreseeable future. Included in net revenues for fiscal 1997
and fiscal 1996 were $0.2 million and $3.0 million, respectively of
nonrefundable technology license fees.
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
56.3% in fiscal 1997 from 44.2%
18
<PAGE> 200
in fiscal 1996. This increase in gross margin is primarily the result of
adjustments of approximately $18.7 million to cost of revenues associated with
the sale of products which had been fully reserved in prior periods as well as
manufacturing cost adjustments of $3.0 million related to foundry agreements.
Additionally, fiscal 1996 gross margins were reduced as a result of
inventory-related charges to cost of sales of $24.0 million. Excluding the
impact of these adjustments, gross margin for fiscal 1997 and 1996 would have
been approximately 43.3% and 53.8%, respectively. This adjusted gross margin
decreased from the comparable period in fiscal 1996 primarily as a result of a
decrease in ASPs of the Company's CD-ROM controller products that was not offset
by a comparable decrease in product costs. The Company's overall gross margin is
subject to change due to various factors, including, among others, competitive
product pricing, yields, wafer costs, assembly and test costs and product mix.
The Company expects that ASPs for its existing products will continue to decline
over time and that ASPs for each new product will decline significantly over the
life of the product. A decline in ASPs that is not offset by a reduction in
production costs or by sales of new products with higher gross margins would
decrease the Company's overall gross margin and could materially and adversely
affect the Company's operating results. In addition, the Company believes that
gross margins for new products will be lower than historical levels and that, as
a result, gross margins in general will decline in the future.
Research and Development Expenses. Research and development costs are
all expensed as incurred. Research and development expenses increased 12.8% to
$34.7 million in fiscal 1997 from $30.7 million in fiscal 1996. This increase
was principally the result of the hiring of additional personnel and associated
expenses. Research and development expenses increased as a percentage of net
revenues to 20.7% in fiscal 1997 from 12.4% in fiscal 1996 due primarily to the
decrease in the Company's net revenues. The Company will continue to invest
substantial resources in research and development, including hiring additional
technical personnel, in an effort to maintain its technological leadership in
the CD-ROM controller market and to diversify its product development in its
other core technologies: video/graphics, MPEG imaging, audio/communications, and
digital imaging. As a result, the Company expects to incur higher research and
development expenses in absolute dollars in fiscal 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 29.1% to $21.7 million in fiscal 1997 from
$16.8 million in fiscal 1996. This increase was primarily the result of the
hiring of additional personnel and associated expenses. Selling, general and
administrative expenses increased as a percentage of net revenues to 12.9% in
fiscal 1997 from 6.8% in fiscal 1996, due primarily to the decrease in the
Company's net revenues. As a result of continuing efforts to develop the
Company's infrastructure and hire additional senior management personnel, the
Company expects to incur higher administrative expenses in absolute dollars in
fiscal 1998.
Acquisition-Related Charges. In November 1995, the Company acquired
Pixel Magic, a privately-held company based in Andover, Massachusetts for $10.5
million in cash, of which $5.0 million was contingent upon the achievement of
certain performance criteria over a three-year period. Approximately $4.8
million of the initial cash payment was allocated to in-process research and
development and was charged to operations in fiscal 1996. In June 1997, the
Company waived certain of the performance criteria and agreed to pay the
contingent amount of $5.0 million in two installments during calendar 1998. The
first payment of $3.0 million is due in January 1998 and the second payment of
$2.0 million is due in December 1998. As a result of this agreement and because
the contingent earnout was based, in part, on the continued employment of the
former shareholder/employees of Pixel Magic, Inc., the Company recorded a
compensation charge of $5.0 million in the quarter ended June 30, 1997.
Nonoperating Income, Net. Nonoperating income, net consisted primarily
of net interest income in fiscal 1997. Nonoperating income, net was $5.4 million
in fiscal 1997 and $6.0 million in fiscal 1996. The decrease is primarily the
result of lower net interest income in fiscal 1997 compared to fiscal 1996.
Income Taxes. The Company's effective tax rate was 38.0% and 41.2% in
fiscal 1997 and 1996, respectively. The lower tax rate in 1997 was primarily
attributable to the effect of the reinstated research and development tax credit
on fiscal 1997 results as well as a geographical shift in the sources of taxable
income in fiscal 1997. See Note 6 of Notes to Consolidated Financial Statements.
FISCAL 1996 COMPARED TO FISCAL 1995
Net Revenues. The Company's net revenues in the comparison periods were
primarily derived from product sales. Net revenues increased 123% to $248.0
million in fiscal 1996 from $111.0 million in fiscal 1995. This increase was
primarily attributable to growth in unit sales of CD-ROM controllers.
International sales, principally to Japan, Singapore and Taiwan, accounted for
approximately 98% and 93% of the Company's net revenues in fiscal 1996 and
fiscal 1995, respectively. Sales of the Company's CD-ROM controller products
accounted for 91% and 74% of net revenues in fiscal 1996 and fiscal 1995,
respectively. Included in net revenues for fiscal 1996 and fiscal 1995 were $3.0
million and $1.3 million, respectively of nonrefundable technology license fees.
Gross Margin. Cost of revenues includes the cost of wafer fabrication,
assembly and testing performed by third-party vendors and direct and indirect
costs associated with the procurement, scheduling and quality assurance
functions performed by the Company. The Company's gross margin decreased to
44.2% in fiscal 1996 from 49.2% in fiscal 1995. This decrease in gross margin is
primarily the result of inventory-related charges to cost of sales of $24.0
million during the fourth quarter of fiscal 1996, partially offset by an
increase in margin from CD-ROM
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controller sales during fiscal 1996. In both fiscal 1996 and 1995, the Company's
gross margin was also favorably affected by nonrefundable technology license fee
revenues, which had no associated cost of revenues. 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.
Research and Development Expenses. Research and development costs are
all expensed as incurred. Research and development expenses increased 110% to
$30.7 million in fiscal 1996 from $14.6 million in fiscal 1995. This increase
was principally the result of the hiring of additional personnel and associated
expenses. Research and development expenses decreased as a percentage of net
revenues to 12.4% in fiscal 1996 from 13.2% in fiscal 1995 due primarily to
rapid growth in the Company's net revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 59% to $16.8 million in fiscal 1996 from $10.5
million in fiscal 1995. This increase was primarily the result of the hiring of
additional personnel and associated expenses. Selling, general and
administrative expenses decreased as a percentage of net revenues to 6.8% in
fiscal 1996 from 9.5% in fiscal 1995, due primarily to rapid growth in the
Company's net revenues.
Acquisition-Related Charges. In November 1995, the Company acquired
Pixel Magic, a privately-held company based in Andover, Massachusetts for $10.5
million in cash, of which $5.0 million was paid up front and $5.0 million was
contingent upon the achievement of certain performance criteria over a
three-year period. Approximately $4.8 million of the initial cash payment was
allocated to in-process research and development and was charged to operations
in fiscal 1996.
Nonoperating Income, Net. Nonoperating income, net consisted primarily
of net interest income in fiscal 1996. Nonoperating income, net was $6.0 million
in fiscal 1996 and $1.7 million in fiscal 1995.
Income Taxes. The Company's effective tax rate was 41.2% and 31.7% in
fiscal 1996 and 1995, respectively. The higher tax rate in 1996 was primarily
attributable to an increase in income before tax in fiscal 1996 and the full
utilization of the Company's federal net operating loss carryforwards by the
middle of fiscal 1995. See Note 6 of Notes to Consolidated Financial Statements.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The following factors should be carefully considered in evaluating the
Company and its business.
The Company's operating results are subject to quarterly and other
fluctuations due to a variety of factors, including the gain or loss of
significant customers, increased competitive pressures, the timing of new
product announcements and introductions by the Company or its competitors and
market acceptance of new or enhanced versions of the Company's and its
customers' products. Other factors include the availability of foundry capacity,
fluctuations in manufacturing yields, availability and cost of raw materials,
the cyclical nature of both the semiconductor industry, the market for PCs and
the markets addressed by the Company's products, seasonal customer demand, the
Company's ability to diversify its product offerings, the competitiveness of the
Company's customers, the timing of significant orders, significant increases in
expenses associated with the expansion of operations and development of the
Company's support infrastructure, and changes in pricing policies by the
Company, its competitors or its suppliers, including decreases in ASPs of the
Company's products. In addition, the Company's quarterly operating results could
be materially adversely affected by legal expenses incurred in connection with,
or any adverse judgment in, the Company's ongoing shareholder legal proceedings.
The Company's operating results could also be adversely affected by economic
conditions generally in various geographic areas where the Company or its
customers do business, or by order cancellations or rescheduling. These factors
are difficult to forecast, and these or other factors could materially affect
the Company's quarterly or annual operating results. There can be no assurance
as to the level of sales or earnings that may be attained by the Company in any
given period in the future.
The Company currently places noncancelable orders to purchase its
products from independent foundries on an approximately three month rolling
basis and is currently committed with two of its foundries for certain minimum
amounts of capacity for the next several years, while its customers generally
place purchase orders with the Company less than four weeks prior to delivery
that may be rescheduled or under certain circumstances may be canceled without
significant penalty. Consequently, if anticipated sales and shipments in any
quarter are rescheduled, canceled, or do not occur as quickly as expected,
expense and inventory levels could be disproportionately high and the Company's
business, financial condition and results of operations for that quarter or for
the year would be materially adversely affected.
The semiconductor industry has historically been characterized by rapid
technological change, cyclical market patterns, significant price erosion,
periods of over-capacity and production shortages, variations in manufacturing
costs and yields and significant expenditures for capital equipment and product
development. In addition, the industry has experienced significant economic
downturns at various times, characterized by diminished product demand and
accelerated erosion of product prices. The Company may experience substantial
period-to-period fluctuations in operating results due to general semiconductor
industry conditions.
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The Company and various of its current and former officers and
Directors are parties to certain legal proceedings. See "Legal Proceedings." All
of these actions are in the early stages of proceedings and the Company is
currently investigating the allegations. Based on its current information, the
Company believes the suits to be without merit and will defend its position
vigorously. No provision for any liability that may result upon adjudication has
been made in the Company's Consolidated Financial Statements. In connection with
these legal proceedings, the Company has incurred, and expects to continue to
incur, substantial legal and other expenses. Shareholder suits of this kind are
highly complex and can extend for a protracted period of time, which can
substantially increase the cost of such litigation and divert the attention of
the Company's management.
The markets in which the Company competes are intensely competitive and
are characterized by rapid technological change, declining unit ASP's and rapid
product obsolescence. The Company expects competition to increase in the future
from existing competitors and from other companies that may enter the Company's
existing or future markets with solutions that may be less costly or provide
higher performance or additional features. The Company's existing and potential
competitors include many large domestic and international companies that have
substantially greater financial, manufacturing, technical, marketing,
distribution and other resources, broader product lines and longer standing
relationships with customers than the Company. The Company's competitors also
include a number of emerging companies as well as some of the Company's own
customers and suppliers. The Company is currently attempting to enter several
new markets in which the Company has not previously operated. These markets are
intensely competitive and the Company will have to compete with large domestic
and international companies that have long standing relationships with the
Company's target customers. Certain of the Company's principal competitors
maintain their own semiconductor foundries and may therefore benefit from
certain capacity, cost and technological advantages. The Company believes that
its ability to compete successfully depends on a number of factors, both within
and outside of its control, including the price, quality and performance of the
Company's and its customers' products, the timing and success of new product
introductions by the Company, its customers and its competitors, the emergence
of new PC standards, the development of technical innovations, the ability to
obtain adequate foundry capacity and sources of raw materials, the efficiency of
production, the rate at which the Company's customers design the Company's
products into their products, the market acceptance of the products of the
Company's customers, the number and nature of the Company's competitors in a
given market, the assertion of intellectual property rights and general market
and economic conditions. There can be no assurance that the Company will be able
to compete successfully in the future.
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, particularly
the PC market and the consumer electronics market, are characterized by intense
price competition. As the markets for the Company's products mature and
competition increases, the Company anticipates that ASPs on its products will
decline. 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, or fails to reduce its manufacturing costs, the result would be a
material adverse effect on the Company's business, financial condition and
operating results.
The markets for the Company's products are characterized by evolving
industry standards, rapid technological change and product obsolescence. The
Company's performance is highly dependent upon the successful development and
timely introduction of new products at competitive price and performance levels.
Currently, the Company's financial performance is dependent upon the Company's
level of success in the CD-ROM controller market. In an effort to diversify its
product and market base, the Company has invested substantial resources in
optical storage as well as in its other core technologies: video/graphics, MPEG
imaging, audio/communications, and digital imaging. There can be no assurance
that products currently under development in these core technologies or any
other new products will be successfully developed or will achieve market
acceptance, thereby affecting the Company's ability to achieve diversification
of its product and market bases. The failure of the Company to introduce new
products successfully or the failure of new products to achieve market
acceptance would have a material adverse effect on the Company's business,
financial condition and results of operations. The success of new product
introductions is dependent on several factors, including recognition of market
requirements, product cost, timely completion and introduction of new product
designs, securing sufficient foundry capacity for volume manufacturing of
wafers, quality of new products and achievement of acceptable manufacturing
yields from the Company's contract manufacturers. Due to the design complexity
of its products, the Company has experienced delays in completing development
and introduction of new products, and there can be no assurance that the Company
will not encounter such delays in the development and introduction of future
products. There can be no assurance that the Company will successfully identify
new product opportunities and develop and bring new products to market in a
timely manner, that the Company's products will be selected for design into the
products of its targeted customers or that products or technologies developed by
others will not render the Company's products or technologies obsolete or
noncompetitive. The failure of the Company's new product development efforts or
the failure of the Company to achieve market acceptance of its new products
would have a material adverse effect on the Company's business, financial
condition and operating results.
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The Company's ability to compete is affected by its ability to protect
its proprietary information. The Company considers its technology to be
proprietary and relies on a combination of patents, trademarks, copyrights,
trade secret laws, confidentiality procedures and licensing arrangements to
protect its intellectual property rights. The Company currently has three
patents granted, fourteen patents pending, seventeen patents in preparation in
the United States, and two international patents pending. The Company intends to
seek additional international patents and additional United States patents on
its technology. There can be no assurance that additional patents will issue
from any of the Company's pending applications or applications in preparation,
or be issued in all countries where the Company's products can be sold, or that
any claims allowed from pending applications or applications in preparation will
be of sufficient scope or strength to provide meaningful protection or any
commercial advantage to the Company. Additionally, competitors of the Company
may be able to design around the Company's patents. 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. In fiscal 1997, the Company filed a complaint with the
International Trade Commission ("ITC") against certain Asian manufacturers of
optical storage controller devices based on the Company's belief that such
devices infringed one or more of the Company's patents. The complaint seeks a
ban on the importation into the United States of any infringing CD-ROM
controller or products containing such infringing CD-ROM controllers. (See
"Legal Proceedings"). There can be no assurance that the steps taken by the
Company to protect its proprietary information will be adequate to prevent
misappropriation of its technology or that the Company's competitors will not
independently develop technologies that are substantially equivalent or superior
to the Company's technology.
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights, which has resulted in significant,
often protracted and expensive litigation. Although there is currently no
pending intellectual property litigation against the Company, the Company or its
foundries may from time to time be notified of claims that the Company may be
infringing patents or other intellectual property rights owned by third parties.
If it is necessary or desirable, the Company may seek licenses under such
patents or other intellectual property rights. However, there can be no
assurance that licenses will be offered or that the terms of any offered
licenses will be acceptable to the Company. The failure to obtain a license from
a third party for technology used by the Company could cause the Company to
incur substantial liabilities and to suspend the manufacture of products or the
use by the Company's foundries of processes requiring the technology.
Furthermore, the Company may initiate claims or litigation against third parties
for infringement of the Company's proprietary rights or to establish the
validity of the Company's proprietary rights. The Company recently initiated
such litigation by filing a complaint with the International Trade Commission.
Litigation by or against the Company could result in significant expense to the
Company and divert the efforts of the Company's technical and management
personnel, whether or not such litigation results in a favorable determination
for the Company. In the event of an adverse result in any such litigation, the
Company could be required to pay substantial damages, cease the manufacture, use
and sale of infringing products, expend significant resources to develop
non-infringing technology, discontinue the use of certain processes or obtain
licenses to the infringing technology. There can be no assurance that the
Company would be successful in such development or that such licenses would be
available on reasonable terms, or at all, and any such development or license
could require expenditures by the Company of substantial time and other
resources. Patent disputes in the semiconductor industry have often been settled
through cross-licensing arrangements. Because the Company has a limited
portfolio of patents, the Company may not be able to settle an alleged patent
infringement claim through a cross-licensing arrangement. If a successful claim
is made against the Company, or its customers, and a license is not made
available to the Company on commercially reasonable terms, or if the Company is
required to pay substantial damages or awards, the Company's business, financial
condition and operating results would be materially adversely affected.
The Company generally enters into confidentiality agreements with its
employees and confidentiality and license agreements with its customers and
potential customers, and limits access to and distribution of the source and
object code of its software and other proprietary information. Under some
circumstances, the Company grants licenses that give its customers limited
access to the source code of the Company's software which increases the
likelihood of misappropriation or misuse of the Company's technology.
Accordingly, despite precautions taken by the Company, it may be possible for
unauthorized third parties to copy certain portions of the Company's technology
or to obtain and use information that the Company regards as proprietary. There
can be no assurance that the steps taken by the Company will be adequate to
prevent misappropriation of its technology or to provide an adequate remedy in
the event of a breach or misappropriation by others.
Certain technology used in the Company's products is licensed from
third parties. Some of the Company's products, particularly those targeted for
the DVD market, require certain types of copy protection software that the
Company must license from third parties. There can be no assurance that such
licenses, or licenses of other third party technology, will be available on
terms acceptable to the Company, if at all. The inability of the Company to
enter into such license arrangements on acceptable terms could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company contracts with independent foundries to manufacture all of
its products, enabling the Company to focus on its design strengths, minimize
fixed costs and capital expenditures and gain access to advanced manufacturing
facilities. Certain of the Company's foundry agreements require up-front,
nonrefundable prepayments or deposits and these fixed costs could affect the
Company's operating margins if the Company is unable to utilize
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the minimum number of wafers required under the agreements. The Company is
dependent on its foundries to allocate to the Company a portion of their foundry
capacity sufficient to meet the Company's needs to produce products of
acceptable quality and with acceptable manufacturing yields and to deliver
products to the Company in a timely manner. These foundries fabricate products
for other companies and some manufacture products of their own design. The
Company has recently experienced a decrease in the supply of available foundry
capacity which in turn has created an increase in the lead time required to
manufacture the Company's products. If the Company is unsuccessful in getting
its customers to place orders on a longer lead time, the Company may be unable
to fulfill customer demand. The loss of any of these foundries as a supplier,
the inability of the Company in a period of increased demand for its products to
expand the foundry capacity of its current suppliers or qualify other wafer
manufacturers for additional foundry capacity, any inability to obtain timely
and adequate deliveries from the Company's current or future suppliers or any
other circumstances that would require the Company to seek alternative sources
of supply could delay shipments of the Company's products, which could damage
relationships with its current and prospective customers, provide an advantage
to the Company's competitors and have a material adverse effect on the Company's
business, financial condition and operating results.
The Company's reliance on independent manufacturers and third party
assembly and testing vendors involves a number of additional risks, including
the unavailability of, or interruption in access to, certain process
technologies and reduced control over delivery schedules, quality assurance and
costs. In addition, as a result of the Company's dependence on foreign
subcontractors, the Company is subject to the risks of conducting business
internationally, including foreign government regulation and general political
risks, such as political and economic instability, potential hostilities,
changes in diplomatic and trade relationships, currency fluctuations, unexpected
changes in, or imposition of, regulatory requirements, tariffs, import and
export restrictions, and other barriers and restrictions, potentially adverse
tax consequences, the burdens of complying with a variety of foreign laws and
other factors beyond the Company's control.
The manufacture of semiconductors is a highly complex and precise
process. Minute levels of contaminants in the manufacturing environment, defects
in the masks used to print circuits on a wafer, difficulties in the fabrication
process or other factors can cause a substantial percentage of wafers to be
rejected or a significant number of die on each wafer to be nonfunctional. Many
of these problems are difficult to diagnose and time consuming or expensive to
remedy. The Company's products are particularly complex and difficult to
manufacture. There can be no assurance that the Company's foundries will not
experience irregularities or adverse yield fluctuations in their manufacturing
processes. Any yield or other production problems or shortages of supply
experienced by the Company or its foundries could have a material adverse effect
on the Company's business, financial condition and results of operations.
Sales of the Company's CD-ROM controller products comprised 84%, 91%
and 74% of the Company's net revenues in fiscal 1997, 1996 and 1995,
respectively. Sales of CD-ROM controller products are expected to continue to
account for a substantial portion of the Company's total revenues for the
foreseeable future. The Company expects that as the market for CD-ROM controller
products matures or becomes obsolete due to the introduction of DVD-ROM
products, sales of such products will decline. Although the Company is currently
pursuing the development of optical storage semiconductors for use in DVD-ROM
drives, there can be no assurance that the Company will have a DVD-ROM product,
that such product will be available within an acceptable market window, or that
such product will be able to sustain the current level of optical storage
product sales. In addition, there can be no assurance that the market for CD-ROM
controller products in general, or the Company's CD-ROM controller products in
particular, will support the Company's planned operations in the future. Any
decrease in the overall level of sales of, or the prices for, the Company's
CD-ROM controller products, due to introductions of products by present or
future competitors, a decline in demand for CD-ROM controller products, product
obsolescence or any other reason would have a material adverse effect on the
Company's business, financial condition and results of operations. Although the
Company has recently introduced several new products in its attempt to diversify
its product and market base, there can be no assurance that these products will
be successfully designed in and brought to production or that the Company's
customer's products will be accepted in the marketplace.
During fiscal 1997, 1996 and 1995, 96%, 98% and 93%, respectively, of
the Company's net revenues were derived from international sales. A substantial
portion of the Company's international revenues in fiscal 1997, 1996 and 1995
were derived from Japanese, Taiwanese, Korean and Singapore manufacturers of
CD-ROM drives. Accordingly, the Company is subject to the risks of conducting
business outside of the United States. These risks include unexpected changes
in, or impositions of, legislative or regulatory requirements, delays resulting
from difficulty in obtaining export licenses for certain technology, tariffs,
quotas and other trade barriers and restrictions, longer payment cycles, greater
difficulty in accounts receivable collection, potentially adverse taxes, the
burdens of complying with a variety of foreign laws and other factors beyond the
Company's control. The Company is also subject to general geopolitical risks in
connection with its international operations, such as political, social and
economic instability, potential hostilities and changes in diplomatic and trade
relationships. There can be no assurance that such factors will not adversely
affect the Company's operations in the future or require the Company to modify
its current business practices. In addition, the laws of certain foreign
countries in which the Company's products are or may be developed, manufactured
or sold, including various countries in Asia, may not protect the Company's
products or intellectual property rights to the same extent as do the laws of
the United States and thus make the possibility of piracy of the Company's
technology and products more likely. Most of the Company's
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foreign sales are negotiated in U.S. dollars; however, invoicing is often done
in local currency. As a result, the Company may be subject to the risks of
currency fluctuations. There can be no assurance that one or more of the
foregoing factors will not have a material adverse effect on the Company's
business, financial condition or operating results or require the Company to
modify its current business practices.
A limited number of customers historically has accounted for a
substantial portion of the Company's net revenues. In fiscal 1997, 1996 and
1995, sales to the Company's top ten customers accounted for approximately 78%,
80% and 76%, respectively, of the Company's net revenues. These customers were
all purchasers of the Company's CD-ROM product. In fiscal 1997, Mitsumi
accounted for 14% and LG Electronics accounted for 13%. In fiscal 1996, Mitsumi
accounted for 26%, Kanematsu accounted for 19% and NEC accounted for 13% of the
Company's net revenues. Kanematsu, a Japanese trading company, purchases product
from the Company and resells the product to Japanese manufacturers. In fiscal
1995, Mitsumi accounted for 29% and Kanematsu accounted for 13% of the Company's
net revenues. Although the Company is currently attempting to diversify its
products, markets, and customer base, the Company expects that sales to a
limited number of customers will continue to account for a substantial portion
of its net revenues for the foreseeable future. The Company has experienced
significant changes from year to year in the composition of its major customer
base and believes this pattern will continue. For example, Mitsumi has only been
a significant customer of the Company since fiscal 1994. The Company does not
have long-term purchase agreements with any of its customers. Customers
generally purchase the Company's products pursuant to short-term purchase
orders. The loss of, or significant reduction in purchases by, current major
customers such as Mitsumi or LG Electronics would have a material adverse effect
on the Company's business, financial condition and operating results. There can
be no assurances that the Company's current customers will continue to place
orders or that existing orders will not be canceled. If sales to current
customers cease or are reduced, there can be no assurance that the Company will
be able to continue to obtain the orders from new customers necessary to offset
any such losses or reductions.
The Company's future performance depends, to a significant degree, on
the continued retention and contribution of members of the Company's senior
management as well as other key personnel. The Company is in the process of
recruiting additional senior managers and technical personnel. Competition for
these persons is intense and there can be no assurance that the Company will be
able to attract and retain qualified senior managers and technical personnel.
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 June 30, 1997 consisted of approximately $145.3 million in cash,
cash equivalents and short-term investments. The Company also has approximately
$12.6 million in lines of letters of credit with Taiwanese financial
institutions, of which $12.5 million was available at June 30, 1997.
Additionally, approximately $25.0 million in lines of credit exist with Japanese
financial institutions, of which approximately $18.0 million was available at
June 30, 1997.
In fiscal 1997, operating activities provided net cash of approximately
$65.4 million. This cash resulted primarily from net income of approximately
$23.7 million, utilization of foundry deposits of $11.0 million, an increase in
accounts payable and accrued expenses of $10.3 million, and an increase in
deferred income taxes of $9.4 million. Investing activities utilized cash of
approximately $24.1 million primarily due to an investment in a foundry joint
venture of $25.9 million, additions to property, plant and equipment of $6.9
million, partially offset by net cash provided from short-term investments of
$10.7 million. In fiscal 1996, the Company's operating activities provided net
cash of approximately $30.7 million. This cash resulted primarily from net
income of approximately $37.1 million. Approximately $12.7 million in cash was
used to finance additions to property and equipment. In fiscal 1995, the
Company's operating activities provided net cash of approximately $22.5 million.
This cash resulted primarily from net income of approximately $21.2 million.
Approximately $4.2 million in cash was used to finance additions to property and
equipment.
The Company believes that its existing cash, cash equivalents,
short-term investments and credit facilities will be sufficient to provide
adequate working capital and to fund necessary purchases of property and
equipment through at least the next twelve months. Capital expenditures for
fiscal 1998 are anticipated to be approximately $16.0 million. The Company may
also utilize cash to acquire or invest in complementary businesses or products
or to obtain the right to use complementary technologies. From time to time, in
the ordinary course of business, the Company evaluates potential acquisitions of
such businesses, products or technologies. However, the Company has no present
understandings, commitments or agreements with respect to any material
acquisition of other businesses, products or technologies.
In June and November 1995, the Company entered into agreements with
TSMC and Chartered to obtain certain additional wafer capacity through the year
2001 (see Note 7 of Notes to Consolidated Financial Statements). The agreements
call for the Company to commit to certain future wafer purchases and to deposit
funds with the suppliers as either a portion of the price of the additional
wafers in advance of their delivery or as a non-interest bearing deposit to
secure the availability of additional wafers. The price of such wafers will be
determined in the
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future periods in which specific orders are actually placed. If the Company is
not able to use, assign, or sell the additional wafer quantities, all or a
portion of the deposits may be forfeited.
In October 1996, the Company amended its previous agreement with TSMC
resulting in a reduction of approximately $73 million of the Company's future
wafer purchases required under the original agreement. Under the amended
agreement, no additional prepayment is required; however, the Company must
utilize the entire amount of the prepayment paid to date through a certain
committed amount of wafer purchases in the years 1997, 1998, and 1999 or the
prepayment will be forfeited.
In September 1996 and April 1997, the Company amended its agreement
with Chartered. The amendments resulted in a reduction of the Company's future
wafer purchase commitments and the elimination of required future cash deposits
under the original agreement of approximately $36 million. Under the amended
agreement, the required future cash deposits of approximately $36 million could
be reinstated if certain conditions are not met. The Company currently believes
the terms and conditions of the agreement as amended will be met and that these
commitments will not be reinstated although no assurance can be given in this
regard.
The Company recorded $3.0 million in cost of sales during fiscal 1996
associated with manufacturing cost adjustments related to its wafer foundry
agreements as a result of lower forecasted capacity usage during the calendar
year ending December 31, 1996. The execution of these amendments reduced the
Company's wafer purchase commitments during the remainder of calendar 1996 and
thereafter and resulted in a favorable manufacturing cost adjustment recorded to
cost of revenues of $3.0 million. The remaining deposits and prepayments under
the amended foundry agreements described above are recorded at cost and total
approximately $34.2 million as of June 30, 1997. The Company currently
anticipates being able to utilize and fully recover the value of all foundry
prepayments and deposits under the terms of the amended agreements.
In October 1995, the Company entered into a series of agreements with
United Microelectronics Corporation to form, along with other investors, a
separate Taiwanese company, United Integrated Circuits Corporation "UICC", for
the purpose of building and managing a semiconductor manufacturing facility in
the Science Based Industrial Park in Hsin Chu City, Taiwan, Republic of China.
The Company has agreed to invest approximately $60 million for a 10% equity
position in the venture. In January 1996, the Company made an initial payment of
$13.7 million, and in January 1997, the Company made a second payment of $25.9
million due under this agreement. The final payment of $15.0 million under this
agreement is due in fiscal 1998. As an investor in this venture, the Company
will have rights to a portion of the total wafer capacity for the manufacture of
its proprietary products. However, there can be no assurance that a market will
develop for the shares representing the Company's equity investment at any time
in the future. See Note 7 of Notes to Consolidated Financial Statements.
In November 1995, the Company acquired Pixel Magic, a privately-held
company based in Andover, Massachusetts for $10.5 million in cash, of which $5.0
million was contingent upon the achievement of certain performance criteria over
a three-year period. Approximately $4.8 million of the initial cash payment was
allocated to in-process research and development and was charged to operations
in fiscal 1996. In June 1997, the Company waived certain of the performance
criteria and agreed to pay the contingent amount of $5.0 million in two
installments during calendar 1998. The first payment of $3.0 million is due in
January 1998 and the second payment of $2.0 million is due in December 1998. As
a result of this agreement and because the contingent earnout was based, in
part, on the continued employment of the former shareholder/employees of Pixel
Magic, Inc., the Company recorded a compensation charge of $5.0 million in the
quarter ended June 30, 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data of the Company required
by this item are set forth at the pages indicated at Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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<PAGE> 207
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As of August 31, 1997, the Directors of the Company, and the executive
officers of the Company, who are elected by and serve at the discretion of the
Board of Directors, were as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
David D. Tsang 55 Chairman of the Board of Directors, President and Chief Executive Officer
Sidney S. Faulkner 44 Vice President, Finance, Chief Financial Officer and Secretary
Kenji Fujimoto 48 Vice President of Oak, General Manager, Oak Technology, K.K.
Abel S. Lo 47 Vice President of Oak, General Manager, Oak Technology, Taiwan
Ben T. Taniguchi 66 Vice President of Sales
Mou Hsin Yang, Ph.D. 51 Vice President of Operations
Aydin Koc 46 Vice President, Optical Storage Business Unit
Paul Vroomen 40 Vice President, Strategic Marketing
Ta-Lin Hsu, Ph.D. 54 Director
Timothy Tomlinson 47 Director
Richard B. Black 64 Director
</TABLE>
Mr. Tsang has been President and Chief Executive Officer of the Company
since he founded the Company in July 1987 and a Director of the Company since
October 1987. He has also served as Chairman of the Board of Directors of the
Company since January 1991. Mr. Tsang has also held the positions of Chief
Financial Officer from July 1987 to March 1993 and Secretary of the Company from
July 1987 to December 1994. He also is a Director of Quality Semiconductor, Inc.
and Enable Semiconductor, Inc., both developers of semiconductor products and
ASE Test, a semiconductor assembly and testing company. Prior to joining Oak,
Mr. Tsang was the founder and served in various positions including President,
Chief Executive Officer and Chairman of Data Technology Corp., a manufacturer of
disk controllers and high density disk drives, from 1979 to 1987, and co-founded
Xebec, a manufacturer of disk controllers, where he was employed from 1974 to
1979. Mr. Tsang holds a B.S.E.E. degree in electrical engineering from Brigham
Young University and an M.S. degree in electrical engineering from the Santa
Clara University.
Mr. Faulkner joined the Company as Corporate Controller in February
1991 and has served as Chief Financial Officer since March 1993. Mr. Faulkner
has also held the position of Vice President, Finance since July 1994 and
Secretary since December 1994. Prior to joining Oak, Mr. Faulkner was a private
consultant from May 1990 to January 1991 and was Director of Quality of Falco
Data Products, a computer hardware company, from 1985 to April 1990. Mr.
Faulkner has also held various accounting positions with Eaton Corp. and Cordis
Dow Corporation. Mr. Faulkner holds a B.S.B.A. degree in accounting from the
University of Florida.
Mr. Fujimoto has been General Manager, Oak Technology, K.K., the
Company's Japanese subsidiary, since joining the Company in February 1991 and
became a Vice President of Oak in April 1995. He has also been a Director of
EDEE, a technology development company in Japan, since September 1993. Prior to
joining Oak, Mr. Fujimoto served as Senior Manager, Marketing and Applications
of AMD Japan from 1976 to January 1991. He holds a B.S. degree in electrical
engineering from the University of Electrocommunications (Japan).
Mr. Lo joined the Company as Engineering Design Manager in 1987. He has
been General Manager, Oak Technology, Taiwan since 1989 and became a Vice
President of Oak in April 1995. Prior to joining Oak, he was Software Manager at
Convergent Technologies, a computer system manufacturer, from June 1986 to May
1987, and Software Manager at the Systems Division of ITT Corp. from May 1985 to
June 1986. Mr. Lo holds a B.S. degree in electrical engineering from Seattle
University, an M.S. degree in electrical engineering from the University of
Washington and an M.S. degree in computer science from Rensselaer Polytechnic
Institute.
Mr. Taniguchi joined the Company as Director, Optical Storage Business
Unit in January 1995 and has served as Vice President of Sales since July 1996.
Prior to joining Oak, he was Western Regional Sales Manager for Standard
Microsystems Corporation, a manufacturer of network interface boards and
components, from March 1994 to January 1995; Vice President and General Manager
of Ultrastor Corporation, a manufacturer of SCSI host
26
<PAGE> 208
adapters and disk array controllers, from August 1993 to March 1994, and
Regional Sales Director for Kenteck Information Systems, a manufacturer of laser
printers, from August 1991 until August 1993. From November 1990 to August 1991,
he was Vice President, Sales and Marketing for Cornerstone Imaging, and from
1986 to November 1990 he was Vice President, Sales and Marketing of Data
Technology Corp., a manufacturer of disk controllers and high density disk
drives. Mr. Taniguchi holds a B.S. degree in applied physics from the University
of California, Los Angeles.
Dr. Yang joined the Company as Director of IC Development in 1987,
served as the Company's Director of Operations from January 1995 until April
1995 and has been Vice President of Operations since April 1995. Mr. Yang holds
a B.S.E.E. degree from National Chiao Tung University, Hsinchu, Taiwan and a
M.S.E.E. degree and a Ph.D. in electrical engineering from Washington
University, St. Louis, Missouri.
Mr. Koc joined the Company as Vice President and General Manager of the
Optical Storage Business Unit in September 1996. Prior to joining the Company,
Mr. Koc spent nine years at LSI Logic Corporation, most recently as Director of
ASIC marketing. Mr. Koc holds both a B.S.E.E. and an M.S.E.E. from Middle East
Technical University as well as an M.B.A. from Stanford University.
Mr. Vroomen joined the Company as Vice President, Strategic Marketing
in September 1997. From May 1996 to June 1997, Mr. Vroomen was Vice President
and General Manager of the Consumer Digital Entertainment business unit at VLSI
Technology, Inc. From November 1994 to April 1996, Mr. Vroomen was Vice
President, Sales & Marketing at Array Microsystems, Inc., a developer of codec
chips for digital video applications and from April 1989 to November 1994, Mr.
Vroomen was at Zilog, Inc. where he was Vice President of the Computer
Peripherals business unit. He holds an M.S.E.E. from the Philips International
Institute in Eindhoven, the Netherlands, and a Managerial Advancement Program
diploma from the University of the Witwatersrand Graduate School of Business in
Johannesburg, South Africa.
Dr. Hsu has been a Director of the Company since January 1991. He has
been employed by H&Q Asia Pacific, the parent company of H&Q Taiwan Co., Ltd.,
since February 1985, most recently as Chairman. He is also a Director of Enable
Semiconductor, Inc., Headway Technologies, ASE Technology Corporation, Behavior
Tech Computer Corporation and AimQuest Corporation. Dr. Hsu holds a B.S. degree
in physics from National Taiwan University, an M.S. degree in electrophysics
from Polytechnic Institute of Brooklyn and a Ph.D. in electrical engineering
from the University of California, Berkeley.
Mr. Tomlinson has been a Director of the Company since June 1988. He
has been a partner of Tomlinson Zisko Morosoli & Maser LLP, a law firm, since
1983. Mr. Tomlinson is also a Director of Portola Packaging, Inc., a
manufacturer of tamper evident closures and related equipment. Mr. Tomlinson
holds a B.A. degree in economics, an M.B.A. and a J.D. from Stanford University.
Mr. Black has been a Director of the Company since November 1992 and
was also a Director from December 1989 to January 1991. He has been the Chairman
of the Board of Directors of ECRM Incorporated, an electronic publishing
equipment manufacturer, since 1983 and a general partner of KBA Partners, L.P.,
an investment company, since 1987. Mr. Black holds a B.S. degree in civil
engineering from Texas A&M University and an M.B.A. from Harvard University.
The information required by Item 11 with respect to compliance with
Section 16(a) of the Securities Exchange Act of 1934 is incorporated by
reference from the Proxy Statement under the Caption "Executive Compensation And
Other Matters."
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K is incorporated by
reference to the information contained in the section captioned "Executive
Compensation and Other Matters" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 of Form 10-K is incorporated by
reference to the information contained in the section captioned "Stock Ownership
of Certain Beneficial Holders and Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 of Form 10-K is incorporated by
reference to the information contained in the section captioned "Certain
Relationships and Related Transactions" in the Proxy Statement.
27
<PAGE> 209
GLOSSARY OF TECHNICAL TERMS
BIOS: Basic Input/Output System. The software interface layer between the system
hardware and the operating system on a PC.
CD-R: Compact Disc Recordable. CD-R drives are an extension of optical storage
technology that use one-time CD-Recordable discs (as opposed to CD-ROM discs
which are read-only).
CD-ReWritable: CD-based drives which use special recordable and rewritable
compact discs.
CD-ROM: Compact Disc Read-Only Memory. A popular high-density storage media for
digital data of all kinds, including graphics, text, video and sound.
DAA: Data Access Arrangement. Provides interface and isolation barrier between
modem and phone line.
DCC: Display Control Command. Information that determines a pictures appearance
(colors, contrast, sub-picture screen position, etc.)
DRAM: Dynamic Random Access Memory. Refers to memory in a PC that stores
portions of active applications and data for fast access.
DSI: Data Search Information. a feature that makes it possible to search for
data while maintaining seamless playback of video.
DVD: Digital Versatile Disc or Digital Video Disc. A new industry standard which
provides much higher levels of data (video, audio, graphics) to be stored on
discs the same size as standard audio or CD-ROM discs.
EDO Memory: Extended Data-Out Memory. A type of memory used in PCs offering
higher performance than standard DRAM.
G3/G4: International fax compression standards.
GUI: Graphical User Interface. A visually descriptive computer interface with
icons and windows such as Microsoft Windows (as opposed to a text-based
interface like DOS) that allows users to perform various tasks on a computer in
a point-and-click environment.
HLI: Highlight Information. A feature that enables users to scroll through a
menu bar and highlight an item of choice.
IDE/ATAPI: Integrated Drive Electronics/AT Attachment Packet Interface. A
dominant PC industry-standard CD-ROM drive interface.
JPEG: Joint Photographic Experts Group. A working committee under the guidance
of the ISO that is attempting to define a proposed universal standard for the
digital compression and decompression of still images for use in computer
systems.
Kbps: Thousands of bits per second. A standard for describing the speed of
information over transmission lines such as phone lines.
MPEG: Motion Picture Experts Group. MPEG-1 and MPEG-2 are standards for the
compression and decompression of video and audio data.
OEM: Original Equipment Manufacturer.
OSD: On-Screen Display. A feature that allows text and graphics to be overlaid
on full-motion video.
PCI: Peripheral Connect Interface. An industry standard architecture for
connecting devices to a PC.
PCI: Presentation Control Information. Information concerning the timing and
presentation of a program.
PCM: Pulse Code Modulation. A method of encoding information in a signal by
varying the amplitude of pulses.
RAMDAC: Random Access Memory Digital-to-Analog Converter. A device typically
integrated as part of a graphics accelerator which converts the graphics
information for display to a monitor.
28
<PAGE> 210
SGRAM: Synchronous Graphics Random Access Memory. A type of memory specifically
used in graphics subsystems offering higher performance than EDO memory and
standard DRAM.
3D: Three-dimensional. 3D graphics on a PC create the illusion of 3D space on
the two dimensions of a computer screen and are commonplace in many imaging
applications.
VideoCD: Video Compact Disc. VideoCD players allow playback of digitally
recorded video and audio.
VMI: Video Module Interface. A standard proposal for connecting a video module,
such as an MPEG module, to a "Video-Ready" GUI device. VMI offers a common
function set for computer manufacturers and semiconductor suppliers.
29
<PAGE> 211
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
<TABLE>
<CAPTION>
1. Financial Statements.
Page
----
<S> <C> <C>
Report of Independent Certified Public Accountants................................................... 33
Consolidated Balance Sheets -- As of June 30, 1997 and 1996.......................................... 34
Consolidated Statements of Operations -- For the Three Year Period Ended June 30, 1997............... 35
Consolidated Statements of Stockholders' Equity - For the Three Year Period Ended June 30, 1997...... 36
Consolidated Statements of Cash Flows - For the Three Year Period Ended June 30, 1997................ 37
Notes to Consolidated Financial Statements........................................................... 38
2. Financial Statement Schedule. The following Financial Statement Schedule of the Registrant is
filed as part of this report:
Schedule II - Valuation and Qualifying Accounts...................................................... 54
All other schedules are omitted because they are not applicable or the
required information is shown in the Consolidated Financial Statements
or notes thereto.
3. Exhibits. The following Exhibits are filed as part of, or incorporated by reference into, this report:
</TABLE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------ -------------
<S> <C> <C>
3.01 The Company's Restated Certificate of Incorporation,
amended (1)
3.02 The Company's Restated Bylaws (2)
3.03 Certificate of Correction to the Restated Certificate
of Incorporation of the Company
4.01 Form of Specimen Certificate for the Company's Common
Stock (3)
4.02 Amended and Restated Registration Rights Agreement
dated as of October 15, 1993 among the Company and
various investors (3)
4.03 The Company's Restated Certificate of Incorporation,
as amended (See Exhibit 3.01)
4.04 The Company's Restated Bylaws (See Exhibit 3.02)
4.05 Form of Certificate of Designation of Series A Junior
Participating Preferred Stock of the Company dated
August 18, 1997
4.06 Rights Agreement between the Company and BankBoston,
N.A. dated August 19, 1997
10.01 1988 Stock Option Plan, as amended and related
documents (3)*
10.02 1994 Stock Option Plan and related documents (3) and
amendment thereto dated February 1, 1996 (4)*
10.03 1994 Outside Directors' Stock Option Plan and related
documents (3)*
10.04 1994 Employee Stock Purchase Plan (3)*
10.05 401(k) Plan and related documents (3) and Amendment
Number One and Supplemental Participation Agreement
thereto (5)*
</TABLE>
30
<PAGE> 212
<TABLE>
<S> <C> <C>
10.06 Lease Agreement dated August 3, 1988 between John
Arrillaga, Trustee, or his Successor Trustee, UTA
dated 7/20/77 (John Arrillaga Separate Property
Trust) as amended and Richard T. Peery, Trustee, or
his Successor Trustee, UTA dated 7/20/77 (Richard T.
Peery Separate Property Trust) as amended, and Justin
Jacobs, Jr., dba Siri-Kifer Investments, a joint
venture, and the Company, as amended June 1, 1990,
and Consent to Alterations dated March 26, 1991
(lease agreement for 139 Kifer Court, Sunnyvale,
California) (3), and amendments thereto dated June
15, 1995 and July 19, 1995 (5)
10.07 Lease Agreement dated August 22, 1994 between John
Arrillaga, Trustee, or his Successor Trustee, UTA
dated 7/20/77 (John Arrillaga Separate Property
Trust) as amended and Richard T. Peery, Trustee, or
his Successor Trustee, UTA dated 7/20/77 (Richard T.
Peery Separate Property Trust) as amended, and Justin
Jacobs, Jr., dba Siri- Kifer Investments, a joint
venture, and the Company (lease agreement for 140
Kifer Court, Sunnyvale, California) (3), and
amendment thereto dated June 15, 1995 (5)
10.08 Form of Indemnification Agreement, between the
Company and each of its Directors and executive
officers (14)
10.09 VCEP Agreement dated July 30, 1990 between the
Company and Advanced Micro Devices, Inc. (3)
10.10 Product License Agreement dated April 13, 1993
between the Company and Media Chips, Inc., as amended
September 16, 1993 (3)
10.11 Resolutions of the Board of Directors of the Company
dated July 27, 1994 setting forth the provisions of
the Executive Bonus Plan (3) (12)*
10.12 Employee Incentive Plan effective January 1, 1995
(3)*
10.13 Option Agreement between Oak Technology, Inc., and
Taiwan Semiconductor Manufacturing Co., Ltd. dated as
of August 8, 1996 (14)**
10.14 Foundry Venture Agreement between the Company and
United Microelectronics Corporation dated as of
October 2, 1995 (6) (12)
10.15 Fab Ven Foundry Capacity Agreement among the Company,
Fab Ven and United Microelectronics Corporation dated
as of October 2, 1995 (7) (12)
10.16 Written Assurances Re: Foundry Venture Agreement
among the Company, United Microelectronics
Corporation and Fab Ven dated as of October 2, 1995
(8) (12)
10.17 Lease Agreement dated June 15, 1995 between John
Arrillaga, Trustee, or his Successor Trustee, UTA
dated 7/20/77 (John Arrillaga Separate Property
Trust) as amended and Richard T. Peery, Trustee, or
his Successor Trustee, UTA dated 7/20/77 (Richard T.
Peery Separate Property Trust) as amended, and the
Company (lease agreement for 130 Kifer Court,
Sunnyvale, California) (9), and amendments thereto
dated June 15, 1995 and August 18, 1995 (10)
10.18 Deposit Agreement dated November 8, 1995 between
Chartered Semiconductor Manufacturing Ltd. and the
Company (11), and Amendment Agreement (No. 1) thereto
dated September 25, 1996 (13)**
10.19 Amendment Agreement (No. 2) dated April 7, 1997 to
Deposit Agreement dated November 8, 1995 between
Chartered Semiconductor Manufacturing Ltd. and the
Company(15)**
10.20 First Amendment to Plan of Reorganization and
Agreement of Merger dated October 27, 1995 among the
Company, Oak Acquisition Corporation, Pixel Magic,
Inc. and the then shareholders of Pixel dated June
25, 1996 and Second Amendment thereto dated June 13,
1997
10.21 First Amendment to Non-Compete and Technology
Transfer Agreement by and among the Company, Pixel
Magic, Inc. and Peter D. Besen dated June 13, 1997**
10.22 Agreement of Termination of Employment Agreement
between Pixel Magic, Inc. and Peter D. Besen dated
June 13, 1997
</TABLE>
31
<PAGE> 213
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------ -------------
<S> <C> <C>
10.23 Agreement of Termination of Employment Agreement
between Pixel Magic, Inc. and Don Schulsinger dated
June 13, 1997
10.24 Release and Settlement Agreement between the Company
and United Microelectronics Corporation dated July
31, 1997**
11.01 Statement regarding computation of net income per
share
23.01 Consent of Independent Auditors
24.01 Power of Attorney (see page 55 of this Form 10-K)
27.01 Financial Data Schedule
</TABLE>
(1) Incorporated herein by reference to exhibit 3.01 of the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996.
(2) Incorporated herein by reference to exhibit 3.05 filed with the
Company's Registration Statement on Form S-1 (File No. 33-87518)
declared effective by the Securities and Exchange Commission on
February 13, 1995 (the "February 1995 Form S-1").
(3) Incorporated herein by reference to the exhibit with the same number
filed with the February 1995 Form S-1.
(4) Incorporated herein by reference to Exhibit 10.1 filed with the
Company's Registration Statement on Form S-8 (File No. 333-4334) on May
2, 1996.
(5) Incorporated herein by reference to the exhibit with the same number
filed with the Company's Annual Report on Form 10-K for the year ended
June 30, 1996.
(6) Incorporated herein by reference to Exhibit 2.1 filed with the
Company's Form 8-K dated October 2, 1995 (the "October 1995 form 8-K").
(7) Incorporated herein by reference to Exhibit 2.2 filed with the October
1995 Form 8-K.
(8) Incorporated herein by reference to Exhibit 2.3 filed with the October
1995 Form 8-K.
(9) Incorporated herein by reference to Exhibit 10.08 filed with the
Company's Annual Report on Form 10-K for the year ended June 30, 1995.
(10) Incorporated herein by reference to Exhibit 10.08 filed with the
Company's Annual Report on Form 10-K for the year ended June 30, 1996.
(11) Incorporated herein by reference to Exhibit 10.04 filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended December
31, 1995.
(12) Confidential treatment has been granted with respect to portions of
this exhibit.
(13) Incorporated herein by reference to Exhibit 10.17 filed with the
Company's Annual Report on Form 10-K for the year ended June 30, 1996.
(14) Incorporated herein by reference to the exhibit with the same number
filed with the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996.
(15) Incorporated herein by reference to the exhibit with the same number
filed with the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1997.
* Indicates Management incentive plan.
** Confidential treatment granted and/or requested as to portions of the
exhibit.
(b) Reports on Form 8-K.
There were no Reports on Form 8-K filed by the Company during the
quarter ended June 30, 1996.
TRADEMARK ACKNOWLEDGMENTS
- Oak Technology, Inc. and the Oak logo are registered
trademarks of the Company. Eon, Pixel Magic, TelAudia3D,
Audia3D, Troika, Warp, Interactive DVD Browser, IDB and
"Multimedia Solutions in Silicon" are trademarks of the
Company.
- All other brand names or trademarks appearing in the Form 10-K
are the property of their respective owners.
32
<PAGE> 214
Independent Auditors' Report
The Board of Directors
Oak Technology, Inc.:
We have audited the accompanying consolidated balance sheets of Oak Technology,
Inc. and subsidiaries as of June 30, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended June 30, 1997. In connection with our
audits of the consolidated financial statements, we have also audited the
consolidated financial statement schedule, insofar as it relates to the
three-year period ended June 30, 1997. These consolidated financial statements
and consolidated financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and consolidated financial statement schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Oak Technology, Inc.
and subsidiaries as of June 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related consolidated financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG Peat Marwick LLP
Palo Alto, California
July 29, 1997, except as to Note 13,
which is as of August 19, 1997
33
<PAGE> 215
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
June 30,
-----------------------
1997 1996
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents ....................................... $ 87,609 $ 44,934
Short-term investments .......................................... 57,660 68,350
Accounts receivable, net of allowance for doubtful accounts of
$663 and $916, respectively ................................. 24,872 20,172
Inventories ..................................................... 12,322 14,763
Current portion of foundry deposits ............................. 15,015 4,595
Deferred tax asset .............................................. 4,350 13,889
Prepaid expenses and other current assets ....................... 4,107 3,809
-------- --------
Total current assets ........................................ 205,935 170,512
Property and equipment, net .......................................... 19,958 18,212
Foundry deposits ..................................................... 19,145 52,000
Investment in foundry venture ........................................ 39,618 13,696
Other assets ......................................................... 2,939 1,888
-------- --------
Total assets ................................................ $287,595 $256,308
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt ............. $ 7,264 $ 22,062
Accounts payable ................................................ 16,144 7,887
Accrued expenses ................................................ 9,882 4,824
Income taxes payable ............................................ 3,893 -
Deferred revenue ................................................ 584 1,053
-------- --------
Total current liabilities ................................... 37,767 35,826
Long-term debt ....................................................... 2,496 2,858
Deferred income taxes ................................................ 6,344 6,435
Other long-term liabilities .......................................... 2,291 362
-------- --------
Total liabilities ........................................... 48,898 45,481
-------- --------
Stockholders' equity:
Preferred stock, $0.001 par value; 2,000,000 shares authorized;
none issued and outstanding as of June 30, 1997 and 1996 .... - -
Common stock, $0.001 par value; 60,000,000 shares
authorized; 41,086,754 shares issued
and outstanding as of June 30, 1997 and 40,196,796 shares
issued and outstanding as of June 30, 1996 .................. 41 40
Additional paid-in capital ...................................... 159,901 155,751
Retained earnings ............................................... 78,755 55,036
-------- --------
Total stockholders' equity .................................. 238,697 210,827
-------- --------
Total liabilities and stockholders' equity .................. $287,595 $256,308
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE> 216
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net revenues ................................ $167,395 $247,984 $110,982
Cost of revenues ............................ 73,214 138,499 56,366
-------- -------- --------
Gross profit ........................... 94,181 109,485 54,616
Research and development expenses ........... 34,660 30,718 14,646
Selling, general, and administrative expenses 21,673 16,783 10,530
Acquisition related charges ................. 5,000 4,837 -
-------- -------- --------
Operating income ....................... 32,848 57,147 29,440
Nonoperating income, net .................... 5,408 6,011 1,651
-------- -------- --------
Income before income taxes ............. 38,256 63,158 31,091
Income taxes ................................ 14,537 26,025 9,869
-------- -------- --------
Net income ............................. $ 23,719 $ 37,133 $ 21,222
======== ======== ========
Net income per share ........................ $ 0.55 $ 0.87 $ 0.67
======== ======== ========
Shares used in computing net income per share 42,757 42,614 31,474
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE> 217
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock Additional Retained Total
---------------------- ---------------------- Paid-in Earnings Stockholders'
Shares Amount Shares Amount Capital (Deficit) Equity
---------- ------ ----------- ------ --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, June 30, 1994 .... 4,616,750 $ 5 7,575,158 $ 8 $ 15,042 $ (3,319) $ 11,736
Conversion of preferred
stock to common stock .... (4,616,750) (5) 15,100,650 15 (10) - -
Issuance of common stock,
net of issuance costs of
$1,168 ................... - - 13,625,000 14 128,139 - 128,153
Exercise of warrants ....... - - 907,630 1 1,102 - 1,103
Repurchase of common stock . - - (80,000) - (9) - (9)
Exercise of stock options .. - - 460,060 - 166 - 166
Tax benefit on exercise of
stock options ............ - - - - 272 - 272
Net income ................. - - - - - 21,222 21,222
---------- --- ----------- --- --------- -------- ---------
Balances, June 30, 1995 .... - - 37,588,498 38 144,702 17,903 162,643
Exercise of warrants ....... - - 807,430 - 1,211 - 1,211
Repurchase of common stock . - - (57,780) - (1,211) - (1,211)
Exercise of stock options .. - - 1,784,508 2 1,469 - 1,471
Employee stock purchase plan - - 74,140 - 909 - 909
Tax benefit on exercise of
stock options ............ - - - - 8,671 - 8,671
Net income ................. - - - - - 37,133 37,133
---------- --- ----------- --- --------- -------- ---------
Balances, June 30, 1996 .... - - 40,196,796 40 155,751 55,036 210,827
Exercise of stock options .. - - 748,682 1 1,048 - 1,049
Employee stock purchase plan - - 141,276 - 1,169 - 1,169
Tax benefit on exercise of
stock options ............ - - - - 1,933 - 1,933
Net income ................. - - - - - 23,719 23,719
---------- --- ----------- --- --------- -------- ---------
Balances, June 30, 1997 .... - $ - 41,086,754 $41 $ 159,901 $ 78,755 $ 238,697
========== === =========== === ========= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE> 218
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------
1997 1996 1995
-------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ................................................. $ 23,719 $ 37,133 $ 21,222
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ......................... 5,502 3,586 1,502
Inventory-related adjustments ......................... (21,754) 24,845 1,538
Equity in (income) or loss of unconsolidated affiliates 602 (442) (236)
Acquisition-related charges ........................... 5,000 4,837 -
Deferred income taxes ................................. 9,448 (5,491) (2,098)
Foundry deposits utilized ............................. 11,035 - -
Changes in operating assets and liabilities:
Accounts receivable .................................. (4,700) 2,050 (11,920)
Inventories .......................................... 21,195 (30,533) (86)
Prepaid expenses and other current assets ............ (298) (2,362) (274)
Accounts payable and accrued expenses ................ 10,315 (4,915) 6,340
Income taxes payable, deferred revenue and other
liabilities........................................ 5,286 2,008 6,542
-------- --------- ---------
Net cash provided by operating activities ....... 65,350 30,716 22,530
-------- --------- ---------
Cash flows from investing activities:
Purchases of short-term investments ........................ (66,791) (107,150) (29,537)
Proceeds from matured short-term investments ............... 77,481 64,607 4,673
Additions to property and equipment, net ................... (6,908) (12,665) (4,167)
Acquisition of Pixel Magic, Inc., net of cash acquired ..... - (5,126) -
Investment in foundry venture .............................. (25,922) (13,696) -
Foundry deposits ........................................... - (45,520) -
Other assets ............................................... (1,993) (161) (484)
-------- --------- ---------
Net cash used in investing activities .............. (24,133) (119,711) (29,515)
-------- --------- ---------
Cash flows from financing activities:
Issuance of debt ........................................... 32,730 54,865 7,859
Repayment of debt .......................................... (33,490) (48,452) (7,946)
Issuance of common stock ................................... 2,218 2,380 129,413
-------- --------- ---------
Net cash provided by financing activities ....................... 1,458 8,793 129,326
-------- --------- ---------
Net increase (decrease) in cash and cash equivalents ............ 42,675 (80,202) 122,341
Cash and cash equivalents, beginning of period .................. 44,934 125,136 2,795
-------- --------- ---------
Cash and cash equivalents, end of period ........................ $ 87,609 $ 44,934 $ 125,136
======== ========= =========
Supplemental information:
Cash paid during the period:
Interest .............................................. $ 465 $ 680 $ 402
========= ========= =========
Income taxes .......................................... $ - $ 28,514 $ 5,582
======== ========= =========
Noncash investing and financing activities:
Accrual of foundry commitments ........................ $(14,400) $ 14,400 $ 1,200
======== ========= =========
Utilization of foundry deposits ....................... $ 11,035 $ - $ -
======== ========= =========
Conversion of preferred stock to common stock ......... $ - $ - $ 14,928
======== ========= =========
Tax benefit related to stock plans .................... $ 1,933 $ 8,671 $ 272
======== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE> 219
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY
Oak Technology, Inc. (the "Company") commenced operations in August 1987,
as a California corporation. The Company is engaged in the design,
development and marketing of high performance multimedia semiconductors and
related software to the PC, consumer electronics, and digital office
equipment markets. The Company formed a subsidiary in Taipei, Taiwan, in
January 1989, and in Tokyo, Japan, in January 1991. In December 1994, the
Board of Directors approved the reincorporation of the Company as a
Delaware corporation. In November 1995, the Company acquired Pixel Magic,
Inc.
In February 1995, the Company completed an initial public offering of
10,925,000 shares of its common stock, of which 7,425,000 were sold by the
Company. At that time, all of the outstanding convertible preferred stock
automatically converted into approximately 15,100,000 shares of common
stock. In May 1995, the Company completed a secondary public offering of
9,200,000 shares of its common stock, of which 6,200,000 shares were sold
by the Company.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Preparation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
transactions and accounts have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash Equivalents and Investments
The Company's policy is to invest cash in excess of operating requirements
in interest-bearing investments. Securities purchased with remaining
maturities of three months or less at the date of acquisition are
considered to be cash equivalents. Securities purchased with remaining
maturities greater than three months at the date of acquisition are
included in short-term investments.
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity
Securities, effective July 1, 1994. SFAS No. 115 requires entities to
classify investments in debt and equity securities with readily determined
fair values as "held-to-maturity," "available-for-sale" or "trading" and
establishes accounting and reporting requirements for each classification.
In accordance with SFAS No. 115, the Company has classified all securities
held as available-for-sale securities. Such securities are reported at fair
value with unrealized gains or losses, if material, excluded from earnings
and reported as a separate component of stockholders' equity. To date,
unrealized gains and losses have not been significant.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily cash and cash equivalents,
short-term investments and accounts receivable. The Company's cash
equivalents and short-term investments are primarily in money market
accounts, certificates of deposit, corporate notes and U.S. government
obligations. The Company's short-term investments have maturities ranging
from 1997 through 1999. Also included in cash and cash equivalents as of
June 30, 1997, and 1996, are approximately $19,005,000 and $9,780,000,
respectively, in accounts with Taiwanese and Japanese banks and financial
institutions. The Company periodically discounts notes receivable with
recourse due from some customers with banks in Japan. As of June 30, 1997,
the Company had no discounted notes receivable outstanding.
Generally, the Company requires no collateral on trade receivables,
although a substantial portion of export international sales are guaranteed
by letters of credit. The Company believes that any credit risks are
substantially mitigated by its credit evaluation process and its
maintenance of reserves for estimated credit losses.
38
<PAGE> 220
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventories
Inventories are stated at the lower of cost (first in, first out) or
market. The Company periodically reviews its inventories for potential
slow-moving or obsolete items and writes down specific items to net
realizable value as appropriate.
Depreciation and Amortization
Property and equipment is stated at cost. Depreciation and amortization are
computed using the straight-line method. Useful lives of three to five
years are used for computer equipment, purchased software and furniture and
fixtures; useful lives of up to five years are used for leasehold
improvements and a useful life of 60 years is used for a building.
Foundry Deposits and Prepayments
Deposits and prepayments paid under agreements to secure additional wafer
capacity are carried at the lesser of cost or net realizable value.
Revenue Recognition
Product revenue is recognized upon shipment, with provisions for estimated
returns and allowances. Revenue from nonrefundable technology license fees
is recognized upon transfer of the associated technology. Product design
revenue is recognized upon completion of contractual milestones.
Foreign Currency Translation and Transactions
The Company's transactions are generally denominated in U.S. dollars, which
is considered to be the functional currency of the Company and its
subsidiaries. Sales to customers in Japan and Taiwan are invoiced in local
currencies. Assets and liabilities of the Company's foreign subsidiaries
are remeasured into the functional currency from the local currency at
rates in effect at period-end except for inventories, property and
equipment, and intangible assets, which are remeasured at historical rates.
Revenues and expenses are remeasured at average rates during the period.
Adjustments arising from the remeasurement of local currency financial
statements are included in nonoperating results.
The Company enters into forward contracts to hedge certain exposures
related to foreign currency transactions. Gains and losses on contracts are
recognized in the same period as the transactions being hedged and are
charged to nonoperating income. As of June 30, 1997 and 1996, the Company
had forward contracts to exchange yen for approximately $4,100,000 and
$1,084,000, respectively.
Income Taxes
The Company records income taxes using an asset and liability approach that
results in the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's consolidated financial statements or tax returns. In estimating
future tax consequences, all expected future events other than enactment of
changes in tax laws or rates are considered.
U.S. income taxes are provided on income from foreign subsidiaries to the
extent the Company plans to repatriate such income.
Net Income Per Share
Net income per share data have been computed using the weighted average
number of shares of common stock, dilutive common equivalent shares from
the convertible preferred stock and dilutive common equivalent shares from
stock options and warrants outstanding (using the treasury stock method).
Pursuant to the Securities and Exchange Commission Staff Accounting
Bulletin No. 83, common equivalent shares issued during the twelve-month
period prior to the Company's initial public offering in February 1995 have
been included in the calculation as if they were outstanding for all
periods prior to the offering (even if antidilutive, using the treasury
stock method).
39
<PAGE> 221
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock-Based Compensation
The Company accounts for its stock option plan in accordance with the
provisions of the Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. As
such, compensation expense would be recorded on the date of grant only if
the current market price of the underlying stock exceeded the exercise
price. On January 1, 1996, the Company adopted the disclosure requirements
of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting
for Stock-Based Compensation. Under SFAS No. 123 the Company must disclose
pro forma net income and pro forma earnings per share disclosures for
employee stock option grants made in 1996 and future years as if the fair
value-based method defined in SFAS No. 123 had been applied.
Recent Accounting Pronouncements
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of. SFAS No. 121
requires the Company to review the recoverability of the carrying amount of
its long-lived assets whenever events or changes in circumstances indicate
that the carrying amount of an asset might not be recoverable.
In the event that facts and circumstances indicate that the carrying amount
of long-lived assets may be impaired, an evaluation of recoverability would
be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset would be compared to the
asset's carrying amount to determine if a write-down to fair value is
required. Fair value may be determined by reference to discounted future
cash flows over the remaining useful life of the related asset. Such
adoption did not have a material effect on the Company's consolidated
financial position or results of operations.
In February 1997 the Financial Accounting Standards Board issued SFAS No.
128 "Earnings Per Share." SFAS No. 128 requires the presentation of basic
earnings per share ("EPS") and, for companies with complex capital
structures, diluted EPS. SFAS No. 128 is effective for annual and interim
periods ending after December 15, 1997. The Company expects that basic EPS
will be higher than primary earnings per share as presented in the
accompanying consolidated financial statements. Generally, diluted EPS will
be the same as fully diluted earnings per share.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and displaying comprehensive income and its components in the
consolidated financial statements. It does not, however, require a specific
format for the statement, but requires the Company to display an amount
representing total comprehensive income for the period in that financial
statement. The Company is in the process of determining its preferred
format. SFAS No. 130 is effective for fiscal years beginning after December
15, 1997.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS
No. 131 establishes standards for the way public business enterprises are
to report information about operating segments in annual financial
statements and requires those enterprises to report selected information
about operating segments in interim financial reports issued to
shareholders. SFAS No 131 is effective for financial statements for periods
beginning after December 15, 1997.
Stock Split
In March 1996, the Company completed a two-for-one stock split in the form
of a 100% stock dividend. All share and per share information for all
periods presented has been adjusted to reflect the impact of the stock
split.
Reclassifications
Certain reclassifications were made to the 1995 and 1996 consolidated
financial statements to conform to the 1997 presentation.
40
<PAGE> 222
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) BALANCE SHEET AND OPERATING STATEMENT COMPONENTS
Investments
As of June 30, 1997, all investments were considered available-for-sale
securities and consisted of the following (in thousands):
<TABLE>
<CAPTION>
Estimated
Accrued Fair
Cost Interest Value
-------- -------- --------
<S> <C> <C> <C>
Money market funds ........... $ 63,002 $ 5 $ 63,007
Certificates of deposit ...... 34,916 18 34,934
Corporate notes .............. 16,521 285 16,806
U.S. government obligations... 30,046 225 30,271
======== ======== ========
$144,485 $ 533 $145,018
======== ======== ========
</TABLE>
As of June 30, 1997, approximately $97.9 million of these investments had
contractual maturities within one year and approximately $46.6 million had
contractual maturities between one and two years. These investments were
classified on the consolidated balance sheet as follows (in thousands):
<TABLE>
<S> <C>
Cash equivalents ....................... $ 86,825
Short-term investments ................. 57,660
========
$144,485
========
</TABLE>
As of June 30, 1996, all investments were considered available-for-sale
securities and consisted of the following (in thousands):
<TABLE>
<CAPTION>
Estimated
Accrued Fair
Cost Interest Value
-------- -------- --------
<S> <C> <C> <C>
Money market funds ........... $ 35,579 $ - $ 35,579
Repurchase agreements ........ 1,843 4 1,847
Certificates of deposit ...... 17,205 - 17,205
Corporate notes .............. 8,009 191 8,200
U.S. government obligations... 43,136 574 43,710
======== ======== ========
$105,772 $ 769 $106,541
======== ======== ========
</TABLE>
As of June 30, 1996, approximately $55 million of these investments had
contractual maturities within one year and approximately $51 million had
contractual maturities between one and two years. These investments were
classified on the consolidated balance sheet as follows (in thousands):
<TABLE>
<S> <C>
Cash equivalents .......................... $ 37,422
Short-term investments .................... 68,350
========
$105,772
========
</TABLE>
41
<PAGE> 223
(3) BALANCE SHEET AND OPERATING STATEMENT COMPONENTS (CONTINUED)
Inventories
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 30,
--------------------------
1997 1996
------- -------
<S> <C> <C>
Purchased parts and work in process... $ 5,521 $ 5,888
Finished goods ....................... 6,801 8,875
======= =======
$12,322 $14,763
======= =======
</TABLE>
In 1996, the Company recorded a charge of approximately $21.0 million to
increase the allowance against inventory to reflect a deterioration in the
net realizable value of excess or obsolete inventory, the majority of which
was composed of one of the Company's CD-ROM controller products. In 1997,
due to more favorable market and economic conditions, the Company sold
$18.7 million of the inventory which had been reserved in 1996 resulting in
a favorable adjustment to cost of revenues.
Property and Equipment
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 30,
--------------------------
1997 1996
------- -------
<S> <C> <C>
Land ............................................ $ 3,487 $ 3,487
Building and leasehold improvements ............. 2,152 2,023
Computers, equipment and purchased software ..... 24,190 17,715
Furniture and fixtures .......................... 1,126 970
------- -------
30,955 24,195
Less accumulated depreciation and amortization... 10,997 5,983
======= =======
$19,958 $18,212
======= =======
</TABLE>
Accrued Expenses
Accrued expenses consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 30,
------------------------
1997 1996
------ ------
<S> <C> <C>
Commission and payroll related items ................................ $4,510 $3,072
Royalties ........................................................... 788 668
Current portion of acquisition-related accrued liability to former
Pixel Magic shareholders .......................................... 3,000 -
Other ............................................................... 1,584 1,084
====== ======
$9,882 $4,824
====== ======
</TABLE>
42
<PAGE> 224
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) BALANCE SHEET AND OPERATING STATEMENT COMPONENTS (CONTINUED)
License Fees
Nonrefundable technology license fees of approximately $235,322, $3,003,000
and $1,334,000 were recorded as revenue in fiscal 1997, 1996 and 1995
respectively.
Nonoperating Income, Net
Nonoperating income, net consisted of the following (in thousands):
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Interest income ................................ $ 6,614 $ 7,299 $ 2,034
Interest expense ............................... (468) (725) (387)
Foreign currency translation/transaction loss... (722) (1,082) (186)
Income(loss) on equity method investee ......... (602) 442 236
Other income (expense) ......................... 586 77 (46)
======= ======= =======
$ 5,408 $ 6,011 $ 1,651
======= ======= =======
</TABLE>
(4) NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 30,
--------------------------
1997 1996
------- -------
<S> <C> <C>
Accrued foundry commitments... $ - $14,400
Short-term notes ............. 158 2,340
Mortgage notes ............... 2,446 2,637
Short-term bank loans ........ 7,105 5,479
Capital lease obligations .... 51 64
------- -------
9,760 24,920
Less current portion ......... 7,264 22,062
======= =======
$ 2,496 $ 2,858
======= =======
</TABLE>
Accrued foundry commitments consisted primarily of payments due under
agreements with Taiwan Semiconductor Manufacturing Company and Chartered
Semiconductor Manufacturing Pte. Ltd. to obtain additional wafer capacity.
As a result of the amendments to the foundry agreements described in Note
7, the Company was relieved of these commitments in fiscal 1997.
Short-term notes consist primarily of revolving borrowings from five
Taiwanese financial institutions, collateralized by land and a building in
Taiwan, and bear interest at rates determined at the time of each
borrowing. Under arrangements with the five financial institutions, as of
June 30, 1997, the Company may borrow up to an aggregate of approximately
$12,619,000 subject to annual renewal. Compensating balances ranging from
20% to 30% of outstanding borrowings are required for individual balances
exceeding established minimums, however no compensating balances were
required as of June 30, 1997. Borrowings as of June 30, 1997 bore interest
at 3.25%.
Mortgage notes are payable in monthly installments of principal and
interest totaling approximately $28,807 and are also collateralized by land
and a building in Taiwan. These notes mature at various dates through March
2012 and bear interest at variable rates, based on the Taiwan Bank
reference rate, ranging from 8% to 8.025% as of June 30, 1997.
43
<PAGE> 225
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
Short-term bank loans consist of borrowings from two Japanese financial
institutions, collateralized by standby letters of credit drawn on U.S.
banks, and bear interest based on the Japanese prime rate. Under
arrangements with these two financial institutions, as of June 30, 1997,
the Company may borrow up to an aggregate of approximately $25 million
subject to annual renewal. Borrowings as of June 30, 1997, bore interest
ranging from 1.08% to 1.12%.
Future principal payments under all outstanding obligations as of June 30,
1997 are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending June 30,
--------------------
<S> <C>
1998 ..................................... $7,264
1999 ..................................... 363
2000 ..................................... 193
2001 ..................................... 197
2002 ..................................... 214
Thereafter ............................... 1,529
======
$9,760
======
</TABLE>
(5) ACQUISITION OF PIXEL MAGIC, INC.
In November 1995, the Company acquired all of the outstanding stock of
Pixel Magic, Inc. ("Pixel Magic"), a privately held company based in
Andover, Massachusetts, specializing in the design and manufacture of
compression/decompression and image enhancement technology for the digital
equipment product market, for $10.5 million of which $5.0 million was
contingent upon the achievement of certain performance criteria over a
three year period. In June 1997, the Company waived certain of the
performance criteria and agreed to pay the entire contingent amount of $5.0
million in two installments during calendar 1998. The first payment of $3.0
million is due in January 1998 and the second payment of $2.0 million is
due in December 1998. As a result of this agreement and because the
contingent earnout was based, in part, on the continued employment of the
former shareholder/employees of Pixel Magic, Inc., the Company recorded a
compensation charge of $5.0 million in the quarter and fiscal year ended
June 30, 1997. The acquisition was accounted for using the purchase method
of accounting and accordingly, the operating results of Pixel Magic have
been included in the consolidated financial statements of the company from
the date of acquisition. The initial cash payment was allocated as follows
(in thousands):
<TABLE>
<S> <C>
Net liabilities assumed ....................... $ (191)
In-process research and development ........... 4,837
Purchased technology .......................... 854
=======
$ 5,500
=======
</TABLE>
Approximately $4.8 million of the initial cash payment was allocated to
in-process research and development and was charged to operations in the
quarter ended December 31, 1995. The remainder of the cost was allocated to
purchased software and assets and liabilities based upon management's
estimate of their fair market values as of the acquisition date. The amount
allocated to purchased technology will be amortized over 30 months.
44
<PAGE> 226
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) ACQUISITION OF PIXEL MAGIC, INC. (CONTINUED)
The following unaudited pro forma combined results of operations for the
twelve months ended June 30, 1996 and 1995 are presented as if the
acquisition had occurred at the beginning of each period. The one-time
charge for the write-off of in-process research and development and the
compensation expense associated with the waiver of the performance criteria
associated with the contingent payment amount have not been reflected in
the following pro forma summary as they are nonrecurring. This pro forma
summary does not necessarily reflect the results of operations as they
would have been if the Company and Pixel Magic had constituted a
consolidated entity during such periods (in thousands, except per share
data):
<TABLE>
<CAPTION>
June 30,
------------------------------
1996 1995
-------- --------
<S> <C> <C>
Net revenues ............. $249,170 $113,645
Net income ............... $ 39,857 $ 21,155
Net income per share ..... $ 0.94 $ 0.67
</TABLE>
(6) INCOME TAXES
The components of the income tax expense are as follows (in thousands):
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal and state ......................... $ 1,087 $ 21,622 $ 11,970
Foreign ................................... 2,069 1,223 1,050
Deferred:
Federal and state ......................... 9,771 (9,984) (4,008)
Foreign ................................... (323) 4,493 1,910
Less benefit of net operating loss carryovers... - - (1,325)
Charge in lieu of taxes attributable to
employee stock option plans ............... 1,933 8,671 272
======== ======== ========
Total tax provision ................... $ 14,537 $ 26,025 $ 9,869
======== ======== ========
</TABLE>
A reconciliation between the income tax provision computed at the federal
statutory rate and the effective tax rate is as follows (in thousands):
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Expense at federal statutory tax rate ..... $ 13,390 $ 22,105 $ 10,882
State income tax, net of federal benefit... 523 1,209 733
Rate differential on foreign income ....... (327) 1,615 -
Pixel Magic acquisition ................... 1,667 1,773 -
Valuation allowance adjustment ............ - - (3,770)
Other ..................................... (716) (677) 2,024
======== ======== ========
Total tax provision .............. $ 14,537 $ 26,025 $ 9,869
======== ======== ========
</TABLE>
45
<PAGE> 227
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
June 30,
----------------------------
1997 1996
------- --------
<S> <C> <C>
Various reserves and accruals .................... $ 4,086 $ 13,982
Deferred research and development expenses ....... 66 73
State tax credits ................................ 412 -
------- --------
Total gross deferred tax assets ............. 4,564 14,055
------- --------
Fixed assets depreciation differences ............ (344) (63)
Other foreign liabilities ........................ (6,214) (6,538)
------- --------
Total gross deferred tax liabilities ........ (6,558) (6,601)
------- --------
Net deferred tax assets (liabilities)... $(1,994) $ 7,454
======= ========
</TABLE>
As of June 30, 1997, the Company has a state tax credit carryforward of
approximately $412,000; if not utilized, approximately $284,000 of these
credits will expire in 2005. As of June 30, 1997 and 1996, the cumulative
amount of unremitted earnings of non-U.S. subsidiaries on which the Company
had not provided U.S. taxes approximated $15,000,000 and $11,600,000,
respectively. The additional taxes that could arise if those earnings were
to be remitted to the U.S. would not be material after consideration of
existing foreign taxes. It is management's intent that these earnings
remain indefinitely invested.
(7) FOUNDRY AGREEMENTS AND INVESTMENT IN FOUNDRY VENTURE
Foundry Agreements
In June and November 1995, the Company entered into agreements with TSMC
and Chartered to obtain certain additional wafer capacity through the year
2001. The agreements call for the Company to commit to certain future wafer
purchases and to deposit funds with the suppliers as either a portion of
the price of the additional wafers in advance of their delivery or as a
non-interest bearing deposit to secure the availability of additional
wafers. The price of such wafers will be determined in the future periods
in which specific orders are actually placed. If the Company is not able to
use, assign, or sell the additional wafer quantities, all or a portion of
the deposits may be forfeited.
In October 1996, the Company amended its previous agreement with TSMC
resulting in a reduction of the Company's future wafer purchases required
under the original agreement by approximately $73 million. Under the
amended agreement, no additional prepayment is required; however, the
Company must utilize the entire amount of the prepayment paid to date
through a certain committed amount of wafer purchases in the years 1997,
1998, and 1999 or the prepayment will be forfeited.
In September 1996 and April 1997, the Company amended its agreement with
Chartered. The amendments resulted in a reduction of the Company's future
wafer purchase commitments and the elimination of required future cash
deposits under the original agreement of approximately $36 million. Under
the amended agreement, the required future cash deposits of approximately
$36 million could be reinstated if certain conditions are not met. The
Company currently believes the terms and conditions of the agreement as
amended will be met and that these commitments will not be reinstated
although no assurance can be given in this regard.
The Company recorded $3.0 million in cost of sales during fiscal 1996
associated with manufacturing cost adjustments related to its wafer foundry
agreements as a result of lower forecasted capacity usage during the
calendar year ending December 31, 1996. The execution of these amendments
reduced the Company's wafer purchase commitments during the remainder of
calendar 1996 and thereafter and resulted in a favorable manufacturing cost
adjustment recorded to cost of revenues of $3.0 million. The remaining
deposits and prepayments under the amended foundry agreements described
above are recorded at cost and total approximately $34.2 million as of June
30, 1997. The Company currently anticipates being able to utilize and fully
recover the value of all foundry prepayments and deposits under the terms
of the amended agreements.
46
<PAGE> 228
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) FOUNDRY AGREEMENTS AND INVESTMENT IN JOINT VENTURE (CONTINUED)
Investment in Foundry Venture
In October 1995, the Company entered into a series of agreements with
United Microelectronics Corporation to form, along with other investors, a
separate Taiwanese company, United Integrated Circuits Corporation "UICC",
for the purpose of building and managing a semiconductor manufacturing
facility in the Science Based Industrial Park in Hsin Chu City, Taiwan,
Republic of China. The Company has agreed to invest approximately $60
million for a 10% equity position in the venture. In January 1996, the
Company made an initial payment of $13.7 million and in January 1997, the
Company made a second payment of $25.9 million due under this agreement.
The final payment of $15.0 million under this agreement is due in fiscal
1998. Investment in the foundry venture was approximately $39.6 million as
of June 30, 1997. As an investor in this venture, the Company will have
rights to a portion of the total wafer capacity for the manufacture of its
proprietary products. However, there can be no assurance that a market will
develop for the shares representing the Company's equity investment at any
time in the future.
(8) COMMITMENTS AND CONTINGENCIES
The Company and various of its current and former officers and Directors
are parties to several lawsuits which purport to be class actions filed on
behalf of all persons who purchased or acquired the Company's stock
(excluding the defendants and parties related to them) for the period July
27, 1995 through May 22, 1996. The first, a state court proceeding
designated In re Oak Technology Securities Litigation, Master File No.
CV758510 pending in Santa Clara County Superior Court in Santa Clara,
California, consolidates five putative class actions. This lawsuit also
names as defendants several of the Company's venture capital fund
investors, two of its investment bankers and two securities analysts. The
plaintiffs allege violations of California securities laws and statutory
deceit provisions as well as breaches of fiduciary duty and abuse of
control. On December 6, 1996, the state court Judge sustained the Oak
defendants' demurrer to all causes of action alleged in plaintiffs' First
Amended Consolidated Complaint, but allowed plaintiffs the opportunity to
amend. The plaintiff's Second Amended Consolidated Complaint was filed on
August 1, 1997.
The Company and various of its current and former officers and Directors
are also parties to four putative class action lawsuits pending in the U.S.
District Court for the Northern District of California. These actions have
been consolidated as In re Oak Technology, Inc. Securities Litigation, Case
No. C-96-20552-SW(PVT). This action alleges certain violations of federal
securities laws and is brought on behalf of purchasers of the Company's
stock for the period July 27, 1995 through May 22, 1996. This action also
names as a defendant one of the Company's investment bankers. On July 29,
1997, the federal court Judge granted the Oak defendants Motion to Dismiss
the plaintiffs; First Amended Consolidated Complaint, but granted
plaintiffs leave to amend most claims. The plaintiffs' Second Amended
Consolidated Complaint was filed on September 4, 1997.
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. This lawsuit, which asserts a claim
for breach of fiduciary duty and a claim under California securities law
based upon the officers' and Directors' trading in securities of the
Company, has been stayed pending resolution of the class actions.
In all of the putative state and federal class actions, the plaintiffs are
seeking monetary damages and equitable relief. In the derivative action,
the plaintiffs are also seeking an accounting for the defendants' sales of
Company stock and the payment of monetary damages to the Company.
All of these actions are in the early stages of proceedings and the Company
is currently investigating the allegations. Based on its current
information, the Company believes the suits to be without merit and will
defend its position vigorously. Although it is reasonably possible the
Company may incur a loss upon conclusion of these claims, an estimate of
any loss or range of loss cannot be made. No provision for any liability
that may result upon adjudication has been made in the Company's
Consolidated Financial Statements.
In connection with these legal proceedings, the Company has incurred, and
expects to continue to incur, substantial legal and other expenses.
Shareholder suits of this kind are highly complex and can extend for a
protracted period of time, which can substantially increase the cost of
such litigation and divert the attention of the Company's management.
47
<PAGE> 229
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) STOCKHOLDERS' EQUITY
The Company is authorized to issue two classes of stock, preferred stock
and common stock, each with a par value of $0.001 per share.
Preferred Stock
Upon conversion of all of the outstanding preferred stock at the effective
date of the Company's initial public offering in February 1995, the number
of preferred shares authorized was reduced to 14,760,708 undesignated
shares. In April 1995 the number of preferred shares authorized was reduced
to 4,000,000 undesignated shares and in March 1996, to 2,000,000
undesignated shares; none of these preferred shares have been issued. The
Board of Directors is authorized, subject to any limitations prescribed by
Delaware law, to provide for the issuance of shares of preferred stock in
one or more series, to establish the number of shares to be included in
each series, and to fix the powers, preferences and rights of the shares.
Warrants
Warrants to purchase an aggregate of 796,644 shares of Series D preferred
stock at $2.25 per share were outstanding as of June 30, 1994. The warrants
are exercisable at any time on or prior to December 15, 1997. Following the
conversion of Series D preferred stock to common stock upon the Company's
initial public offering in February 1995, these warrants represented the
right to purchase 1,194,948 shares of common stock at $1.50 per share.
Warrants representing the right to purchase 204,990 shares of common stock
were exercised under the warrants' cashless exercise provisions, resulting
in the issuance of 177,098 shares of common stock in 1995; 807,448 shares
of common stock resulted in the issuance of 749,650 shares of common stock
in 1996; no shares were issued pursuant to warrant exercises in 1997.
Warrants representing the right to purchase 182,528 shares of common stock
were outstanding as of June 30, 1997 and 1996.
Stock Options
Upon the reincorporation of the Company in Delaware in February 1995, the
Company assumed the obligations of its predecessor under the 1988 Stock
Option Plan (the "1988 Plan"), as amended and restated. The Company does
not intend to issue any additional options under the 1988 Plan.
In December 1994, the Board of Directors approved the 1994 Stock Option
Plan (the "1994 Plan") under which 3,000,000 shares of Common Stock were
reserved for issuance; 3,000,000 additional shares were approved in
February 1996. Under the 1994 Plan, either incentive or nonqualified
options to purchase the Company's common stock may be granted to employees
as determined by the Board of Directors at prices generally at fair market
value at the date of grant (110% in certain cases of nonqualified options).
Nonqualified options may be granted to employees and consultants as
determined by the Board of Directors at prices not lower than 85% of fair
market value at the date of grant. The Board of Directors also has the
authority to set exercise dates (generally no longer than five years from
date of grant), payment terms and other provisions for each grant.
On August 1, 1996 the Company repriced 1,800,370 options under the 1994
Plan to $6.50, the fair market value as of that date. The repriced shares
were treated as canceled and regranted; however, they retained their
original vesting terms and were not exercisable until after April 30, 1997.
In December 1994 the Board of Directors also approved the 1994 Outside
Directors' Stock Option Plan (the "Directors Plan"), under which 500,000
shares of Common Stock were reserved for issuance. The Directors Plan
provides for the automatic grant of options to purchase shares of Common
Stock to nonemployee Directors of the Company.
Stock options are subject to vesting, generally over 50 months. Under the
1988 Plan, shares are exercisable prior to vesting and are held in escrow
until vested; however, unvested shares are subject to a right of repurchase
by the Company at their original purchase price upon termination of
employment. Unexercised options expire 90 days after termination of
employment with the Company.
48
<PAGE> 230
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) STOCKHOLDERS' EQUITY (CONTINUED)
A summary of all the Company's stock option plans is set forth below:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Options Exercise Options Exercise
Outstanding Price Exercisable Price
---------- ------ --------- ------
<S> <C> <C> <C> <C>
Balances, June 30, 1994... 4,031,000 $ 0.66
Granted ............. 1,443,200 8.05
Exercised ........... (460,060) 0.39
Canceled ............ (318,660) 2.72
---------- ------ --------- ------
Balances, June 30, 1995... 4,695,480 $ 2.82 4,092,280 $ 1.15
Granted ............. 1,576,400 22.33
Exercised ........... (1,784,508) 0.82
Canceled ............ (495,862) 13.55
---------- ------ --------- ------
Balances, June 30, 1996... 3,991,510 $10.08 2,257,424 $ 2.11
Granted ............. 3,118,240 7.69
Exercised ........... (748,682) 1.41
Canceled ............ (2,579,072) 15.82
========== ====== ========= ======
Balances, June 30, 1997... 3,781,996 $ 5.91 1,459,573 $ 3.33
========== ====== ========= ======
</TABLE>
The weighted average fair values of options granted in fiscal years 1997
and 1996 were $3.82 and $14.12, respectively.
The following table summarizes information about the stock options
outstanding as of June 30, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------- --------------------------
Weighted
Average
Shares Remaining Weighted Shares Weighted
at Contractual Average at Average
June 30, Life Exercise June 30, Exercise
Exercise Prices 1997 (Years) Price 1997 Price
------------------ -------------- ------------- ------------- -------------- ----------
<S> <C> <C> <C> <C> <C>
$ 0.43 to $ 5.00 1,175,336 1.60 $ 1.65 905,815 $ 1.27
$ 6.50 1,538,310 3.40 6.50 547,998 6.50
$ 6.81 to $10.13 778,700 4.61 8.53 - -
$10.38 to $14.25 271,650 4.49 12.30 - -
$25.00 18,000 3.59 25.00 5,760 25.00
============== ============= ============= ============== ==========
$ 0.43 to $25.00 3,781,996 3.17 $ 5.91 1,459,573 $ 3.33
============== ============= ============= ============== ==========
</TABLE>
49
<PAGE> 231
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) STOCKHOLDERS' EQUITY (CONTINUED)
Stock Purchase Plan
In December 1994, the Board of Directors approved the 1994 Stock Purchase
Plan (the "Stock Purchase Plan") under which 600,000 shares of common stock
were reserved for issuance. The Stock Purchase Plan permits eligible
employees to purchase shares at a price equal to 85% of the lower of the
fair market value at the beginning or end of each six-month offering
period. Under the Stock Purchase Plan, 141,276 and 74,140 shares were
issued in fiscal years 1997 and 1996 at weighted average prices of $8.28
and $12.27, and weighted average fair values of $3.84 and $6.97,
respectively.
Fair Value Information
The Company applies APB Opinion 25 and related Interpretations in
accounting for its stock options plans. Accordingly, no compensation cost
has been recognized for its stock option plans nor its Stock Purchase Plan.
Had compensation cost for the Company's option plans been determined
consistent with FASB Statement No. 123, the Company's net income and net
income per share would have been reduced to the pro forma amounts indicated
below (in thousands, except per share data):
<TABLE>
<CAPTION>
June 30,
--------------------------------
1997 1996
---------- ----------
<S> <C> <C>
Net income:
As reported .... $ 23,719 $ 37,133
Pro forma ...... 18,890 35,014
Net income per share:
As reported .... $ 0.55 $ 0.87
Pro forma ...... 0.44 0.82
</TABLE>
Pro forma net income reflects only options granted in fiscal 1997 and 1996.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income
amounts presented above because compensation cost is reflected over the
options' vesting period of three to four years and compensation cost for
options granted prior to July 1, 1995, is not considered.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with a dividend yield of 0% and the
following weighted average assumptions:
<TABLE>
<CAPTION>
Stock Option Plans Stock Purchase Plan
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Expected life (years) .... 3.745 3.745 0.500 0.500
Expected volatility ...... 85% 85% 85% 85%
Risk-free interest rate... 6.51% 5.82% 5.29% 5.38%
</TABLE>
(10) EMPLOYEE BENEFIT PLAN
In July 1990, the Company adopted a 401(k) Profit Sharing Plan ("401(k)
Plan") which is intended to qualify under section 401(k) of the Internal
Revenue Code of 1986, as amended. The 401(k) Plan covers substantially all
of the Company's U.S. employees. Participants may elect to contribute a
percentage of their compensation to this plan, up to the statutory maximum
amount. The Company makes contributions to the 401(k) Plan based on 25% of
an employee's contribution up to a maximum of 1.25% of total compensation;
$198,820 and $226,844 in matching contributions were recorded during fiscal
1997 and fiscal 1996, respectively. No matching contributions were made in
prior years.
50
<PAGE> 232
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) INDUSTRY SEGMENT AND MAJOR CUSTOMERS
The Company designs, develops and markets high performance multimedia
semiconductors and related software to original equipment manufacturers
worldwide who serve the PC, consumer electronics and digital office
equipment markets.
The following table summarizes the annual percentage contribution to net
revenues by customers when sales to such customers exceeded 10% of net
revenues and the percentage of total accounts receivable due from these
customers.
<TABLE>
<CAPTION>
Percentage of Net Revenues
----------------------------------
Year Ended June 30,
----------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
LG Electronics ....................... 13% 2% -
Mitsumi Electronic Co.,Ltd ........... 14% 26% 29%
Kanematsu Semiconductor Corporation... 7% 19% 13%
NEC Home Electronics, Ltd. ........... 8% 13% 9%
</TABLE>
<TABLE>
<CAPTION>
Percentage of Total Accounts Receivable
----------------------------------
As of June 30,
----------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
LG Electronics........................ 1% - -
Mitsumi Electronic Co.,Ltd ........... 23% 31% 32%
Kanematsu Semiconductor Corporation... 6% 7% 21%
NEC Home Electronics, Ltd. ........... 22% 20% 20%
</TABLE>
Sales of the Company's CD-ROM controller products comprised 84%, 91%, and
74% of the net revenues in fiscal 1997, 1996, and 1995, respectively.
51
<PAGE> 233
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) GEOGRAPHIC SEGMENT REPORTING
The Company maintains significant operations in the United States, Taiwan
and Japan. Activities in the United States consist of corporate
administration, product development, logistics and worldwide sales
management. Foreign operations consist of regional sales and limited
board-level manufacturing.
The following is a summary of operations by geographic areas (in
thousands):
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenue from unaffiliated customers originating from:
United States ............................. $ 15,139 $ 37,142 $ 25,224
Taiwan .................................... 82,613 47,963 28,368
Japan ..................................... 69,643 162,879 57,390
--------- --------- ---------
$ 167,395 $ 247,984 $ 110,982
========= ========= =========
Transfers between geographic areas
(eliminated in consolidation):
United States ............................. $ 130,102 $ 180,569 $ 72,483
Taiwan .................................... 1 4,175 5,523
Japan ..................................... 710 233 7,161
--------- --------- ---------
$ 130,813 $ 184,977 $ 85,167
========= ========= =========
Income before income taxes:
United States ............................. $ 31,767 $ 48,349 $ 27,579
Taiwan .................................... 6,041 2,536 3,069
Japan ..................................... 834 8,574 3,844
Eliminations .............................. (386) 3,699 (3,401)
--------- --------- ---------
$ 38,256 $ 63,158 $ 31,091
========= ========= =========
Identifiable assets:
United States ............................. $ 251,706 $ 226,039 $ 178,262
Taiwan .................................... 27,743 14,778 20,096
Japan ..................................... 25,731 22,848 28,118
Eliminations .............................. (17,585) (7,357) (32,523)
--------- --------- ---------
$ 287,595 $ 256,308 $ 193,953
========= ========= =========
Export sales from United States to
unaffiliated customers:
Canada .................................... $ 51 $ 50 $ 207
Taiwan .................................... 190 9 59
Japan ..................................... 211 1,273 6
Other Asia ................................ 6,621 26,189 13,594
Europe .................................... 1,212 3,668 2,134
--------- --------- ---------
$ 8,285 $ 31,189 $ 16,000
========= ========= =========
</TABLE>
52
<PAGE> 234
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) SUBSEQUENT EVENT
On August 19, 1997 the Board of Directors of the Company declared a
dividend of one preferred share purchase right (a "Right") for each
outstanding share of Common Stock, par value $0.001 per share (the "Common
Stock") of the Company. The dividend is payable on August 29, 1997 (the
"Record Date") to the stockholders of record on that date. Each Right
entitles the registered holder to purchase from the Company one
one-thousandth of a share (a "Unit") of Series A Junior Participating
Preferred Stock, par value $0.001 per share of the Company at a price of
$60.00 per Unit subject to adjustment. The description and terms of the
Rights are set forth in a Rights Agreement dated as of August 19, 1997
between the Company and BankBoston, N.A., as Rights Agent.
53
<PAGE> 235
SCHEDULE II
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Additions
Charged to
Beginning Costs and Deductions Ending
Allowance for Doubtful Accounts Balance Expenses Write-Offs Balance
------------------------------- ------- -------- ---------- -------
<S> <C> <C> <C> <C>
Year ended June 30, 1997....... $916 $286 $(539) $663
Year ended June 30, 1996....... 534 866 (484) 916
Year ended June 30, 1995....... 218 458 (142) 534
</TABLE>
54
<PAGE> 236
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: September 24, 1997 OAK TECHNOLOGY, INC.
By:/s/ Sidney S. Faulkner
-------------------------------
Sidney S. Faulkner
Vice President, Finance,
Chief Financial Officer
and Secretary
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints David D. Tsang and Sidney S. Faulkner,
and each of them, his or her true and lawful attorneys-in-fact, each with full
power of substitution, for him or her in any and all capacities, to sign any
amendments to this report on Form 10-K and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact or their substitute or substitutes may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ David D. Tsang President, Chief Executive Officer September 24, 1997
- --------------------------- and Director
David D. Tsang (Principal Executive Officer)
/s/ Sidney S. Faulkner Vice President, Finance, September 24, 1997
- --------------------------- Chief Financial Officer and
Sidney S. Faulkner Secretary
(Principal Financial and Accounting
Officer)
/s/ Richard B. Black Director September 24, 1997
- ---------------------------
Richard B. Black
/s/ Ta-Lin Hsu Director September 24, 1997
- ---------------------------
Ta-Lin Hsu
/s/ Timothy Tomlinson Director September 24, 1997
- ---------------------------
Timothy Tomlinson
</TABLE>
55
<PAGE> 237
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Exhibit Title Page
- ------ ------------- ----
<S> <C> <C>
3.03 Certificate of Correction to the Restated Certificate of Incorporation
of the Company
4.05 Form of Certificate of Designation of Series A Junior Participating
Preferred Stock of the Company dated August 18, 1997
4.06 Rights Agreement between the Company and BankBoston, N.A. dated August
19, 1997
10.20 First Amendment to Plan of Reorganization and Agreement of Merger
dated October 27,1995 among the Company, Oak Acquisition Corporation,
Pixel Magic, Inc. and the then shareholders of Pixel dated June 25,
1996 and Second Amendment thereto dated June 13, 1997
10.21 First Amendment to Non-Compete and Technology Transfer Agreement by
and among the Company, Pixel Magic, Inc. and Peter D. Besen dated June
13, 1997**
10.22 Agreement of Termination of Employment Agreement between Pixel Magic,
Inc. and Peter D. Besen dated June 13, 1997
10.23 Agreement of Termination of Employment Agreement between Pixel Magic,
Inc. and Don Schulsinger dated June 13, 1997
10.24 Release and Settlement Agreement between the Company and United
Microelectronics Corporation dated July 31, 1997**
11.01 Statement regarding computation of net income per share
23.01 Consent of Independent Auditors
24.01 Power of Attorney (see page 55 of this Form 10-K)
27.01 Financial Data Schedule
</TABLE>
- ---------------------------
** Confidential treatment granted and/or requested as to portions of the
exhibit.
56
<PAGE> 238
EXHIBIT 11.01
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
June 30,
---------------------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Statement of Operations data:
Net income ................................... $23,719 $37,133 $21,222
======= ======= =======
Weighted average number of common and
dilutive common equivalent shares
used in computations:
Common stock ............................. 40,751 39,262 17,390
Preferred stock .......................... - - 8,028
Stock options and other
common stock equivalents ............. 2,006 3,352 4,136
------- ------- -------
Subtotal ........................ 42,757 42,614 29,554
Preferred stock granted subject to
Staff Accounting Bulletin No. 83 ..... - - 1,058
Stock options and other common stock
equivalents granted subject to Staff
Accounting Bulletin No. 83 ........... - - 862
Shares used in computing net income per share (1) . 42,757 42,614 31,474
======= ======= =======
Net income per share (2) .......................... $ 0.55 $ 0.87 $ 0.67
======= ======= =======
</TABLE>
(1) Shares used in computing net income per share for prior periods have been
restated to reflect the impact of a two for one stock split approved by the
Company's Board of Directors in January 1996.
(2) The difference between primary and fully diluted net income per share is
not material.
<PAGE> 239
EXHIBIT 23.01
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Oak Technology, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
33-89446 and 333-04334) on Form S-8 of Oak Technology, Inc. of our report dated
July 29, 1997, except as to Note 13, which is as of August 19, 1997, relating to
the consolidated balance sheets of Oak Technology, Inc. and subsidiaries as of
June 30, 1997 and 1996, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended June 30, 1997, and related schedule, which report appears in the
June 30, 1997 annual report on Form 10-K of Oak Technology, Inc.
KPMG Peat Marwick LLP
Palo Alto, California
September 23, 1997
<PAGE> 240
Form 10-Q for OAK TECHNOLOGY INC filed on May 15 1998
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from __________ to __________
COMMISSION FILE NO. 0-25298
OAK TECHNOLOGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0161486
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
139 KIFER COURT
SUNNYVALE, CALIFORNIA 94086
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(408) 737-0888
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES X NO .
--- ---
As of March 31, 1998, there were outstanding 42,192,509 shares of the
Registrant's Common Stock, par value $0.001 per share.
<PAGE> 241
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
INDEX
PAGE
-----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1998
and June 30, 1997 . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the
Three Months and Nine Months ended
March 31, 1998 and 1997 . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the
Nine Months Ended March 31, 1998 and 1997 . . . . . . . . . . 5
Notes to Consolidated Financial Statements. . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 32
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . 35
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
2
<PAGE> 242
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
March 31, June 30,
1998 1997
----------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................ $ 71,508 $ 87,609
Short-term investments............................................... 57,754 57,660
Accounts receivable, net of allowance for doubtful accounts of
$647 and $663, respectively....................................... 20,624 24,872
Inventories.......................................................... 9,137 12,322
Current portion of foundry deposits.................................. 10,098 15,015
Deferred tax assets.................................................. 4,350 4,350
Prepaid expenses and other current assets............................ 7,708 4,107
----------- ------------
Total current assets.............................................. 181,179 205,935
Property and equipment, net............................................ 24,342 19,958
Foundry deposits....................................................... 18,231 19,145
Investment in foundry venture.......................................... 51,234 39,618
Other assets........................................................... 2,893 2,939
----------- ------------
Total assets...................................................... $ 277,879 $ 287,595
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt.................. $ 7,766 $ 7,264
Accounts payable..................................................... 6,287 16,144
Accrued expenses..................................................... 8,484 9,882
Income taxes payable................................................. - 3,893
Deferred revenue..................................................... 320 584
----------- ------------
Total current liabilities......................................... 22,857 37,767
Long-term debt......................................................... 49 2,496
Deferred income taxes.................................................. 4,151 6,344
Other long-term liabilities............................................ 203 2,291
----------- ------------
Total liabilities................................................. 27,260 48,898
----------- ------------
Stockholders' equity:
Preferred stock, $0.001 par value; 2,000,000 shares authorized;
none issued and outstanding as of March 31, 1998 and
June 30, 1997...................................................... - -
Common stock, $0.001 par value; 60,000,000 shares authorized;
42,192,509 and 41,086,754 shares issued and outstanding as of
March 31, 1998 and June 30, 1997, respectively..................... 42 41
Additional paid-in capital........................................... 161,031 159,901
Retained earnings.................................................... 89,546 78,755
----------- ------------
Total stockholders' equity........................................ 250,619 238,697
----------- ------------
Total liabilities and stockholders' equity........................ $ 277,879 $ 287,595
----------- ------------
----------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 243
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------ -------------------------
1998 1997 1998 1997
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues....................................... $ 35,550 $ 50,634 $ 128,196 $ 117,171
Cost of revenues................................... 21,145 22,829 65,133 48,270
----------- ---------- ----------- -----------
Gross profit.................................. 14,405 27,805 63,063 68,901
Research and development expenses.................. 12,394 8,552 35,400 24,506
Selling, general and administrative expenses....... 8,823 5,720 22,970 15,100
Restructuring charges.............................. 1,766 - 1,766 -
----------- ---------- ----------- -----------
Operating income (loss)....................... (8,578) 13,533 2,927 29,295
Nonoperating income, net........................... 2,342 1,143 12,060 3,127
----------- ---------- ----------- -----------
Income (loss) before income taxes.............. (6,236) 14,676 14,987 32,422
Income taxes expense (benefit)..................... (3,232) 5,136 4,196 11,347
----------- ---------- ----------- -----------
Net income (loss).............................. $ (3,004) $ 9,540 $ 10,791 $ 21,075
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
Net income (loss) per share:
Basic.......................................... $ (0.07) $ 0.24 $ 0.26 $ 0.52
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
Diluted........................................ $ (0.07) $ 0.22 $ 0.25 0.49
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
Shares used in computing net income (loss)
per share:
Basic.......................................... 42,000 40,532 41,809 40,469
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
Diluted........................................ 42,000 42,801 42,644 42,630
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 244
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
--------------------------
1998 1997
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................ $ 10,791 $ 21,075
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization...................................... 5,309 4,020
Inventory-related adjustments...................................... 3,630 (20,154)
Equity in loss of unconsolidated affiliates........................ - 292
Restructuring charges.............................................. 1,766
Deferred income taxes.............................................. (2,193) 277
Foundry deposits utilized.......................................... 5,831 3,364
Changes in operating assets and liabilities:
Accounts receivable............................................. 4,248 (4,086)
Inventories..................................................... (445) 19,002
Prepaid expenses and other current assets....................... (1,418) (805)
Accounts payable and accrued expenses........................... (13,962) 11,308
Income taxes payable, deferred revenue and other liabilities.... (7,165) 11,704
---------- -----------
Net cash provided by operating activities.................... 6,392 45,997
---------- -----------
Cash flows from investing activities:
Purchases of short-term investments................................ (57,235) (31,022)
Proceeds from matured short-term investments....................... 57,141 41,037
Additions to property and equipment, net........................... (9,450) (4,456)
Investment in foundry venture...................................... (11,616) (25,922)
Other assets....................................................... (97) 26
---------- -----------
Net cash used in investing activities........................ (21,257) (20,337)
---------- -----------
Cash flows from financing activities:
Issuance of debt...................................................... 12,497 31,976
Repayment of debt..................................................... (14,442) (34,121)
Issuance of common stock.............................................. 2,496 1,533
Treasury stock acquisitions........................................... (1,787) -
---------- -----------
Net cash used in financing activities........................... (1,236) (612)
---------- -----------
Net increase (decrease) in cash and cash equivalents.................... (16,101) 25,048
Cash and cash equivalents, beginning of period.......................... 87,609 44,934
Cash and cash equivalents, end of period................................ $ 71,508 $ 69,982
---------- -----------
---------- -----------
Supplemental information:
Cash paid during the period:
Interest........................................................... $ 246 $ 102
---------- -----------
---------- -----------
Income taxes....................................................... $ 13,654 $ 1,508
---------- -----------
---------- -----------
Noncash investing and financing activities:
Benefit related to stock plans........................................ $ 422 $ 1,530
---------- -----------
---------- -----------
Adjustment to foundry commitments..................................... $ 5,342 $ (14,400)
---------- -----------
---------- -----------
Utilization of foundry deposits....................................... $ 489 $ 3,364
---------- -----------
---------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 245
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PREPARATION
The accompanying unaudited consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission (the "Commission"). In the opinion of management, the
consolidated financial statements reflect all adjustments considered
necessary for a fair presentation of the consolidated financial position,
operating results and cash flows for those periods presented. The results of
operations for the interim periods presented are not necessarily indicative
of the results that may be expected for the full fiscal year or in any future
period. This quarterly report on Form 10-Q should be read in conjunction
with the audited consolidated financial statements and notes thereto for the
year ended June 30, 1997, included in the Oak Technology, Inc. (the
"Company") 1997 Annual Report on Form 10-K filed with the Commission.
2. NET INCOME (LOSS) PER SHARE
Basic and diluted net income (loss) per share have been computed using
the weighted average number of shares of common stock and dilutive common
equivalent shares from stock options and warrants outstanding in accordance
with Statement of Financial Accounting Standards No. 128, "Earnings per
Share." The following table provides a reconciliation of the components of
the basic and diluted earnings per share computations:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------- --------------------
1998 1997 1998 1997
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net income (loss)....................... $ (3,004) $ 9,540 $ 10,791 $ 21,075
--------- -------- --------- --------
--------- -------- --------- --------
Weighted average shares used in
computing basic net income (loss)
per share............................. 42,000 40,532 41,809 40,469
--------- -------- --------- --------
Weighted average number of dilutive
common equivalent shares used in
computing diluted net income (loss)
per share:
Options............................ - 2,108 756 2,005
Warrants........................... - 161 79 156
--------- -------- --------- --------
Weighted average shares used in
computing diluted net income (loss)
per share............................. 42,000 42,801 42,644 42,630
--------- -------- --------- --------
--------- -------- --------- --------
Net income (loss) per share:
Basic.............................. $ (0.07) $ 0.24 $ 0.26 $ 0.52
--------- -------- --------- --------
--------- -------- --------- --------
Diluted............................ $ (0.07) $ 0.22 $ 0.25 $ 0.49
--------- -------- --------- --------
--------- -------- --------- --------
</TABLE>
6
<PAGE> 246
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
3. INVENTORIES
Inventories are stated at the lower of cost (first in, first out) or market
and consisted of the following (in thousands):
March 31, June 30,
1998 1997
----------- ----------
Purchased parts and work in process.............. $ 4,243 $ 5,521
Finished goods................................... 4,894 6,801
----------- ----------
$ 9,137 $ 12,322
----------- ----------
----------- ----------
The decrease in inventory is primarily due to a $3.5 million write-off
of inventory related to the discontinuation of the graphics and
audio/communications businesses during the quarter ended March 31, 1998.
4. CONTINGENCIES
The Company and various of its current and former officers and Directors
are parties to several lawsuits which purport to be class actions filed on
behalf of all persons who purchased or acquired the Company's stock
(excluding the defendants and parties related to them) for the period July
27, 1995 through May 22, 1996. The first, a state court proceeding
designated IN RE OAK TECHNOLOGY SECURITIES LITIGATION, Master File No.
CV758510 pending in Santa Clara County Superior Court in Santa Clara,
California, consolidates five putative class actions. This lawsuit also
names as defendants several of the Company's venture capital fund investors,
two of its investment bankers and two securities analysts. The plaintiffs
allege violations of California securities laws and statutory deceit
provisions as well as breaches of fiduciary duty and abuse of control. On
December 6, 1996, the state court judge sustained the Oak defendants'
demurrer to all causes of action alleged in plaintiffs' First Amended
Consolidated Complaint, but allowed plaintiffs the opportunity to amend. The
plaintiffs' Second Amended Consolidated Complaint was filed on August 1,
1997. On December 3, 1997, the state court judge sustained the Oak
defendants' demurrer to plaintiffs' Second Amended Consolidated Complaint
without leave to amend to the causes of action for breach of fiduciary duty
and abuse of control, and to the California Corporations Code Sections
25400/25500 claims with respect to the Company, a number of the individual
officers and directors, and the venture capital investors. The judge also
sustained the demurrer with leave to amend to the California Civil Code
Sections 1709/1710 claims, however plaintiffs elected not to amend this
claim. Accordingly, the only remaining claim in the state court, IN RE OAK
TECHNOLOGY SECURITIES LITIGATION, is the California Corporations Code
Sections 25400/25500 cause of action against four officers of the Company and
the Company's investment bankers.
7
<PAGE> 247
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
4. CONTINGENCIES (CONTINUED)
The Company and various of its current and former officers and Directors
are also parties to four putative class action lawsuits pending in the U.S.
District Court for the Northern District of California. These actions have
been consolidated as IN RE OAK TECHNOLOGY, INC. SECURITIES LITIGATION, Case
No. C-96-20552-SW(PVT). This action alleges certain violations of federal
securities laws and is brought on behalf of purchasers of the Company's stock
for the period July 27, 1995 through May 22, 1996. This action also names as
a defendant one of the Company's investment bankers. On July 29, 1997, the
federal court judge granted the Oak defendants' Motion to Dismiss the
plaintiffs' First Amended Consolidated Complaint, but granted plaintiffs
leave to amend most claims. The plaintiffs' Second Amended Consolidated
Complaint was filed on September 4, 1997. Defendants Motion to Dismiss was
heard on December 17, 1997. The federal court judge took the matter under
submission and has not yet issued a ruling.
Additionally, various of the Company's current and former officers and
Directors are defendants in three consolidated derivative actions pending in
Santa Clara County Superior Court in Santa Clara, California, entitled IN RE
OAK TECHNOLOGY DERIVATIVE ACTION. This lawsuit, which asserts a claim for
breach of fiduciary duty and a claim under California securities law based
upon the officers' and Directors' trading in securities of the Company, has
been stayed pending resolution of the class actions.
In all of the putative state and federal class actions, the plaintiffs
are seeking monetary damages and equitable relief. In the derivative action,
the plaintiffs are also seeking an accounting for the defendants' sales of
Company stock and the payment of monetary damages to the Company.
All of these actions are in the early stages of proceedings. Based on
its current information, the Company believes the suits to be without
merit and will defend its position vigorously. Although it is reasonably
possible the Company may incur a loss upon conclusion of these claims, an
estimate of any loss or range of loss cannot be made. No provision for any
liability that may result upon adjudication has been made in the Company's
Consolidated Financial Statements.
In connection with these legal proceedings, the Company has incurred,
and expects to continue to incur, substantial legal and other expenses.
Shareholder suits of this kind are highly complex and can extend for a
protracted period of time, which can substantially increase the cost of such
litigation and divert the attention of the Company's management.
8
<PAGE> 248
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
5. FOUNDRY AGREEMENTS
In June and November 1995, the Company entered into agreements with
Taiwan Semiconductor Manufacturing Company ("TSMC") and Chartered
Semiconductor Manufacturing Pte. Ltd. ("Chartered") to obtain certain
additional wafer capacity through the year 2001. The agreements call for the
Company to commit to certain future wafer purchases and to deposit funds with
the suppliers as either a portion of the price of the additional wafers in
advance of their delivery or as a non-interest bearing deposit to secure the
availability of additional wafers. The price of such wafers will be
determined in the future periods in which specific orders are actually
placed. If the Company is not able to use, assign, or sell the additional
wafer quantities, all or a portion of the deposits may be forfeited.
In October 1996, the Company amended its previous agreement with TSMC
resulting in a reduction of the Company's future wafer purchases required
under the original agreement and the elimination of required future cash
prepayments of approximately $73 million. Under the amended agreement, no
additional prepayment is required; however the Company must utilize the
entire amount of the prepayment paid as of October 1996 through a certain
committed amount of wafer purchases in calendar years 1997, 1998, and 1999 or
a portion of the prepayment will be forfeited. In March 1998, the Company
further amended its agreement with TSMC allowing the Company to utilize
excess wafer purchases in 1997 and 1998 to reduce the Company's committed
wafer purchases in the following years. This amendment resulted in the
Company utilizing calendar 1998 committed wafer purchases beginning in
calendar 1997 after the committed wafer purchases for calendar 1997 were met.
As a result of this amendment, the Company recorded a credit to foundry
deposits of approximately $5.3 million which was used to offset payables to
TSMC in the quarter ended March 31, 1998. In addition, the Company received
an additional credit of $7.1 million which will be used to offset future
payments to TSMC. The Company currently believes the terms and conditions of
the agreement, as amended, will be met although no assurance can be given in
this regard.
In September 1996, April 1997 and September 1997, the Company amended
its agreement with Chartered. The amendments resulted in a reduction of the
Company's future wafer purchase commitments and the elimination of required
future cash deposits under the original agreement of approximately $36
million. Under the amended agreement, the required future cash deposits of
approximately $36 million could be reinstated if certain conditions are not
met. The Company currently believes the terms and conditions of the
agreement, as amended, will be met and that these commitments will not be
reinstated although no assurance can be given in this regard.
The deposits and prepayments under the amended foundry agreements described
above are recorded at cost and total approximately $28.3 million as of March 31,
1998. The Company currently anticipates being able to utilize and fully recover
the value of all foundry prepayments and deposits under the terms of the amended
agreements although no assurance can be given in this regard.
9
<PAGE> 249
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
6. INVESTMENT IN FOUNDRY VENTURES
In October 1995, the Company entered into a series of agreements with
United Microelectronics Corporation ("UMC") to form, along with other
investors, a separate Taiwanese company, United Integrated Circuits
Corporation ("UICC"), for the purpose of building and managing a
semiconductor manufacturing facility in the Science Based Industrial Park in
Hsin Chu City, Taiwan, Republic of China. As an investor in this venture, the
Company has rights to a portion of the total wafer capacity for the
manufacture of its proprietary products. The Company paid approximately
$51.2 million for approximately 9.3% of the total outstanding shares of the
foundry venture. The investment in UICC has been accounted for under the
cost method of accounting.
In October 1997, a fire damaged the UICC facility. UICC management has
advised the Company that a majority of the equipment, majority of the
inventory and a significant portion of the building were completely destroyed
at an estimated loss of approximately $331 million (based on current exchange
rates). UICC management has also advised the Company that approximately 10%
of the loss to the facility will not be covered by insurance and that there
is a deductible amount that UICC must pay with respect to the insured
portion. Despite any unreimburseable loss, UICC management has represented
to the Company that it is rebuilding the facility and expects the facility to
be fully rebuilt and operational by April of 1999. Given the fire, the
Company has evaluated its investment in the UICC facility and the potential
impact of the Company's portion of the unreimburseable loss to determine
whether there has been an impairment and as the Company believes that
estimated future cash inflows expected to be generated by the facility and/or
disposition of the investment are in excess of the carrying amount of the
investment, no impaired loss has been recognized as of March 31, 1998.
Representations have been made by UICC management that the facility's foundry
capacity that has been guaranteed to the Company will be available through
substitute capacity arrangements. To date, the Company has not requested
that UICC make such substitute capacity available to the Company. Therefore,
there can be no assurance that such substitute foundry capacity will be
available to the Company should the Company require it. Additionally, there
can be no assurance that a market will develop for the shares representing
the Company's equity investment at any time in the future.
7. SETTLEMENT AWARDS
In September 1997, October 1997 and February 1998, the Company received
$2.6 million, $4.8 million and $0.7 million, respectively, pursuant to a
Settlement Agreement entered into on July 31, 1997 between the Company and
United Microelectronics Corporation ("UMC") in connection with a complaint
the Company had filed with the International Trade Commission on July 21,
1997 based on the Company's belief that certain UMC CD-ROM controllers
infringed one of the Company's patents. Proceeds from this settlement were
recorded as miscellaneous income and are included in nonoperating income for
the periods ended September 30, 1997, December 31, 1997 and March 31, 1998,
respectively.
10
<PAGE> 250
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
8. BUSINESS REORGANIZATION
In January 1998, the Company announced its intention to discontinue its
graphics and audio/communications businesses and focus on three core markets:
optical storage, consumer electronics and digital office equipment. Unable
to locate a buyer for either its graphics or its audio/communications
businesses, the Company discontinued all product development, marketing,
selling and other efforts related to these businesses during the quarter
ended March 31, 1998. As a result of the discontinuation of these
businesses, the Company laid-off 30 employees and recorded a restructuring
charge to operations related to this reorganization of $1.8 million and an
inventory-related charge of $3.5 million to cost of revenues during the
quarter ending March 31, 1998.
The following represents the Company's restructuring activities for the
quarter ended March 31, 1998:
<TABLE>
<CAPTION>
Prepaid
Royalties Severance Other Total
----------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Restructuring charges................. $ 948,322 $ 611,549 $ 206,496 $ 1,766,367
Noncash items......................... (948,322) - (111,496) (1,059,818)
----------- ---------- ---------- ------------
Balance at March 31, 1998............... $ - $ 611,549 $ 95,000 $ 706,549
----------- ---------- ---------- ------------
----------- ---------- ---------- ------------
</TABLE>
The remaining restructuring accrual of $0.7 million is included in accrued
expenses as of March 31, 1998. Of the remaining restructuring accrual of
$0.7 million, the Company made $0.6 million in cash payments in April 1998
and the remaining balance of $0.1 million is anticipated to be paid in the
first quarter of fiscal year 1999.
9. BUSINESS ACQUISITIONS
On January 29, 1998, the Company and its wholly-owned subsidiary Pixel
Magic, Inc. signed a Plan of Reorganization and Agreement of Merger ("The
Merger Agreement") with Xerographic Laser Images Corporation ("XLI"), a
developer of resolution enhancement technology. Pursuant to the Merger
Agreement, XLI will become a wholly-owned subsidiary of Pixel Magic. The
Merger Agreement provides for a cash payment of approximately $3.7 million to
XLI shareholders on the effective date of the merger and the right to receive
additional payments up to a maximum of approximately $11.3 million subject to
the achievement of certain milestones by XLI over a three year period ending
on December 31, 2000. The merger is subject to the approval of XLI
shareholders. The transaction will be accounted for as a purchase
transaction. The Company currently anticipates that it will expense a
significant portion of the purchase price in the period during which the
acquisition is closed.
11
<PAGE> 251
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
9. BUSINESS ACQUISITIONS (CONTINUED)
On March 20, 1998, the Company entered into an asset purchase agreement
with Odeum Microsystems, Inc. ("Odeum") and Hyundai Electronics America
("HEA") pursuant to which the Company agreed to acquire certain assets of
Odeum for approximately $4.0 million. With this acquisition, the Company
acquired two products currently in production, an integrated MPEG-2
audio/video decoder and transport demultiplexer and a DVD-5 compliant QPSK
demodulator. Both products are used predominantly in "free to air" satellite
and cable set-top boxes for MPEG-2 encoded digital television broadcasting.
The transaction was consummated on April 2, 1998. This transaction will be
accounted for as a purchase transaction. The Company anticipates that it
will expense a significant portion of the purchase price for this acquisition
in the period ended June 30, 1998.
10. STOCK REPURCHASE PLAN
On January 22, 1998, the Company announced that its Board of Directors
had authorized the repurchase of up to 2.0 million shares of its common
stock, either in the open market or in private transactions. The repurchase
program is authorized for one year, unless further extended by the Company's
Board of Directors. As of March 31, 1998, the Company has purchased 287,500
shares for approximately $1.8 million.
11. SUBSEQUENT EVENTS
On April 30, 1998, the Company entered into several agreements with Omni
Peripherals Pte. Ltd., a private Singaporean company ("Omni") and two other
investors pursuant to which the Company acquired a preferred equity interest
in Omni. Omni was incorporated in Singapore on January 2, 1996, and is in
the business of designing, developing and marketing mechatronics modules for
optical storage drives. The Company paid $802,124, for its interest,
representing approximately 20% of the issued stock of Omni. As a group, the
three preferred investors own 51% of the issued stock of Omni. There can be
no assurance that a market will develop for the shares representing the
Company's equity investment at any time in the future nor can there be any
assurance that Omni will successfully develop its products or that if
developed, its products will be competitive and achieve market acceptance.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
EXCEPT FOR THE HISTORICAL FINANCIAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS QUARTERLY REPORT ON FORM 10-Q MAY BE CONSIDERED
"FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES ACT OF
1934, AS AMENDED. SUCH STATEMENTS INCLUDE DECLARATIONS REGARDING THE INTENT,
BELIEF OR CURRENT EXPECTATIONS OF THE COMPANY AND ITS MANAGEMENT AS OF THE
DATE HEREOF. 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 DATE HEREOF OR TO REFLECT THE
OCCURRENCE OF UNANTICIPATED EVENTS. PROSPECTIVE INVESTORS ARE CAUTIONED THAT
ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE
AND INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS. AMONG
THE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS ARE: (i) THAT THE
INFORMATION IS OF A PRELIMINARY NATURE AND MAY BE SUBJECT TO FURTHER
ADJUSTMENT, (ii) VARIABILITY IN THE COMPANY'S QUARTERLY OPERATING RESULTS,
(iii) GENERAL CONDITIONS IN THE SEMICONDUCTOR INDUSTRY, (iv) RISKS RELATED TO
PENDING LEGAL PROCEEDINGS, (v) DEVELOPMENT BY COMPETITORS OF NEW OR SUPERIOR
PRODUCTS OR THE ENTRY OF NEW COMPETITORS INTO THE COMPANY'S MARKETS, (vi) THE
COMPANY'S ABILITY TO DIVERSIFY ITS PRODUCT AND MARKET BASE BY DEVELOPING AND
INTRODUCING NEW PRODUCTS WITHIN DESIGNATED MARKET WINDOWS AT COMPETITIVE
PRICE AND PERFORMANCE LEVELS, (vii) WILLINGNESS OF PROSPECTIVE CUSTOMERS TO
DESIGN THE COMPANY'S PRODUCTS INTO THEIR PRODUCTS, (viii) AVAILABILITY OF
ADEQUATE FOUNDRY CAPACITY AND ACCESS TO PROCESS TECHNOLOGIES, (ix) THE
COMPANY'S ABILITY TO PROTECT ITS PROPRIETARY INFORMATION AND OBTAIN ADEQUATE
LICENSES OF THIRD PARTY TECHNOLOGY ON ACCEPTABLE TERMS, (x) RISKS RELATED TO
USE OF INDEPENDENT MANUFACTURERS AND THIRD PARTY ASSEMBLY AND TEST VENDORS,
(xi) DEPENDENCE ON KEY PERSONNEL, (xii) RELIANCE ON A LIMITED NUMBER OF LARGE
CUSTOMERS, (xiii) THE COMPANY'S CURRENT DEPENDENCE ON SALES OF CD-ROM
CONTROLLER PRODUCTS AND THE PC MARKET, (xiv) RISKS RELATED TO INTERNATIONAL
BUSINESS OPERATIONS AND THE COMPANY'S CURRENT DEPENDENCE ON SALES TO THE
ASIAN MARKETS, (xv) ABILITY OF THE COMPANY TO MAINTAIN ADEQUATE PRICE LEVELS
AND MARGINS WITH RESPECT TO ITS PRODUCTS, (xvi) MANAGEMENT OF CHANGING
OPERATIONS RELATED TO THE COMPANY'S RESTRUCTURING AND MANAGEMENT CHANGES
ANNOUNCED ON JANUARY 22, 1998, (xvii) RISKS RELATED TO ACQUISITIONS (xviii)
THE ABILITY TO ATTRACT AND RETAIN QUALIFIED MANAGEMENT AND TECHNICAL
PERSONNEL AND OTHER RISKS IDENTIFIED FROM TIME TO TIME IN THE COMPANY'S
REPORTS AND REGISTRATION STATEMENTS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION, INCLUDING THE ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JUNE
30, 1997.
The Company designs, develops and markets high performance integrated
semiconductors and related software to original equipment manufacturers
worldwide that serve the optical storage, consumer electronics and digital
office equipment markets. The Company's products typically consist of
hardware, firmware and software to provide a complete solution for customers.
The Company contracts with independent foundries to manufacture all of
its hardware products, enabling the Company to focus on its design strengths,
minimize fixed costs and capital expenditures and gain access to advanced
manufacturing facilities. Except pursuant to its agreements with TSMC,
Chartered and UICC, the Company's foundries generally are not
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obligated to supply products to the Company for any specific period, in any
specific quantity or at a specific price.
During the quarter ending March 31, 1998, the Company implemented a
strategy of concentrating its efforts on the markets for optical storage,
consumer electronics and digital office equipment. As part of this strategy,
the Company sought to discontinue its graphics and audio/communications
businesses and restructure its business to leverage its three core
technologies: optical storage, MPEG imaging and digital imaging. Unable to
locate a buyer for either its graphics or its audio/communications
businesses, the Company discontinued all product development, marketing,
selling and other efforts related to these businesses during the quarter
ended March 31, 1998. As a result of the discontinuation of these
businesses, the Company laid-off 30 employees and recorded a restructuring
charge of $1.8 million to operations and a $3.5 million inventory-related
charge to cost of revenues related to this restructuring during the quarter
ended March 31, 1998. The $1.8 million charge consisted of $1.0 million
charges related to a write-off of prepaid royalties, approximately $0.6
million for severance pay and $0.2 in miscellaneous charges.
On April 22, 1998, the Company announced that it expects to incur a loss
from operations in the quarter ending June 30, 1998 due to a number of
factors currently affecting its optical storage business, including, but not
limited to, new competitors entering the market, a maturation of the CD-ROM
controller market, pressure from the sub-$1000 PC segment for low-cost
components, uncertain demand for personal computers and delays in new product
releases. Through the restructuring efforts described above, the Company
intends to direct and focus Company resources and management time on the
optical storage, consumer electronics and digital office equipment markets
with primary emphasis on the optical storage market. However, there can be
no assurance that these actions will enable the Company to diminish the
pressures currently affecting its optical storage business and/or enable the
Company to successfully transition the business to the emerging CD-R/W and
DVD markets.
On January 29, 1998, the Company and its wholly-owned subsidiary
Pixel Magic, Inc. signed a Plan of Reorganization and Agreement of Merger
("The Merger Agreement") with Xerographic Laser Images Corporation ("XLI"), a
developer of resolution enhancement technology. Pursuant to the Merger
Agreement, XLI will become a wholly-owned subsidiary of Pixel Magic. The
Merger Agreement provides for a cash payment of approximately $3.7 million to
XLI shareholders on the effective date of the merger and the right to receive
additional payments up to a maximum of approximately $11.3 million subject to
the achievement of certain milestones by XLI over a three year period ending
on December 31, 2000. The merger is subject to the approval of XLI
shareholders. The transaction will be accounted for as a purchase
transaction. The Company currently anticipates that it will expense a
significant portion of the purchase price in the period during which the
acquisition is closed.
On March 20, 1998, the Company entered into an asset purchase
agreement with Odeum Microsystems, Inc. ("Odeum") and Hyundai Electronics
America ("HEA") pursuant to which the Company agreed to acquire certain
assets of Odeum for approximately $4.0 million. With this acquisition, the
Company acquired two products currently in production, an integrated MPEG-2
audio/video decoder and transport demultiplexer and a DVD-5 compliant QPSK
demodulator. Both products are used predominantly in "free to air" satellite
and cable set-top boxes for MPEG-2 encoded digital television broadcasting.
The transaction was consummated
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on April 2, 1998. This transaction will be accounted for as a purchase
transaction. The Company anticipates that it will expense a significant
portion of the purchase price for this acquisition in the period ended June
30, 1998.
On April 30, 1998, the Company entered into several agreements with
Omni Peripherals Pte. Ltd., a private Singaporean company ("Omni") and two
other investors pursuant to which the Company acquired a preferred equity
interest in Omni. Omni was incorporated in Singapore on January 2, 1996, and
is in the business of designing, developing and marketing mechatronics
modules for optical storage drives. The Company paid $802,124, for its
interest, representing approximately 20% of the issued stock of Omni. As a
group, the three preferred investors own 51% of the issued stock of Omni.
There can be no assurance that a market will develop for the shares
representing the Company's equity investment at any time in the future nor
can there be any assurance that Omni will successfully develop its products
or that if developed, its products will be competitive and achieve market
acceptance.
On February 27, 1998, the Company incorporated a wholly-owned
subsidiary, Oak Technology, Ltd. in Bristol, England. The subsidiary will
employ primarily technical personnel who will develop products for the
Company's consumer products business.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31,
1997
NET REVENUES. The Company's net revenues in the comparison periods were
primarily derived from sales of its CD-ROM controller products which
comprised 77% and 86% of the Company's net revenues in the three months ended
March 31, 1998 and 1997 respectively. Net revenues decreased 29.8% to $35.6
million in the three months ended March 31, 1998 from $50.6 million in the
comparable period of fiscal 1997. This decrease was primarily attributable
to a decrease in unit sales and overall average selling price ("ASP") of
CD-ROM controllers, in relatively equal proportion, partially offset by an
increase in sales of digital office equipment controllers. In the three
months ended March 31, 1998 and 1997, sales to the Company's top ten
customers accounted for approximately 76% and 78%, respectively, of the
Company's net revenues. International sales, principally to Japan, Taiwan,
Korea and Belgium accounted for approximately 87% and 98% of the Company's
net revenues in the three months ended March 31, 1998 and 1997, respectively.
This decrease in international sales, as a percentage of total sales, is
primarily attributable to a decrease in international revenues as well as an
increase in domestic revenues in the comparison quarters. Sales of products
related to the graphics and audio/communications businesses which the Company
discontinued in the quarter ended March 31, 1998 accounted for less than 3%
and 1% of the Company's net revenues in each of the three months ended March
31, 1998 and 1997, respectively. Although the Company is attempting to
diversify its revenue product base in the three core markets of optical
storage, consumer electronics and digital office equipment, it anticipates
that CD-ROM controller sales will continue to account for a substantial
majority of its revenue in the foreseeable future. As the Company has been
experiencing continued pressure on CD-ROM controller ASPs, increased
competition, a maturation of the CD-ROM controller market and development
delays in the Company's next generation CD-ROM product, the Company does not
anticipate year over year growth in CD-ROM controller unit sales and revenue
to continue at the same rate, if at all, in the foreseeable future. See
"Factors That May Affect Future Results" below.
GROSS MARGIN. Cost of revenues includes the cost of wafer fabrication,
assembly and testing performed by third-party vendors and direct and indirect
costs associated with the procurement, scheduling and quality assurance
functions performed by the Company. The
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Company's gross margin decreased to 40.5% in the three month period ended
March 31, 1998 as compared to 54.9% during the comparable period in the prior
year. Gross margin in the three month period ended March 31, 1998 includes
the impact of a $3.5 million inventory-related charge to cost of revenues
related to the discontinuation of the graphics and audio/communications
businesses. Excluding the impact of the discontinuation of these businesses,
gross margin in the three months ended March 31, 1998 would have been 50.5%.
Gross margin in the three month period ended March 31, 1997 included the
impact of favorable adjustments of approximately $5.2 million to cost of
revenues associated with the sale of products which had been fully reserved
in a prior period. Excluding the effect of this adjustment, gross margin in
the three month period ended March 31, 1997 would have been 44.7%. The
increase in gross margin during the comparison periods, excluding the impact
of the adjustments recorded during the three months ended March 31, 1998 and
March 31, 1997, is primarily the result of a product mix shift to higher
margin CD-ROM controllers and the CD-R/W controller. Gross margins related to
the graphics and audio/communications businesses which the Company
discontinued in the quarter ended March 31, 1998 accounted for approximately
2% and less than 1% of the Company's total gross margin contribution in each
of the three months ended March 31, 1998 and 1997, respectively. 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, product design changes and product mix. The Company
expects that ASPs for its existing products will continue to decline over
time and that ASPs for each new product will decline significantly over the
life of the product. The Company is currently experiencing severe price
pressure on its CD-ROM controller and MPEG products and expects such price
erosion to continue. A decline in ASPs that is not offset by cost
reductions through product design changes, manufacturing process changes,
yield improvement, savings negotiated with its manufacturing subcontractors
or by sales of new products with higher gross margins would decrease the
Company's overall gross margin and could materially adversely affect the
Company's operating results. The Company does not believe that it can
achieve cost reductions or sales of new products with higher gross margins
which fully offset the expected price declines of its CD-ROM and MPEG
products and therefore, it expects gross margin percentages to decline for
such products. In addition, the Company believes that gross margins for new
products in its optical storage and consumer markets will be lower than
historical levels and that, as a result, gross margins in general will
decline in the future.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development costs are
expensed as incurred. Research and development expenses increased 44.9% to
$12.4 million in the three months ended March 31, 1998 from $8.6 million in
the comparable period in the prior year. Additionally, research and
development expenses increased as a percentage of net revenues to 34.9%
during the three months ended March 31, 1998 from 16.9% in the comparable
period in the prior year. The increased spending related to research and
development activities was principally the result of the hiring of additional
technical personnel and associated expenses during the comparison periods.
The Company will continue to invest substantial resources in research and
development, including hiring additional technical personnel, in an effort to
maintain its technological leadership in the optical storage market and
diversify its product development in its other core markets: consumer
electronics and digital office equipment. Although the Company expects
research and development expenses to decrease as a result of the
discontinuation of its graphics and audio/communications businesses, the
increase in the investment in the remaining core businesses may partially, if
not fully, offset this decrease. As a result, no assurance can be given that
absolute research and development expenses for the remainder of fiscal 1998
will decrease.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses include costs related to salaries, commissions, legal
fees, consulting and other costs related to the sales, marketing and
administrative functions of the Company. Selling, general and administrative
expenses increased 54.2% to $8.8 million in the three months ended March 31,
1998 from $5.7 million in the comparable period in the prior year.
Additionally, selling, general and administrative expenses increased as a
percentage of net revenues to 24.8% in the three months ended March 31, 1998
from 11.3% during the comparable period in fiscal 1997. This increase was
principally the result of the hiring of additional management and
administrative personnel and associated expenses, an increase in legal
expenses as well as a decrease in the Company revenues in the comparison
periods. The increase in legal expenses relates primarily to a complaint the
Company filed with the International Trade Commission on July 21, 1997 ("ITC
Complaint") and additional litigation related to a settlement agreement with
one of the parties in the ITC Complaint. See "Legal Proceedings". Although
the Company may experience a decrease in selling, general and administrative
expenses as a result of the discontinuation of its graphics and
audio/communications businesses, any such decrease is expected to be offset
by the continuing efforts to develop the Company's support infrastructure and
hire additional senior management personnel. As a result, the Company expects
to incur higher absolute selling, general and administrative expenses in the
remainder of fiscal 1998.
RESTRUCTURING CHARGES. During the three months ended March 31, 1998,
the Company discontinued its graphics and audio/communications businesses and
incurred a charge to operations of $1.8 million related to these discontinued
businesses. The $1.8 million charge consisted of $1.0 million related to a
write-off of prepaid royalties, approximately $0.6 million for severance pay
and $0.2 for miscellaneous charges.
NONOPERATING INCOME. During the three months ended March 31, 1998,
nonoperating income increased to $2.3 million from $1.1 million during the
comparable three months of fiscal 1997. This increase was primarily the
result of the receipt of approximately $0.7 million related to the settlement
agreement between the Company and United Microelectronics Corporation in
connection with a complaint the Company filed with the International Trade
Commission on July 21, 1997. See "Legal Proceedings".
INCOME TAXES. The overall effective tax rate for the three months ended
March 31, 1998 was 52% and 35% for the period ended March 31, 1997. The
change in the tax rate was the result of the loss recorded in the quarter
ended March 31, 1998 and the resultant impact on total anticipated fiscal
1998 net income.
NINE MONTHS ENDED MARCH 31, 1998 COMPARED TO NINE MONTHS ENDED MARCH 31, 1997
NET REVENUES. The Company's net revenues in the comparison periods were
primarily derived from sales of its CD-ROM controller products which
comprised 81% and 86% of the Company's net revenues in the nine months ended
March 31, 1998 and 1997 respectively. Net revenues increased 9.4% to $128.2
million in the nine months ended March 31, 1998 from $117.2 million in the
comparable period of fiscal 1997. This increase was primarily attributable to
an increase in unit sales of CD-ROM controllers from the comparable period of
fiscal 1997 partially offset by a decline in the average selling price
("ASP") of the CD-ROM controllers. The increase in unit sales of the CD-ROM
controllers is primarily the result of the relatively low unit sales in the
comparable period of fiscal 1997 resulting from customer decisions to reduce
inventory, an overall slowdown in the PC market and a shift in the CD-ROM
industry from 4x
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speed drives to 6x and 8x speed drives. In the nine months ended March 31,
1998 and 1997, sales to the Company's top ten customers accounted for
approximately 80% and 77%, respectively, of the Company's net revenues.
International sales, principally to Japan, Taiwan, Korea and Belgium
accounted for approximately 93% and 98% of the Company's net revenues in the
nine months ended March 31, 1998 and 1997, respectively. Sales of products
related to the graphics and audio/communications businesses that the Company
discontinued accounted for approximately 3% of the Company's net revenues in
the nine months ended March 31, 1998 and approximately 2% in the nine months
ended March 31, 1997.
GROSS MARGIN. Cost of revenues includes the cost of wafer fabrication,
assembly and testing performed by third-party vendors and direct and indirect
costs associated with the procurement, scheduling and quality assurance
functions performed by the Company. The Company's gross margin decreased to
49.2% in the nine month period ended March 31, 1998 as compared to 58.8%
during the comparable period in the prior year. Gross margin in the nine
month period ended March 31, 1998 includes the impact of a $3.5 million
inventory-related charge to cost of revenues related to the discontinuation
of the graphics and audio/communications businesses. Excluding the impact of
these discontinued businesses, gross margin in the nine month period ended
March 31, 1998 would have been 52.0%. Margins for the nine month period
ended March 31, 1997 were favorably affected by adjustments of approximately
$18.7 million to cost of revenues associated with the sale of products which
had been fully reserved in a prior period as well as manufacturing cost
adjustments of $3.0 million related to foundry agreements. Excluding the
impact of these adjustments, gross margin for the nine month period ended
March 31, 1997 would have been 40.0%. The increase in gross margin during
the comparison periods, excluding the impact of the adjustments recorded
during the nine months ended March 31, 1998 and the nine months ended March
31, 1997, is primarily the result of a product mix shift to higher margin
CD-ROM controllers and the CD-R/W controller. Gross margins related to the
graphics and audio/communications businesses that the Company discontinued
accounted for approximately 2% and (4%) of the Company's total gross margin
contribution in the nine months ended March 31, 1998 and 1997, respectively.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development costs are
expensed as incurred. Research and development expenses increased 44.4% to
$35.4 million in the nine months ended March 31, 1998 from $24.5 million in
the comparable period in the prior year. This increase was principally the
result of the hiring of additional personnel and associated expenses.
Research and development expenses increased as a percentage of net revenues
to 27.6% during the nine months ended March 31, 1998 from 20.9% in the
comparable period in the prior year. This increase was principally the result
of the hiring of additional technical personnel and associated expenses
during the comparison periods.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses include costs related to salaries, commissions, legal
fees, consulting and other costs related to the sales, marketing and
administrative functions of the Company. Selling, general and administrative
expenses increased 52.1% to $23.0 million in the nine months ended March 31,
1998 from $15.1 million in the comparable nine months in fiscal 1997.
Additionally, selling, general and administrative expenses increased as a
percentage of net revenues to 17.9% in the nine months ended March 31, 1998
from 12.9% during the comparable period in fiscal 1997. This increase was
principally the result of the hiring of additional management and
administrative personnel and associated expenses as well as increases in
legal expenses. The increase in legal expenses relates primarily to a
complaint the Company filed with the
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International Trade Commission on July 21, 1997 ("ITC Complaint") and
additional litigation related to a settlement agreement with one of the
parties in the ITC Complaint. See "Legal Proceedings."
NONOPERATING INCOME. During the nine months ended March 31, 1998,
nonoperating income increased to $12.1 million from $3.1 million during the
comparable nine months in fiscal 1997. This increase was primarily the result
of the receipt of approximately $8.1 million related to the settlement
agreement between the Company and United Microelectronics Corporation in
connection with a complaint the Company had filed with the International
Trade Commission on July 21, 1997. See "Legal Proceedings".
INCOME TAXES. The overall effective tax rate for the nine months ended
March 31, 1998 was 28% and 35% for the nine months ended March 31, 1997. The
change in the tax rate was the result of the loss recorded in the quarter
ended March 31, 1998 and the resultant impact on total anticipated fiscal
1998 net income.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The following factors should be carefully considered in evaluating the
Company and its business.
The Company's operating results are subject to quarterly and other
fluctuations due to a variety of factors, including the gain or loss of
significant customers, increased competitive pressures, the timing of new
product introductions by the Company or its competitors and market acceptance
of new or enhanced versions of the Company's and its customers' products.
Other factors include the availability of foundry capacity, fluctuations in
manufacturing yields, availability and cost of raw materials, the cyclical
nature of both the semiconductor industry, the market for PCs and the other
markets addressed by the Company's products, seasonal customer demand, the
Company's ability to diversify its product offerings, the competitiveness of
the Company's customers, the timing of significant orders and order
cancellations or rescheduling, significant increases in expenses associated
with the expansion of operations and development of the Company's support
infrastructure, and changes in pricing policies by the Company, its
competitors or its suppliers, including decreases in ASPs of the Company's
products. In addition, the Company's quarterly operating results could be
materially adversely affected by legal expenses incurred in connection with,
or any adverse judgment in, the Company's ongoing shareholder legal
proceedings. The Company's operating results could also be adversely
affected by economic conditions generally in various geographic areas where
the Company or its customers do business. These factors are difficult to
forecast, and these or other factors could materially affect the Company's
quarterly or annual operating results. The Company's operating results in
the remainder of fiscal 1998 are likely to be affected by these factors as
well as others. Accordingly, there can be no assurance as to the level of
sales or earnings that may be attained by the Company in any given period in
the future.
The Company currently places noncancelable orders to purchase its
products from independent foundries on an approximately three month rolling
basis and is currently committed with two of its foundries for certain
minimum amounts of capacity through the end of calendar 1999, while its
customers generally place purchase orders with the Company less than four
weeks prior to delivery that may be rescheduled or under certain
circumstances may be canceled without significant penalty. Consequently, if
anticipated sales and shipments in any quarter are
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rescheduled, canceled, or do not occur as quickly as expected, expense and
inventory levels could be disproportionately high and the Company's business,
financial condition and results of operations for that quarter or for the
fiscal year would be materially adversely affected.
The semiconductor industry has historically been characterized by rapid
technological change, cyclical market patterns, significant price erosion,
periods of over-capacity and production shortages, variations in
manufacturing costs and yields and significant expenditures for capital
equipment and product development. In addition, the industry has experienced
significant economic downturns at various times, characterized by diminished
product demand and accelerated erosion of product prices. The Company may
experience substantial period-to-period fluctuations in operating results due
to conditions affecting the Company's specific markets or to general
semiconductor industry conditions.
The Company's success is highly dependent upon its ability to develop
new, technically advanced products, to introduce them to the marketplace
ahead of the competition, and to have them selected for design into products
of leading OEM manufacturers. Both revenues and margins may be affected
quickly if new product introductions are delayed or if the Company's products
are not designed into successive generations of products of the Company's
customers. These factors have become increasingly important to the Company's
results of operations because the rate of change in the markets served by the
Company continues to accelerate. In an effort to attempt to increase its
competitiveness in the Company's core markets, the Company recently
implemented a strategy to concentrate its efforts on the markets for optical
storage, consumer electronics and digital office equipment. As part of this
strategy, the Company discontinued its graphics and audio/communications
businesses and is restructuring its business to leverage its three core
technologies: optical storage, MPEG imaging and digital imaging. As a result
of the decision to discontinue its graphics and audio/communications
businesses the Company recorded a charge to operations related to this
restructuring during the quarter ended March 31, 1998 of $1.8 million and an
inventory-related charge to cost of revenues of $3.5 million. See "Notes to
Consolidated Financial Statements".
The Company and various of its current and former officers and Directors
are parties to certain legal proceedings. See "Legal Proceedings". All of
these actions are in the early stages of proceedings. Based on its current
information, the Company believes the suits to be without merit and will
defend its position vigorously. No provision for any liability that may
result has been made in the Company's Consolidated Financial Statements. In
connection with these legal proceedings, the Company has incurred, and
expects to continue to incur, substantial legal and other expenses.
Shareholder suits of this kind are highly complex and can extend for a
protracted period of time, which can substantially increase the cost of such
litigation and divert the attention of the Company's management.
The markets in which the Company competes are intensely competitive and
are characterized by rapid technological change, declining unit ASPs and
rapid product obsolescence. The Company expects competition to increase in
the future from existing competitors and from other companies that may enter
the Company's existing or future markets with solutions that may be less
costly or provide higher performance or additional features. Competition
typically occurs at the design stage, where the customer evaluates
alternative design approaches that require integrated circuits such as those
offered by the Company. Because of shortened product life cycles and even
shorter design-in cycles, particularly in the CD-ROM controller market, the
Company's competitors have increasingly frequent opportunities to
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achieve design wins in next generation systems or, in the CD-ROM controller
market, in the next generation drive. In the event that competitors succeed
in supplanting the Company's products, the Company's market share may not be
sustainable and revenue, gross margin and earnings would be adversely
affected. The Company's existing and potential competitors include many
large domestic and international companies that have substantially greater
financial, manufacturing, technical, marketing, distribution and other
resources, broader product lines and longer standing relationships with
customers than the Company. The Company's competitors also include a number
of emerging companies as well as some of the Company's own customers and
suppliers. Certain of the Company's principal competitors maintain their own
semiconductor foundries and may therefore benefit from certain capacity, cost
and technological advantages. The Company believes that its ability to
compete successfully depends on a number of factors, both within and outside
of its control, including the price, quality and performance of the Company's
and its customers' products, the timing and success of new product
introductions by the Company, its customers and its competitors, the
emergence of new PC and other market standards, the development of technical
innovations, the ability to obtain adequate foundry capacity and sources of
raw materials, the efficiency of production, the rate at which the Company's
customers design the Company's products into their products, the market
acceptance of the Company's customer's products, the number and nature of the
Company's competitors in a given market, the assertion of intellectual
property rights and general market and economic conditions. There can be no
assurance that the Company will be able to compete successfully in the future.
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, particularly the optical storage market and the consumer
electronics market, are characterized by intense price competition. As the
markets for the Company's products mature and competition increases, the
Company anticipates that ASPs on its products will decline. 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, or fails to reduce
its manufacturing costs, the result would be a material adverse effect on the
Company's business, financial condition and operating results.
The markets for the Company's products are characterized by evolving
industry standards, rapid technological change and product obsolescence. The
Company's performance is highly dependent upon the successful development and
timely introduction of new products at competitive price and performance
levels. Currently, the Company's financial performance is dependent upon the
Company's level of success in the CD-ROM controller market. The Company has
recently experienced some product development delays in this area. In an
effort to diversify its product and market base, the Company has invested
substantial resources in optical storage as well as in its other core
technologies for the consumer and digital office equipment markets. There
can be no assurance that products currently under development in these core
technologies or any other new products will be successfully developed or will
achieve market acceptance, thereby affecting the Company's ability to achieve
diversification of its products and markets, and thereby revenue
diversification. The failure of the Company to introduce new products
successfully or the failure of new products to achieve market acceptance
would have a
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material adverse effect on the Company's business, financial condition and
results of operations. The success of new product introductions is dependent
on several factors, including recognition of market requirements, product
cost, timely completion and introduction of new product designs, securing
sufficient foundry capacity for volume manufacturing of wafers, quality of
new products and achievement of acceptable manufacturing yields from the
Company's contract manufacturers. Due to the design complexity of its
products, the Company has experienced delays in completing development and
introduction of new products, and there can be no assurance that the Company
will not encounter such delays in the development and introduction of future
products. There can be no assurance that the Company will successfully
identify new product opportunities and develop and bring new products to
market in a timely manner, that the Company's products will be selected for
design into the products of its targeted customers or that products or
technologies developed by others or changing industry standards will not
render the Company's products or technologies obsolete or noncompetitive.
The failure of the Company's new product development efforts or the failure
of the Company to achieve market acceptance of its new products would have a
material adverse effect on the Company's business, financial condition and
operating results.
The Company has begun to pursue, and will continue to pursue,
opportunities to acquire key technology to augment its technical capabilities
or to achieve faster time to market as alternatives to internally developing
such technology. Acquisitions involve numerous risks, including difficulties
in integration of the operations, technologies, and products of the acquired
companies; the risk of diverting management's attention from normal daily
operations of the business; risks of entering markets in which the Company
has no or limited direct prior experience and where competitors in such
markets have stronger market positions; the coordination of sales, marketing
and research and development; and the potential loss of key employees of the
acquired company. The Company must also maintain its ability to manage any
such growth effectively. Failure to manage growth effectively and
successfully integrate acquisitions made by the Company could adversely
affect the Company's business and operating results. In addition, with such
acquisitions, there is the risk that future operating performance may be
unfavorably impacted due to acquisition related costs such as, but not
limited to, in-process research and development charges, additional
development expenses, lower gross margins generated by the sales of acquired
products and restructuring costs associated with duplicate facilities.
The Company's ability to compete is affected by its ability to protect
its proprietary information. The Company considers its technology to be
proprietary and relies on a combination of patents, trademarks, copyrights,
trade secret laws, confidentiality procedures and licensing arrangements to
protect its intellectual property rights. The Company currently has six
patents granted, thirty patents pending, thirty-two patents in preparation in
the United States, and fifteen international patents pending. The Company
intends to seek additional international patents and additional United States
patents on its technology. There can be no assurance that additional patents
will issue from any of the Company's pending applications or applications in
preparation, or be issued in all countries where the Company's products can
be manufactured or sold, or that any claims allowed from pending applications
or applications in preparation will be of sufficient scope or strength to
provide meaningful protection or any commercial advantage to the Company.
Additionally, competitors of the Company may be able to design around the
Company's patents. 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
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States and thus make the possibility of piracy of the Company's technology
and products more likely. On April 7, 1998, the Company filed a complaint
with the International Trade Commission ("ITC") against certain Asian
manufacturers of optical storage controller devices based on the Company's
belief that such devices infringed one or more of the Company's patents. The
complaint seeks a ban on the importation into the United States of any
infringing CD-ROM controller or products containing such infringing CD-ROM
controllers. See "Legal Proceedings".
The 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 and certain of its
customers and foundries have, from time to time, been notified that they may
be infringing patents or other intellectual property rights owned by third
parties. In addition, customers have been named in suits alleging
infringement of patents or other intellectual property rights by customer
products. Certain components of these products have been purchased from the
Company and may be subject to indemnification provisions made by the Company
to its customers. If it is necessary or desirable, the Company may seek
licenses under such patents or other intellectual property rights. However,
there can be no assurance that licenses will be offered or that the terms of
any offered licenses will be acceptable to the Company. The failure to
obtain a license from a third party for technology used by the Company could
cause the Company to incur substantial liabilities and to suspend the
manufacture of products or the use by the Company's foundries of processes
requiring the technology. As the Company's products become more integrated
and offer increased functionality, there is a likelihood that more of these
claims will occur. The Company cannot accurately predict the eventual
outcome of any suit or other alleged infringement of intellectual property.
Furthermore, the Company may initiate claims or litigation against third
parties for infringement of the Company's proprietary rights or to establish
the validity of the Company's proprietary rights. The Company recently
initiated such litigation by filing a complaint with the International Trade
Commission. See "Legal Proceedings". Litigation by or against the Company
could result in significant expense to the Company and divert the efforts of
the Company's technical and management personnel, whether or not such
litigation results in a favorable determination for the Company. In the
event of an adverse result in any such litigation, the Company could be
required to pay substantial damages, cease the manufacture, use and sale of
infringing products, expend significant resources to develop non-infringing
technology, discontinue the use of certain processes or obtain licenses to
the infringing technology. There can be no assurance that the Company would
be successful in such development or that such licenses would be available on
reasonable terms, or at all, and any such development or license could
require expenditures by the Company of substantial time and other resources.
Patent disputes in the semiconductor industry have often been settled through
cross-licensing arrangements. Because the Company has a limited portfolio of
patents, the Company may not be able to settle an alleged patent infringement
claim through a cross-licensing arrangement. If a successful claim is made
against the Company, or its customers, and a license is not made available to
the Company on commercially reasonable terms, or if the Company is required
to pay substantial damages or awards, the Company's business, financial
condition and operating results would be materially adversely affected.
The Company generally enters into confidentiality agreements with its
employees and confidentiality and license agreements with its customers and
potential customers, and limits access to and distribution of the source and
object code of its software and other proprietary information. Under some
circumstances, the Company grants licenses that give its customers
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limited access to the source code of the Company's software which increases
the likelihood of misappropriation or misuse of the Company's technology.
Accordingly, despite precautions taken by the Company, it may be possible for
unauthorized third parties to copy certain portions of the Company's
technology or to obtain and use information that the Company regards as
proprietary. There can be no assurance that the steps taken by the Company
will be adequate to prevent misappropriation of its technology or to provide
an adequate remedy in the event of a breach or misappropriation by others.
Certain technology used in the Company's products is licensed from third
parties. Some of the Company's products, particularly those targeted for the
DVD market, require certain types of copy protection software that the
Company must license from third parties. In addition, if the Company is to
successfully design and develop technologically advanced products, it must
license a variety of software design and development tools from third
parties. There can be no assurance that such licenses, or licenses of other
third party technology, will be available or can be renewed on terms
acceptable to the Company, if at all. The inability of the Company to obtain
or renew such license arrangements on acceptable terms could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company contracts with independent foundries to manufacture all of
its hardware products, enabling the Company to focus on its design strengths,
minimize fixed costs and capital expenditures and gain access to advanced
manufacturing facilities. Certain of the Company's foundry agreements
require up-front, nonrefundable prepayments or deposits and these fixed costs
could affect the Company's operating margins if the Company is unable to
utilize the minimum number of wafers required under the agreements. The
Company is dependent on its foundries to allocate to the Company a portion of
their foundry capacity sufficient to meet the Company's needs to produce
products of acceptable quality and with acceptable manufacturing yields and
to deliver products to the Company in a timely manner. These foundries
fabricate products for other companies and some manufacture products of their
own design. While the Company believes there is adequate foundry capacity
available to meet its current requirements, there can be no assurance that
the Company will continue to have access to sufficient capacity to meet its
needs in the future. If there is a decrease in available foundry capacity it
is likely that the lead time required to manufacture the Company's products
will increase. In addition, the Company had anticipated that it would be
able to satisfy a small portion of its manufacturing requirements from UICC;
however due to the October 1997 fire at UICC the Company will not be able to
utilize this foundry in the foreseeable future. UICC management has
indicated that capacity will be available through substitute capacity
arrangements, however no assurance can be given as to the availability of
such capacity. The loss of any of these foundries as a supplier, the
inability of the Company in a period of increased demand for its products to
expand the foundry capacity of its current suppliers or qualify other wafer
manufacturers for additional foundry capacity, any inability to obtain timely
and adequate deliveries from the Company's current or future suppliers or any
other circumstances that would require the Company to seek alternative
sources of supply could delay shipments of the Company's products, which
could damage relationships with its current and prospective customers,
provide an advantage to the Company's competitors and have a material adverse
effect on the Company's business, financial condition and operating results.
In October 1997, a fire damaged the UICC facility. UICC management has
advised the Company that a majority of the equipment, majority of the
inventory and a significant portion of the building were completely destroyed
at an estimated loss of approximately $331 million (based on
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current exchange rates). UICC management has also advised the Company that
approximately 10% of the loss to the facility will not be covered by
insurance and that there is a deductible amount that UICC must pay with
respect to the insured portion. Despite any unreimburseable loss, UICC
management has represented to the Company that it is rebuilding the facility
and expects the facility to be fully rebuilt and operational by April of
1999. Given the fire, the Company has evaluated its investment in the UICC
facility and the potential impact of the Company's portion of the
unreimburseable loss to determine whether there has been an impairment and
as the Company believes that estimated future cash inflows expected to be
generated by the facility and/or disposition of the investment are in excess
of the carrying amount of the investment, no impaired loss has
been recognized as of March 31, 1998. Representations have been made by UICC
management that the facility's foundry capacity that has been guaranteed to
the Company will be available through substitute capacity arrangements. To
date, the Company has not requested that UICC made such substitute capacity
available to the Company. Therefore, there can be no assurance that such
substitute foundry capacity will be available to the Company should the
Company require it. Additionally, there can be no assurance that a market
will develop for the shares representing the Company's equity investment at
any time in the future.
The Company's reliance on independent manufacturers and third party
assembly and testing vendors involves a number of additional risks, including
the unavailability of, or interruption in access to, certain process
technologies and reduced control over delivery schedules, quality assurance
and costs. In addition, as a result of the Company's dependence on foreign
subcontractors, the Company is subject to the risks of conducting business
internationally, including foreign government regulation and general
political risks, such as political and economic instability, potential
hostilities, changes in diplomatic and trade relationships, currency
fluctuations, unexpected changes in, or imposition of, regulatory
requirements, tariffs, import and export restrictions, and other barriers and
restrictions, potentially adverse tax consequences, the burdens of complying
with a variety of foreign laws and other factors beyond the Company's control.
The manufacture of semiconductors is a highly complex and precise
process. Minute levels of contaminants in the manufacturing environment,
defects in the masks used to print circuits on a wafer, difficulties in the
fabrication process or other factors can cause a substantial percentage of
wafers to be rejected or a significant number of die on each wafer to be
nonfunctional. Many of these problems are difficult to diagnose and time
consuming or expensive to remedy. The Company's products are particularly
complex and difficult to manufacture. There can be no assurance that the
Company's foundries will not experience irregularities or adverse yield
fluctuations in their manufacturing processes. Any yield or other production
problems or shortages of supply experienced by the Company or its foundries
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Sales of the Company's CD-ROM controller products comprised 77% and 86%
of the Company's net revenues in the three months ended March 31, 1998 and
1997, respectively. Sales of CD-ROM controller products are expected to
continue to account for a substantial portion of the Company's total revenues
for the foreseeable future. The market for CD-ROM controller products
continues to mature and therefore, it is expected that sales of such products
will not necessarily continue to grow at historical rates and will be
influenced by the traditional seasonality and volatility associated with the
PC market. It is further anticipated that the proliferation of DVD-ROM
drives will impact the demand for CD-ROM controller products. Due to the
backward
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compatibility of DVD-ROM drives, it is critical that the Company maintain its
CD-ROM customer base throughout this transition to DVD-ROM. As the CD-ROM
market has begun to mature and transition toward the emerging CD-R/W and
DVD-ROM market, there have been a number of new competitors entering the
market. This increased competition combined with pressure from the sub-$1000
PC segment for lower cost components have caused tremendous price erosion on
CD-ROM controller prices. In addition, as a majority of the new competitors
are located in Asia, together with a majority of the Company's customers, the
Company currently is hampered in its ability to effectively compete given the
effects of the strong dollar versus Asian currencies. Furthermore, there is
currently a trend toward integrating increased functionality on the CD-ROM
controller. Therefore, the Company's revenues and its gross margins from its
CD-ROM controller products will be dependent on the Company's ability to
introduce such integrated products in a commercially competitive manner. The
Company has not previously offered an integrated CD-ROM controller product
that provides functions that had traditionally been supplied by separate,
single function chips. The Company is currently experiencing development
delays with its first integrated CD-ROM controller product. To provide
integrated CD-ROM controller products, the Company has been and will continue
to be required to expand the scope of its research and development efforts to
provide these new functions, which will require the hiring of engineers
skilled in the respective areas and additional management coordination among
the Company engineering and marketing groups. Alternatively, the Company may
find it necessary or desirable to license or acquire technology to enable the
Company to provide these functions, and there can be no assurance that any
such technology will be available for license or purchase on acceptable terms
to the Company. In addition, with new functions being added to the CD-ROM
controller product, companies that historically provided chips with these
functions are now entering the CD-ROM controller market with integrated
products containing these functions as well as the controller function.
Accordingly, given the above-stated factors, there can be no assurance that
the Company will be able to sustain the current level of such product sales
or current operating margins. In addition, there can be no assurance that
the market for CD-ROM controller products in general, or the Company's CD-ROM
controller products in particular, will support the Company's planned
operations in the future. Any decrease in the overall level of sales of, or
the prices for, the Company's CD-ROM controller products, due to
introductions of products by present or future competitors, a decline in
demand for CD-ROM controller products, product obsolescence or any other
reason would have a material adverse effect on the Company's business,
financial condition and results of operations.
International sales, principally to Japan, Taiwan, Korea and Belgium
accounted for approximately 87% and 98% of the Company's net revenues in the
three months ended March 31, 1998 and 1997, respectively. A substantial
portion of the Company's international revenues in the comparison periods
were derived from Taiwanese, Japanese, Korean and Belgian manufacturers of
CD-ROM drives. Most of the Company's foreign sales are negotiated in U.S.
dollars; however, invoicing is often done in local currency. Assets and
liabilities which are denominated in non-functional currencies are translated
to the functional currency on a monthly basis and the resulting gain or loss
is recorded within nonoperating income in the statement of operations. Many
of the Company's non-functional currency receivables and payables are hedged
through managing net asset positions, product pricing and other means. The
Company's strategy is to minimize its non-functional currency net assets or
net liabilities in its foreign subsidiaries. The Company's policy is not to
speculate in financial instruments for profit on the exchange rate price
fluctuations, trade in currencies for which there are not underlying
exposures, or enter into trades for any currency to intentionally increase
the underlying exposure. The Company uses financial instruments, including
local currency debt arrangements, to offset the gains or losses of the
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financial instruments against gains or losses on the underlying operations
cash flows or investments. The Company expects that there could be hedges of
anticipated transactions or investments in foreign subsidiaries in the
future. The Company is also subject to the additional risks of conducting
business outside of the United States. These risks include unexpected
changes in, or impositions of, legislative or regulatory requirements, delays
resulting from difficulty in obtaining export licenses for certain
technology, tariffs, quotas and other trade barriers and restrictions, longer
payment cycles, greater difficulty in accounts receivable collection,
potentially adverse tax rates, the burdens of complying with a variety of
foreign laws and other factors beyond the Company's control. With the
current economic problems in Asia and the strengthening of the dollar, the
Company has recently experienced a more conservative buying pattern from its
customers and increased price pressure on its products. The Company is also
subject to general geopolitical risks in connection with its international
operations, such as political, social and economic instability, potential
hostilities and changes in diplomatic and trade relationships. There can be
no assurance that such factors will not adversely affect the Company's
operations in the future or require the Company to modify its current
business practices. In addition, the laws of certain foreign countries in
which the Company's products are or may be developed, manufactured or sold,
including various countries in Asia, may not protect the Company's products
or intellectual property rights to the same extent as do the laws of the
United States and thus make the possibility of piracy of the Company's
technology and products more likely. As a result, the Company may be subject
to the risks of currency fluctuations. There can be no assurance that one or
more of the foregoing factors will not have a material adverse effect on the
Company's business, financial condition or results of operations or require
the Company to modify its current business practices.
A limited number of customers historically have accounted for a
substantial portion of the Company's net revenues. In the three months ended
March 31, 1998 and 1997, sales to the Company's top ten customers accounted
for approximately 76% and 78%, respectively, of the Company's net revenues.
The Company expects that sales to a limited number of customers will continue
to account for a substantial portion of its net revenues for the foreseeable
future. The Company has experienced significant changes from year to year in
the composition of its major customer base and believes this pattern will
continue. The Company does not have long-term purchase agreements with any of
its customers. Customers generally purchase the Company's products pursuant
to cancelable short-term purchase orders. The loss of, or significant
reduction in purchases by, current major customers would have a material
adverse effect on the Company's business, financial condition and results of
operations. There can be no assurances that the Company's current customers
will continue to place orders or that existing orders will not be canceled.
If sales to current customers cease or are reduced, there can be no assurance
that the Company will be able to continue to obtain the orders from new
customers necessary to offset any such losses or reductions.
The Company's future performance depends, to a significant degree, on
the continued retention and contribution of members of the Company's senior
management as well as other key personnel. The Company is in the process of
recruiting additional senior managers and technical personnel. Competition
for these persons is intense and there can be no assurance that the Company
will be able to attract and retain qualified managers and other personnel.
The loss of the services of one or more of these key personnel could
adversely affect the Company.
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. These date
code fields will need to accept four digit entries to distinguish 21st
century dates from 20th century dates. As a result, in less than two years,
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computer systems and/or software used by many companies may need to be
upgraded to comply with such "Year 2000" requirements. The Company is
currently installing various new internal information systems in connection
with operating its business. These systems are believed to be Year 2000
compliant. The Company is currently evaluating the impact of the Year 2000 on
its products, suppliers and customers, but has not yet completed the process.
As a result, the Company has no reasonable basis to conclude that the Year
2000 will not materially affect the Company's operations.
Since its inception, the Company has experienced significant growth in
the number of its employees and in the scope of its operating and financial
systems. To manage growth effectively, the Company will need to continue to
improve its operational, financial and marketing information systems,
procedures and controls, and expand, train, and manage its employee base.
The Company is in the final stages of implementing a new management
information system. Any problems encountered with the new system could
materially adversely affect the Company's operations.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its cash requirements from
cash generated from operations, the sale of equity securities, bank lines of
credit and long-term and short-term debt. The Company's principal sources of
liquidity as of March 31, 1998 consisted of approximately $129.3 million in
cash, cash equivalents and short-term investments, approximately $25.0
million in lines of credit with two Japanese financial institutions, of which
$17.8 million was available as of March 31, 1998 and approximately $12.5
million in lines of credit with Taiwanese financial institutions of which
approximately $12.1 million was available as of March 31, 1998.
During the nine months ended March 31, 1998, operating activities
provided net cash of approximately $6.4 million. This cash resulted
primarily from net income of $10.8 million, non-cash adjustments to net
income of $6.7 million, utilization of foundry deposits of $5.8 million and
restructuring related charges of $1.8 million, partially offset by net
changes in accounts payable of $14.0 million and other operating assets and
liabilities of $4.7 million. Net income includes the impact of the receipt of
approximately $8.1 million recorded during the nine months ended March 31,
1998 related to the settlement agreement between the Company and United
Microelectronics Corporation in connection with a complaint the Company had
filed with the International Trade Commission on July 21, 1997. See "Legal
Proceedings". Investing and financing activities utilized cash of
approximately $22.5 million consisting primarily of an investment in the UICC
foundry venture of $11.6 million, purchases of property and equipment of $9.5
million and net repayment of debt of $1.9 million and treasury stock
acquisitions of $1.8 million, partially offset by proceeds from issuance of
common stock of $2.5 million.
The Company believes that its existing cash, cash equivalents,
short-term investments and credit facilities will be sufficient to provide
adequate working capital and to fund necessary purchases of property and
equipment through at least the next twelve months. Capital expenditures for
the remainder of fiscal 1998 are anticipated to be approximately $3.2
million.
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.
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In November 1995, the Company acquired Pixel Magic, a privately-held
company based in Andover, Massachusetts for $10.5 million in cash, of which
$5.0 million was contingent upon the achievement of certain performance
criteria over a three-year period. Approximately $4.8 million of the initial
cash payment was allocated to in-process research and development and was
charged to operations in fiscal 1996. In June 1997, the Company waived
certain of the performance criteria and agreed to pay the contingent amount
of $5.0 million in two installments during calendar 1998. The $5.0 million
amount was expensed by the Company in the quarter ended June 30, 1997. The
first payment of $3.0 million was paid in January 1998 and the second payment
of $2.0 million is due in December 1998.
On January 29, 1998, the Company and its wholly-owned subsidiary Pixel
Magic, Inc. signed a Plan of Reorganization and Agreement of Merger ("The
Merger Agreement") with Xerographic Laser Images Corporation ("XLI"), a
developer of resolution enhancement technology. Pursuant to the Merger
Agreement, XLI will become a wholly-owned subsidiary of Pixel Magic. The
Merger Agreement provides for a cash payment of approximately $3.7 million to
XLI shareholders on the effective date of the merger and the right to receive
additional payments up to a maximum of approximately $11.3 million subject to
the achievement of certain milestones by XLI over a three year period ending
on December 31, 2000. The merger is subject to the approval of XLI
shareholders. The transaction will be accounted for as a purchase
transaction. The Company currently anticipates that it will expense a
significant portion of the purchase price in the period during which the
acquisition is closed.
On March 20, 1998, the Company entered into an asset purchase agreement
with Odeum Microsystems, Inc. ("Odeum") and Hyundai Electronics America
("HEA") pursuant to which the Company agreed to acquire certain assets of
Odeum for $4.0 million. With this acquisition, the Company acquired two
products currently in production, an integrated MPEG-2 audio/video decoder
and transport demultiplexer and a DVD-5 compliant QPSK demodulator. Both
products are used predominantly in "free to air" satellite and cable set-top
boxes for MPEG-2 encoded digital television broadcasting. The transaction
was consummated on April 2, 1998. This transaction will be accounted for as a
purchase transaction. The Company anticipates that it will expense a
significant portion of the purchase price for this acquisition in the period
ended June 30, 1998.
On January 22, 1998, the Company announced that its Board of Directors
had authorized the repurchase of up to 2.0 million shares of its common
stock, either in the open market or in private transactions. Accordingly, the
Company may utilize cash to repurchase its common stock. The repurchase
program is authorized for one year, unless further extended by the Company's
Board of Directors. As of March 31, 1998, the Company has purchased 287,500
shares for approximately $1.8 million.
In June and November 1995, the Company entered into agreements with TSMC
and Chartered to obtain certain additional wafer capacity through the year
2001. The agreements call for the Company to commit to certain future wafer
purchases and to deposit funds with the suppliers as either a portion of the
price of the additional wafers in advance of their delivery or as a
non-interest bearing deposit to secure the availability of additional wafers.
The price of such wafers will be determined in the future periods in which
specific orders are actually placed. If the Company is not able to use,
assign, or sell the additional wafer quantities, all or a portion of the
deposits may be forfeited.
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In October 1996, the Company amended its previous agreement with TSMC
resulting in a reduction of the Company's future wafer purchases required
under the original agreement and the elimination of required future cash
prepayments of approximately $73 million. Under the amended agreement, no
additional prepayment is required; however, the Company must utilize the
entire amount of the prepayment paid as of October 1996 through a certain
committed amount of wafer purchases in calendar years 1997, 1998, and 1999 or
a portion of the prepayment will be forfeited. In March 1998, the Company
further amended its agreement with TSMC allowing the Company to utilize
excess wafer purchases in 1997 and 1998 to reduce the Company's committed
wafer purchases in the following years. This amendment resulted in the
Company utilizing calendar 1998 committed wafer purchases beginning in
calendar 1997 after the committed wafer purchases for calendar 1997 were met.
As a result of this amendment the Company recorded a credit to foundry
deposits of approximately $5.3 million which was used to offset payables to
TSMC in the quarter ended March 31, 1998. In addition, the Company received
an additional credit of $7.1 million which will be used to offset future
payments to TSMC. The Company currently believes the terms and conditions of
the agreement, as amended, will be met although no assurance can be given in
this regard.
In September 1996, April 1997 and September 1997, the Company amended
its agreement with Chartered. The amendments resulted in a reduction of the
Company's future wafer purchase commitments and the elimination of required
future cash deposits under the original agreement of approximately $36
million. Under the amended agreement, the required future cash deposits of
approximately $36 million could be reinstated if certain conditions are not
met. The Company currently believes the terms and conditions of the
agreement as amended will be met and that these commitments will not be
reinstated although no assurance can be given in this regard.
The deposits and prepayments under the amended foundry agreements
described above are recorded at cost and total approximately $28.3 million as
of March 31, 1998. The Company currently anticipates being able to utilize
and fully recover the value of all foundry prepayments and deposits under the
terms of the amended agreements although no assurance can be given in this
regard.
In October 1995, the Company entered into a series of agreements with
United Microelectronics Corporation ("UMC") to form, along with other
investors, a separate Taiwanese company, United Integrated Circuits
Corporation ("UICC"), for the purpose of building and managing a
semiconductor manufacturing facility in the Science Based Industrial Park in
Hsin Chu City, Taiwan, Republic of China. As an investor in this venture, the
Company has rights to a portion of the total wafer capacity for the
manufacture of its proprietary products. The Company paid for its investment
in the foundry venture in three installments: $13.7 million in January 1996,
$25.9 in January 1997 and $11.6 in December 1997. This final payment was made
by the Company after receiving representations from UICC management that the
losses from the October fire (discussed below) would be covered by insurance
and that the facility would be rebuilt to its fully operational state.
Investment in the foundry venture as of March 31, 1998 was approximately
$51.2 million which represents an investment of approximately 9.3% of the
total outstanding shares of the foundry venture.
In October 1997, a fire damaged the UICC facility. UICC management has
advised the Company that a majority of the equipment, majority of the inventory
and a significant portion of the building were completely destroyed at an
estimated loss of approximately $331 million (based on
30
<PAGE> 270
current exchange rates). UICC management has also advised the Company that
approximately 10% of the loss to the facility will not be covered by
insurance and that there is a deductible amount that UICC must pay with
respect to the insured portion. Despite any unreimburseable loss, UICC
management has represented to the Company that it is rebuilding the facility
and expects the facility to be fully rebuilt and operational by April of
1999. Given the fire, the Company has evaluated its investment and the
potential impact of the Company's portion of the unreimburseable loss in the
UICC facility to determine whether there has been an impairment and as the
Company believes that estimated future cash inflows expected to be generated
by the facility and/or disposition of the investment are in excess of the
carrying amount of the investment, no impaired loss has been recognized as of
March 31, 1998. Representations have been made by UICC management that the
facility's foundry capacity that has been guaranteed to the Company will be
available through substitute capacity arrangements. To date, the Company has
not requested that UICC make such substitute capacity available to the
Company. Therefore, there can be no assurance that such substitute foundry
capacity will be available to the Company should the Company require it.
Additionally, there can be no assurance that a market will develop for the
shares representing the Company's equity investment at any time in the future.
31
<PAGE> 271
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and various of its current and former officers and Directors
are parties to several lawsuits which purport to be class actions filed on
behalf of all persons who purchased or acquired the Company's stock
(excluding the defendants and parties related to them) for the period July
27, 1995 through May 22, 1996. The first, a state court proceeding
designated IN RE OAK TECHNOLOGY SECURITIES LITIGATION, Master File No.
CV758510 pending in Santa Clara County Superior Court in Santa Clara,
California, consolidates five putative class actions. This lawsuit also
names as defendants several of the Company's venture capital fund investors,
two of its investment bankers and two securities analysts. The plaintiffs
allege violations of California securities laws and statutory deceit
provisions as well as breaches of fiduciary duty and abuse of control. On
December 6, 1996, the state court judge sustained the Oak defendants'
demurrer to all causes of action alleged in plaintiffs' First Amended
Consolidated Complaint, but allowed plaintiffs the opportunity to amend. The
plaintiffs' Second Amended Consolidated Complaint was filed on August 1,
1997. On December 3, 1997, the state court judge sustained the Oak
defendants' demurrer to plaintiffs' Second Amended Consolidated Complaint
without leave to amend to the causes of action for breach of fiduciary duty
and abuse of control, and to the California Corporations Code Sections
25400/25500 claims with respect to the Company, a number of the individual
officers and directors, and the venture capital investors. The judge also
sustained the demurrer with leave to amend to the California Civil Code
Sections 1709/1710 claims, however plaintiffs elected not to amend this
claim. Accordingly, the only remaining claim in state court, IN RE OAK
TECHNOLOGY SECURITIES LITIGATION, is the California Corporations Code
Sections 25400/25500 cause of action against four officers of the Company and
the Company's investment bankers.
The Company and various of its current and former officers and Directors
are also parties to four putative class action lawsuits pending in the U.S.
District Court for the Northern District of California. These actions have
been consolidated as IN RE OAK TECHNOLOGY, INC. SECURITIES LITIGATION, Case
No. C-96-20552-SW(PVT). This action alleges certain violations of federal
securities laws and is brought on behalf of purchasers of the Company's stock
for the period July 27, 1995 through May 22, 1996. This action also names as
a defendant one of the Company's investment bankers. On July 29, 1997, the
federal court judge granted the Oak defendants' Motion to Dismiss the
plaintiff's First Amended Consolidated Complaint, but granted plaintiffs
leave to amend most claims. The plaintiffs' Second Amended Consolidated
Complaint was filed on September 4, 1997. Defendants' Motion to Dismiss was
heard on December 17, 1997. The federal court judge took the matter under
submission and has not yet issued a ruling.
Additionally, various of the Company's current and former officers and
Directors are defendants in three consolidated derivative actions pending in
Santa Clara County Superior Court in Santa Clara, California, entitled IN RE
OAK TECHNOLOGY DERIVATIVE ACTION. This lawsuit, which asserts a claim for
breach of fiduciary duty and a claim under California securities law based
upon the officers' and Directors' trading in securities of the Company, has
been stayed pending resolution of the class actions.
In all of the putative state and federal class actions, the plaintiffs
are seeking monetary damages and equitable relief. In the derivative action,
the plaintiffs are also seeking an accounting for the defendants' sales of
Company stock and the payment of monetary damages to the Company.
32
<PAGE> 272
All of these actions are in the early stages of proceedings. Based on
its current information, the Company believes the suits to be without merit
and will defend its position vigorously. Although it is reasonably possible
the Company may incur a loss upon conclusion of these claims, an estimate of
any loss or range of loss cannot be made. No provision for any liability
that may result upon adjudication has been made in the Company's Consolidated
Financial Statements.
In connection with these legal proceedings, the Company has incurred,
and expects to continue to incur, substantial legal and other expenses.
Shareholder suits of this kind are highly complex and can extend for a
protracted period of time, which can substantially increase the cost of such
litigation and divert the attention of the Company's management.
On July 21, 1997, the Company filed a complaint with the International
Trade Commission ("ITC") based on the Company's belief that certain CD-ROM
controllers infringed one or more of the Company's patents. The complaint
seeks a ban on the importation into the United States of any infringing
CD-ROM controller or product containing such infringing CD-ROM controller. A
formal investigative proceeding was instituted by the ITC (Investigation No.
337-TA-401) on August 19, 1997, naming as respondents: Winbond Electronics
Corporation ("Winbond"); Winbond Electronics North America Corporation;
Wearnes Technology (Private) Ltd.; Wearnes Electronics Malaysia Sendirian
Berhad; and Wearnes Peripheal International (Pte.).
On March 16, 1998, the Company and Winbond entered into a settlement
agreement pursuant to which Winbond obtained a nonexclusive, royalty-bearing
license to the Company's U.S. patents No.'s 5,535,327 and 5,581,715 and the
Company obtained a nonexclusive, royalty-free license to several Winbond
patents. The settlement agreement provided that the parties would jointly
seek termination and dismissal of investigation No. 337-TA-401 as to Winbond
and its four affiliated companies: Winbond Electronics North America
Corporation; Wearnes Technology (Private) Ltd.; Wearnes Electronics Malaysia
Sendirian Berhad; and Wearnes Peripheal International (Pte.). On April 15,
1998, Investigation No. 337-TA-401 was ordered terminated as to all parties.
As originally filed with the ITC, the Company's complaint also
identified as proposed respondents: United Microelectronics Corporation
("UMC"); Lite-On Group; Lite-On Technology Corp.; Behavior Tech Computer
Corp. and Behavior Tech Computer (USA) Corp. Prior to the ITC's institution
of the formal investigation proceeding, the Company and UMC entered into a
settlement agreement, effective July 31, 1997, pursuant to which UMC agreed
to cease and desist the manufacture 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 and February 1998, the
Company received $2.6 million, $4.8 million and $0.7 million, respectively
pursuant to this settlement. Proceeds from the settlement were recorded as
miscellaneous income and included in nonoperating income for the periods
ended September 30, 1997, December 31, 1997 and March 31, 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. 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
33
<PAGE> 273
controllers, that were the subject of the ITC action and related settlement
agreement, through or to a UMC affiliated, Taiwanese entity called MediaTek.
On February 23, 1998, the federal court judge denied the Company's request
for a preliminary injunction based on the court's findings that there was no
evidence that UMC was presently engaged in the manufacture of CD-ROM
controllers or other products covered by the settlement agreement. On
December 24, 1997, UMC answered the Company's complaint and counterclaimed
asserting causes of action for recission, restitution, fraudulent
concealment, mistake, lack of mutuality, interference and declaratory
judgment of non-infringement, invalidity and unenforceability of the Oak
patent that was the subject of the original ITC action filed against UMC.
The Company believes these counterclaims to be without merit and will
vigorously defend its patent. Both the Company and UMC seek compensatory and
punitive damages. In addition, the Company seeks permanent injunctive
relief. On April 14, 1998, the Company filed a Motion to Bifurcate UMC's
patent counterclaims from the contract-related claim's and counterclaims.
The Motion to Bifurcate is scheduled to be heard on May 22, 1998. If an
order is granted bifurcating the UMC patent counterclaims, a trial on the
contract-related issues is scheduled for December of 1998. If the Company's
Motion to Bifurcate is not granted, it is expected that a trial on all claims
and counterclaims will occur in the second calendar quarter of 1999.
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. 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 April 7, 1998, the Company filed a new complaint with the
International Trade Commission ("ITC") alleging that five Asian companies,
are violating U.S. trade laws by importing or selling CD-ROM drive
controllers that infringe a United States patent owned by the Company. The
Company's complaint is asserted against United Microelectronics Corp.;
MediaTek, Inc.; Lite-On Group; Lite-On Technology Corp and AOpen, Inc.
In its complaint, the Company requests the ITC to investigate the five
above-named companies and to enter an order barring imports into the United
States of their allegedly infringing products and products containing them,
including CD-ROM drives and personal computers. A formal investigative
proceeding was instituted by the ITC (Investigation No. 337-TA-409) on May 8,
1998 naming as respondents United Microelectronics Corp. MediaTek, Inc.,
Lite-On Technology Corp. and AOpen, Inc. In most cases, the ITC decides
within 12 to 15 months after the filing of a complaint whether or not to
issue an order excluding foreign products that allegedly infringe U.S.
patents. In connection with this legal proceeding, the Company will incur
substantial legal and other expenses.
If any of the above pending actions are decided adversely to the
Company, it would likely have a material adverse affect on the Company's
financial condition and results of operations.
34
<PAGE> 274
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith or incorporated by reference
herein.
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------ -------------
<S> <C>
3.01 The Company's Restated Certificate of Incorporation, as amended (1)
3.02 The Company's Restated Bylaws (2)
3.03 Certificate of Correction to the Restated Certificate of
Incorporation of the Company (16)
4.01 Form of Specimen Certificate for the Company's Common Stock (3)
4.02 Amended and Restated Registration Rights Agreement dated as
of October 15, 1993 among the Company and various investors (3)
4.03 The Company's Restated Certificate of Incorporation, as
amended (See Exhibit 3.01)
4.04 The Company's Restated Bylaws (See Exhibit 3.02)
4.05 Form of Certificate of Designation of Series A Junior Participating
Preferred Stock of the Company dated August 18, 1997 (16)
4.06 Rights Agreement between the Company and BankBoston, N.A. dated
August 19, 1997 (16)
10.01 1988 Stock Option Plan, as amended and related documents (3)*
10.02 1994 Stock Option Plan and related documents (3) and amendment
thereto dated February 1, 1996 (4)*
10.03 1994 Outside Directors' Stock Option Plan and related documents (3)*
10.04 1994 Employee Stock Purchase Plan (3)*
10.05 401(k) Plan and related documents (3) and Amendment Number One
and Supplemental Participation Agreement thereto (5)*
10.06 Lease Agreement dated August 3, 1988 between John Arrillaga,
Trustee, or his Successor Trustee, UTA dated 7/20/77 (John
Arrillaga Separate Property Trust) as amended and Richard T.
Peery, Trustee, or his Successor Trustee, UTA dated 7/20/77
(Richard T. Peery Separate Property Trust) as amended, and
Justin Jacobs, Jr., dba Siri-Kifer Investments, a joint
venture, and the Company, as amended June 1, 1990, and Consent
to Alterations dated March 26, 1991 (lease agreement for 139 Kifer
Court, Sunnyvale, California) (3), and amendments thereto dated
June 15, 1995 and July 19, 1995 (5)
</TABLE>
35
<PAGE> 275
<TABLE>
<CAPTION>
<S> <C>
10.07 Lease Agreement dated August 22, 1994 between John
Arrillaga, Trustee, or his Successor Trustee, UTA dated
7/20/77 (John Arrillaga Separate Property Trust) as amended
and Richard T. Peery, Trustee, or his Successor Trustee, UTA
dated 7/20/77 (Richard T. Peery Separate Property Trust) as
amended, and Justin Jacobs, Jr., dba Siri-Kifer Investments,
a joint venture, and the Company (lease agreement for 140 Kifer
Court, Sunnyvale, California) (3), and amendment thereto dated
June 15, 1995 (5)
10.08 Form of Indemnification Agreement, between the Company and each
of its Directors and executive officers (14)
10.09 VCEP Agreement dated July 30, 1990 between the Company and Advanced
Micro Devices, Inc. (3)
10.10 Product License Agreement dated April 13, 1993 between the Company
and Media Chips, Inc., as amended September 16, 1993 (3)
10.11 Resolutions of the Board of Directors of the Company dated July 27,
1994 setting forth the provisions of the Executive Bonus Plan (3) (12)*
10.12 Employee Incentive Plan effective January 1, 1995 (3)*
10.13 Option Agreement between Oak Technology, Inc., and Taiwan Semiconductor
Manufacturing Co., Ltd. dated as of August 8, 1996 (14)**
10.14 Foundry Venture Agreement between the Company and United Microelectronics
Corporation dated as of October 2, 1995 (6) (12)
10.15 Fab Ven Foundry Capacity Agreement among the Company, Fab Ven and
United Microelectronics Corporation dated as of October 2, 1995 (7) (12)
10.16 Written Assurances Re: Foundry Venture Agreement among the Company, United
Microelectronics Corporation and Fab Ven dated as of October 2, 1995 (8) (12)
10.17 Lease Agreement dated June 15, 1995 between John Arrillaga, Trustee, or
his Successor Trustee, UTA dated 7/20/77 (John Arrillaga Separate Property
Trust) as amended and Richard T. Peery, Trustee, or his Successor Trustee,
UTA dated 7/20/77 (Richard T.Peery Separate Property Trust) as amended, and
the Company (lease agreement for 130 Kifer Court, Sunnyvale, California) (9),
and amendments thereto dated June 15, 1995 and August 18, 1995 (10)
10.18 Deposit Agreement dated November 8, 1995 between Chartered Semiconductor
Manufacturing Ltd. and the Company (11), and Amendment Agreement (No. 1)
thereto dated September 25, 1996 (13)**
10.19 Amendment Agreement (No. 2) dated April 7, 1997 to Deposit Agreement dated
November 8, 1995 between Chartered Semiconductor Manufacturing Ltd. and the
Company(15) and addendum thereto dated September 26, 1997(17)**
</TABLE>
36
<PAGE> 276
<TABLE>
<CAPTION>
<S> <C>
10.20 First Amendment to Plan of Reorganization and Agreement of Merger dated
October 27, 1995 among the Company, Oak Acquisition Corporation, Pixel
Magic, Inc. and the then shareholders of Pixel dated June 25, 1996 and
Second Amendment thereto dated June 13, 1997 (16)
10.21 First Amendment to Non-Compete and Technology Transfer Agreement by and
among the Company, Pixel Magic, Inc. and Peter D. Besen dated June 13, 1997 (16)**
10.22 Agreement of Termination of Employment Agreement between Pixel Magic, Inc.
and Peter D. Besen dated June 13, 1997 (16)
10.23 Agreement of Termination of Employment Agreement between Pixel Magic, Inc.
and Don Schulsinger dated June 13, 1997 (16)
10.24 Release and Settlement Agreement between the Company and United
Microelectronics Corporation dated July 31, 1997 (16)**
10.25 Sublease Agreement dated December 1, 1997 between Global Village Communication,
Inc. and the Company (lease agreement for 1150 East Arques Avenue, Sunnyvale,
California) and accompanying lease and amendment thereto (18)
10.26 Amendment to Option Agreement by and between Taiwan Semiconductor
Manufacturing Co., Ltd, and the Company. **
10.27 Settlement Agreement between Winbond Electronics Corporation and the
Company. **
11.01 Statement regarding computation of net income per share
27.01 Financial Data Schedule
</TABLE>
- -------------------
(1) Incorporated herein by reference to exhibit 3.01 of the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996.
(2) Incorporated herein by reference to exhibit 3.05 filed with the Company's
Registration Statement on Form S-1 (File No. 33-87518) declared effective
by the Securities and Exchange Commission on February 13, 1995 (the
"February 1995 Form S-1").
(3) Incorporated herein by reference to the exhibit with the same number filed
with the February 1995 Form S-1.
(4) Incorporated herein by reference to Exhibit 10.1 filed with the Company's
Registration Statement on Form S-8 (File No. 333-4334) on May 2, 1996.
(5) Incorporated herein by reference to the exhibit with the same number filed
with the Company's Annual Report on Form 10-K for the year ended June 30,
1996.
(6) Incorporated herein by reference to Exhibit 2.1 filed with the Company's
Form 8-K dated October 2, 1995 (the "October 1995 form 8-K").
(7) Incorporated herein by reference to Exhibit 2.2 filed with the October 1995
Form 8-K.
(8) Incorporated herein by reference to Exhibit 2.3 filed with the October 1995
Form 8-K.
(9) Incorporated herein by reference to Exhibit 10.08 filed with the Company's
Annual Report on Form 10-K for the year ended June 30, 1995.
(10) Incorporated herein by reference to Exhibit 10.08 filed with the Company's
Annual Report on Form 10-K for the year ended June 30, 1996.
(11) Incorporated herein by reference to Exhibit 10.04 filed with the Company's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1995.
37
<PAGE> 277
(12) Confidential treatment has been granted with respect to portions of this
exhibit.
(13) Incorporated herein by reference to Exhibit 10.17 filed with the Company's
Annual Report on Form 10-K for the year ended June 30, 1996.
(14) Incorporated herein by reference to the exhibit with the same number filed
with the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996.
(15) Incorporated herein by reference to the exhibit with the same number filed
with the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997.
(16) Incorporated herein by reference to the exhibit with the same number filed
with the Company's Annual Report on Form 10-K for the year ended June 30,
1997.
(17) Incorporated herein by reference to the exhibit with the same number filed
with the Company's Quarterly report on Form 10-Q for the quarter ended
September 30, 1997.
(18) Incorporated herein by reference to the exhibit with the same number filed
with the Company's Quarterly report on Form 10-Q for the quarter ended
December 31, 1997.
- -------------------
* Indicates Management incentive plan.
** Confidential treatment granted and/or requested as to portions of the
exhibit.
(b) Reports on Form 8-K
A report on Form 8-K was filed on January 28, 1998 reporting the
business restructuring that was announced with the release of the Company's
second fiscal quarter results. Pursuant to the restructuring plan, the
Company would discontinue its graphics and audio/communications businesses
and focus on three core markets: optical storage, consumer electronics and
digital office equipment. The Company also appointed Mr. Richard Black, a
Director of the Company since 1987, to the executive management team as
president and added Mr. Young Sohn, president of Quantum Corporation's
Enterprise and Personal Storage Group, to its Board of Directors. The form
8-K also reported that its Board of Directors approved a stock repurchase
plan.
38
<PAGE> 278
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OAK TECHNOLOGY, INC.
(Registrant)
Date: May 14, 1998 /S/ SIDNEY S. FAULKNER
-----------------------------
Sidney S. Faulkner
Vice President, Finance
Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
39
<PAGE> 279
EXHIBIT INDEX
Exhibit
Number Exhibit Title
------ -------------
10.26 Amendment to Option Agreement by and between Taiwan
Semiconductor Manufacturing Co., Ltd, and the Company.**
10.27 Settlement Agreement between Winbond Electronics Corporation
and the Company. **
11.01 Statement regarding computation of net income per share
27.01 Financial Data Schedule
-------------------
** Confidential treatment requested as to portions of the exhibit
40
<PAGE> 280
EXHIBIT 10.26
FIRST AMENDMENT TO THE OPTION AGREEMENT
THIS FIRST AMENDMENT TO THE OPTION AGREEMENT (the "Amendment") is made
and becomes effective as of March 1, 1998 (the "Effective Date") by and
between Taiwan Semiconductor Manufacturing Co., Ltd., and company duly
incorporated under the laws of the Republic of China ("ROC"), having its
principal place of business at No. 121, Park Avenue 3, Science Based
Industrial Park, Hsin-Chu, Taiwan, ROC ("TSMC"), and Oak Technology, Inc., a
company duly incorporated under the laws of ROC, having its principal place
of business at Rm. B, No. 370, Sec. 1, Fu-Hsing S. Rd. Taipei, Taiwan ("Oak").
In consideration of mutual covenants and conditions, the parties, hereto
agree to amend the Option Agreement entered into on August 8, 1996 (the
"Option Agreement") as follows:
1. Capitalized terms not defined herein shall have the same meanings given
them in the Option Agreement.
2. Owing to the fact that the actual number of wafers purchased by OAK in
1996 exceeded the 1996 Customer Committed Capacity by [ * ] wafers, the
parties agree to apply such exceeding number of wafers to the 1997 Base
Capacity thereby reducing the 1997 Base Capacity from [ * ] wafers to
[ * ] wafers, and the 1997 Customer Committed Capacity from [ * ] wafers
to [ * ] wafers. The parties further agree that the 1997 TSMC Committed
Capacity shall remain at [ * ] wafers.
3. In the event that OAK's purchase of wafers exceeds the TSMC Committed
Capacity of year(s) 1997 and/or 1998, the parties agree that the exceeding
number of wafers would be applied first to the Base Capacity and then to
the Option Capacity of the following calendar year, and the Base Capacity,
Option Capacity and Customer Committed Capacity of the following calendar
year will therefore be reduced as appropriate by the excess amount.
However, the TSMC Committed Capacity would not be affected by the
occurrence of the above-stated conditions.
4. Subject to the foregoing amendments, the Option Agreement shall continue
in full force and effect.
IN WITNESS WHEREOF, the parties have executed this First Amendment to the
Option Agreement as of the date first stated above.
Taiwan Semiconductor Oak Technology, Inc.
Manufacturing Co., Ltd.
By: /s/ C.C. Tsai By: /s/ Sidney S. Faulkner
---------------------------- ----------------------------
Name: C.C. Tsai Name: Sidney S. Faulkner
Title: Senior Director Title: Vice President
Asia Marketing & Technical Service & Chief Financial Officer
* CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR
REDACTED PORTIONS WHICH HAVE BEEN FILED SEPARATELY
WITH THE COMMISSION.
<PAGE> 281
EXHIBIT 10.27
SETTLEMENT AGREEMENT
WINBOND ELECTRONICS CORPORATION (hereinafter "Winbond") and OAK
TECHNOLOGY, INC. (hereinafter "Oak") hereby agree to settlement of ITC
Investigation No. 337-TA-401 on the following terms and conditions:
1. DEFINITIONS.
a. The "Effective Date" of the settlement is March 16, 1998.
b. The "Licensed Patents" are Oak's U.S. Patent No. 5,535,327 and U.S.
Patent No. 5,581,715, and any continuation, division, continuation-in-part,
reissue, reexamination, renewal and extension thereof, including U.S. and
foreign counterparts.
c. The "Licensed Products" are [ *
] It is agreed that the Winbond 88111F, 88111AF, 88112F, 88113F, 88113AF,
88222, and 88223 chips are Licensed Products that are, were or will be
individually sold by or for Winbond. It is also agreed that all other Winbond
controllers implementing substantially the same structures and/or methods
insofar as the claims of the Licensed Patents are concerned, are also Licensed
Products.
d. As used in this Agreement [ *
]
e. As used in this Agreement [ *
]
2. RIGHTS UNDER THE LICENSED PATENTS.
a. Winbond has the right [ *
]
3. RIGHTS UNDER WINBOND PATENTS. [ *
]
4. DISMISSAL OF ITC ACTION. Based on this Settlement Agreement, Oak and
Winbond agree to jointly seek termination and dismissal of Investigation
No. 337-TA-401 as to all parties.
* CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR
REDACTED PORTIONS WHICH HAVE BEEN FILED SEPARATELY
WITH THE COMMISSION.
5. CONFIDENTIALITY. Terms of this settlement shall be kept
confidential, except as required by law or statute or as otherwise agreed to by
the parties.
[ *
]
9. MODIFICATION. This Agreement shall not be modified, except by a writing
duly executed by both parties.
10. The parties agree that, except as required by law, public comment will be
limited to the following:
Oak and Winbond have resolved their dispute regarding CD-
ROM controller chips. As part of the resolution, Winbond has
obtained a license under the Oak patents.
<PAGE> 282
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized officers.
OAK TECHNOLOGY, INC.
Date: March 17, 1998 By: /s/ SHAWN M. SODERBERG
-------------------------------
Title: GENERAL COUNSEL
----------------------------
Date: March 18, 1998 By: /s/ ARCHIE YEH
-------------------------------
Title: VP WINBOND ELECTRONICS CORP.
----------------------------
* CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR
REDACTED PORTIONS WHICH HAVE BEEN FILED SEPARATELY
WITH THE COMMISSION.
Page 2 of 2
<PAGE> 283
EXHIBIT 11.01
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------- ---------------------------
1998 1997 1998 1997
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net income (loss)............................................. $ (3,004) $ 9,540 $ 10,791 $ 21,075
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Weighted average shares used in computing basic
net income (loss) per share.................................. 42,000 40,532 41,809 40,469
------------ ----------- ------------ -----------
Weighted average number of dilutive common
equivalent shares used in computing diluted net
income (loss) per share:
Options.................................................... - 2,108 756 2,005
Warrants................................................... - 161 79 156
------------ ----------- ------------ -----------
Weighted average shares used in computing
diluted net income (loss) per share.......................... 42,000 42,801 42,644 42,630
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Net income (loss) per share:
Basic...................................................... $ (0.07) $ 0.24 $ 0.26 $ 0.52
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Diluted.................................................... $ (0.07) $ 0.22 $ 0.25 $ 0.49
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
</TABLE>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS AS
FOUND ON PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE YEAR TO DATE AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<PAGE> 284
APPENDIX E
<TABLE>
<S> <C> <C>
[X] PLEASE MARK YOUR
VOTES AS IN THE
EXAMPLE.
</TABLE>
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF
XEROGRAPHIC LASER IMAGES CORPORATION
------------------------
SPECIAL MEETING
AUGUST 11, 1998
The undersigned hereby appoints Anthony D. D'Amelio and Roger F. Salava as
proxies to represent the undersigned, with full power of substitution, at the
Special Meeting of Stockholders of Xerographic Laser Images Corporation, to be
held on August 11, 1998 at 10:00 A.M., local time, at the offices of Warner &
Stackpole LLP, 75 State Street, Boston, Massachusetts, and at any adjournments
thereof. The undersigned hereby directs the said Anthony D. D'Amelio and Roger
F. Salava to vote in accordance with their judgment on any matters that may
properly come before the Special Meeting, all as indicated in the Notice of
Special Meeting, receipt of which is hereby acknowledged, and to act on the
following matters set forth in such notice as specified by the undersigned:
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1. Proposal to approve the merger of OTI FOR AGAINST ABSTAIN
Acquisition with and into XLI. [ ] [ ] [ ]
2. Proposal to ratify and approve the FOR AGAINST ABSTAIN
Plan of Reorganization and [ ] [ ] [ ]
Agreement of Merger, dated as
of January 29, 1998.
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(CONTINUED AND TO BE SIGNED ON THE REVERSE SIDE)
<PAGE> 285
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3. Appointment of Stockholder FOR ALL NOMINEES WITHHOLD AUTHORITY
Representatives LISTED AT RIGHT TO VOTE FOR ALL
(EXCEPT AS MARKED TO NOMINEES LISTED AT NOMINEES: DANIEL ALLEN
THE CONTRARY BELOW) RIGHT ADAM CARLEY
[ ] ANTHONY D'AMELIO
[ ] JOSEPH KATZ
VINCENT SPOTO
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For, except vote withheld for the following nominee(s):
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4. In their discretion to transact such other business as may properly come
before the meeting or any adjournment or adjournments thereof.
In their discretion, the Proxies are authorized to vote upon such other
business that may properly come before the meeting.
THIS BALLOT, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. UNLESS OTHERWISE SPECIFIED, THE SHARES
WILL BE VOTED "FOR" EACH PROPOSAL.
PLEASE DATE, SIGN AND RETURN THIS PROXY. THANK YOU.
Signature of Stockholder(s):
- --------------------------------------------------------------- Dated:
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Printed Name:
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Address:
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NOTE: Signature should agree with the name on the stock certificate as printed
thereon. Executors, administrators, trustees and other fiduciaries should so
indicate when signing.
