<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
FILED BY THE REGISTRANT [X] FILED BY A PARTY OTHER THAN THE REGISTRANT [ ]
- --------------------------------------------------------------------------------
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] 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 Person(s) Filing Proxy Statement)
PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX):
[ ] No fee required.
[X] 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
[ ] 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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XEROGRAPHIC LASER IMAGES CORPORATION
101 BILLERICA AVENUE
5 BILLERICA PARK
NORTH BILLERICA, MA 01862
(978) 670-5999
, 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
[ ], 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, 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. 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.
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
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XEROGRAPHIC LASER IMAGES CORPORATION
101 BILLERICA AVENUE
5 BILLERICA PARK
NORTH BILLERICA, MA 01862
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD [ ], 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 [ ], 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 February 17, 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
, 1998
<PAGE> 4
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 [ ], 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 February 23,
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, to be paid during the period commencing with the quarter
ending March 31, 1999 and ending December 31, 2000. The $15,000,000 payment 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
(the "XLI Warrants") 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 (including the number of shares of XLI
Common Stock into which the shares of XLI Preferred Stock are convertible)
outstanding at the Effective Time of the merger, which amount is anticipated to
be 4,369,370 shares. Based upon these assumptions, 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.
In addition to Merger Cash, XLI Stockholders will 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.
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. 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
<PAGE> 5
December 31, 2000. Each XLI Warrant will be converted into the contingent right
to receive Contingent Cash upon the exercise of the XLI Warrant by the holder
thereof and delivery of the exercise price therefor. 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 February 17, 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 February 17, 1998, the record date for the Special Meeting, it is
anticipated that XLI will have outstanding 3,584,941 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.
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 IN THE
BUSINESS DESCRIPTION AND MANAGEMENT'S DISCUSSION AND ANALYSIS SECTIONS OF XLI'S
ANNUAL REPORT ON FORM 10-KSB FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996.
2
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XEROGRAPHIC LASER IMAGES CORPORATION
PROXY STATEMENT
TABLE OF CONTENTS
<TABLE>
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PAGE
----
<S> <C>
SUMMARY OF PROXY STATEMENT........................................................... 5
RISK FACTORS......................................................................... 8
GENERAL INFORMATION.................................................................. 9
Purpose of the Special Meeting..................................................... 9
Vote Required and Ownership........................................................ 9
Proxies............................................................................ 9
Oak, Pixel, and OTI Acquisition Information........................................ 10
THE MERGER........................................................................... 11
Introduction....................................................................... 11
Parties to the Merger.............................................................. 11
Background of and Reasons for the Merger........................................... 11
Recommendation of Board of Directors............................................... 12
Interest of Certain Persons in the Merger.......................................... 12
Accounting Treatment of the Merger................................................. 13
Certain Federal Income Tax Consequences of the Merger.............................. 13
TERMS OF THE MERGER AGREEMENT........................................................ 14
Effective Date and Time of the Merger.............................................. 14
Effect of Merger on Outstanding Securities......................................... 14
Effect of Merger on XLI Common Stock and XLI Preferred Stock.................... 14
Effect of Merger on XLI Warrants................................................ 14
Effect of Merger on XLI Common Stock Equivalents................................ 14
Calculation of Merger Cash...................................................... 14
Calculation of Contingent Cash.................................................. 15
Exchange of Certificates; Payment of Merger Cash................................... 16
Exchange of Merger Cash for XLI Stock........................................... 16
Escrow of Merger Cash for Private Warrants...................................... 16
Exchange Procedures............................................................. 16
Payment of Contingent Cash......................................................... 17
Escrow of Contingent Cash.......................................................... 18
Set-Off and Indemnity Hold Back.................................................... 18
Audit Rights....................................................................... 18
Distributions from Escrow.......................................................... 18
Initial Escrow Distribution..................................................... 18
Upon Exercise of XLI Warrants................................................... 19
Upon Termination of the Escrow Agreement........................................ 19
Allocation of XLI Warrant Exercise Amounts...................................... 19
Representations and Warranties; Covenants.......................................... 20
Conditions to the Merger........................................................... 20
Termination; Amendment and Waiver.................................................. 21
Post-Closing Adjustment............................................................ 21
</TABLE>
3
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<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Non-Recourse Indemnification....................................................... 21
Provisions Relating to the Stockholder Representatives............................. 22
APPRAISAL RIGHTS..................................................................... 22
OPINION OF FINANCIAL ADVISOR......................................................... 24
DIVIDENDS............................................................................ 28
MATERIAL CONTRACTS................................................................... 28
MARKET PRICES........................................................................ 28
STATEMENT REGARDING ACCOUNTANTS' REPRESENTATIVES..................................... 28
INFORMATION CONCERNING XLI........................................................... 28
Description of Business............................................................ 28
Products and Product Development................................................... 29
Sales and Marketing................................................................ 29
Patents and Proprietary Information................................................ 29
Personnel.......................................................................... 30
Description of Property............................................................ 30
Legal Proceedings.................................................................. 30
Further Information Concerning the Business of XLI................................. 30
MARKET PRICE FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS....................... 31
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE......................................................................... 31
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF XLI................ 32
INFORMATION CONCERNING OTI ACQUISITION............................................... 34
INFORMATION CONCERNING OAK AND ITS SUBSIDIARIES...................................... 34
General............................................................................ 34
Optical Storage Market............................................................. 34
Consumer Electronics............................................................... 34
Digital Office Equipment Market.................................................... 35
Further Information Concerning the Business of Oak and its Subsidiaries............ 35
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.................................... 36
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, 1996...................................................
--
XLI's Quarterly Report on Form 10-QSB for the fiscal quarter ended
September 30, 1997..................................................
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
September 30, 1997..................................................
--
Oak's Form 8-K dated January 22, 1998...............................
APPENDIX E -- FORM OF PROXY CARD..................................................
</TABLE>
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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:........... [ ], 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:............... February 17, 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
5
<PAGE> 9
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-
6
<PAGE> 10
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.
7
<PAGE> 11
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. Pixel is not obligated under the terms of the
Merger Agreement to fund the operations of XLI.
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 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.
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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 February
17, 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, it is anticipated that 3,584,941 shares of XLI Common
Stock will be 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. It is also anticipated that 315,238 shares of XLI
Preferred Stock will be 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
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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.
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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. 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 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
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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 23.9% 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 4.3% 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.
Daniel J. Allen ("Allen"), a Director of XLI, owns 6.3% 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
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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.
ACCOUNTING TREATMENT OF THE MERGER
It is anticipated that the Merger will be accounted for as a purchase
transaction.
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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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
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.
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
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under any Private Warrants outstanding at the Effective Time. 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 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).
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, 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
shall be as determined for financial reporting purposes using generally 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.
The amount of Contingent Cash shall be subject to adjustment, a set-off
amount, 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."
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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 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, a form of which 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
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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. 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.
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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.
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 by
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
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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 Agreement, and the terms of the Escrow
Agreement. 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 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 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 paid out following the
termination of the Escrow Agreement. 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 term of the Escrow Agreement, the aggregate exercise
price paid to Oak in connection with any exercise of
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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 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 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.
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
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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 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
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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.
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 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.
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 may be.
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
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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.
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
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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 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
24
<PAGE> 28
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.
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 has traded
infrequently and the last trade recorded by the NASDAQ Bulletin Board while
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.
25
<PAGE> 29
The aggregate enterprise value of XLI as of the date of this 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
CASH PLUS
ENTERPRISE MINIMUM MERGER CONTINGENT
PURCHASE VALUE CASH 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>
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
the transitional nature of XLI's past business and the prospect of its future
business based upon its new technology, Montgomery found it to be extremely
difficult to identify a clear degree of comparability. 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.
26
<PAGE> 30
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 the company'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. 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.
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.
Finally, Montgomery chose the four midpoint values within each 16 value
scenario to construct a range of values for XLI. The range of values based upon
the discounted cash flow analysis was compared to the minimum and maximum values
of the proposed transaction with Pixel.
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 two thousand ($22,000.00) dollars for Montgomery's
review of the Merger Agreement as first proposed on November 5, 1997. XLI has
agreed to pay an additional one thousand ($1,000.00) dollars for Montgomery's
review of the Merger Agreement as further proposed on January 6, 1998.
27
<PAGE> 31
DIVIDENDS
No dividends on XLI Preferred Stock have accrued or become payable because
XLI 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.
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
in its entirety 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.
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
28
<PAGE> 32
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 this 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 quarter of 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 printers 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 generations of its ImageChip
products to incorporate additional features and functions and to 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 of
Marketing in charge of worldwide sales and marketing of its ASIC and VHDL
product offerings. This individual directly covers 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 next
several years.
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.
29
<PAGE> 33
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.
PERSONNEL
As of January 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, 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, 1996, a copy of which is attached as Appendix C, and XLI's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1995.
2. XLI's Quarterly Report on Form 10-QSB for the quarter ended September
30, 1997, a copy of which is attached as Appendix C, and XLI's Quarterly Report
on Form 10-QSB for the quarter ended June 30, 1997.
30
<PAGE> 34
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 either of the past two years.
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<PAGE> 35
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF XLI
The following table sets forth, as of January 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 January 30, 1998, XLI had 263
stockholders of record.
<TABLE>
<CAPTION>
COMMON STOCK TO BE
BENEFICIALLY OWNED
COMMON STOCK UPON EXERCISE OF
BENEFICIALLY OWNED OPTIONS AND WARRANTS
PRIOR TO THE AT THE EFFECTIVE PREFERRED STOCK
EFFECTIVE TIME(1)(2) TIME(1) BENEFICIALLY OWNED
--------------------- --------------------- ------------------
BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT
- ----------------------------------- --------- ------- --------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Anthony D. D'Amelio(3)............. 590,387 23.9% 634,554 17.7% 6,000 1.9%
101 Billerica Avenue, 5 Billerica
Park
N. Billerica, MA 01862
Roger F. Salava(4)................. 158,583 6.4% 182,750 5.1% -- --
101 Billerica Avenue, 5 Billerica
Park
N. Billerica, MA 01862
James L. Salerno(5)................ 151,084 6.1% 163,584 4.6% 50,000 15.9%
101 Billerica Avenue, 5 Billerica
Park
N. Billerica, MA 01862
Daniel J. Allen(6)................. 155,000 6.3% 215,001 6.0% -- --
101 Billerica Avenue, 5 Billerica
Park
N. Billerica, MA 01862
Joseph L. Katz, Trustee of Research
Investment Trust(7)................ 186,422 7.6% 186,422 5.2% -- --
101 Billerica Avenue, 5 Billerica
Park
N. Billerica, MA 01862
Joseph L. Katz, Individually(8).... 15,000 0.7% 30,000 0.8% -- --
101 Billerica Avenue, 5 Billerica
Park
N. Billerica, MA 01862
Vincent J. Spoto(9)................ 87,108 3.5% 97,108 2.7% -- --
50 Cypress Road
Wellesley, MA 02181
Adam L. Carley..................... 104,917 4.3% 104,917 2.9% -- --
6 Hillside Road
Windham, NH 03087
All directors and executive
officers as a group (7
persons)......................... 1,448,501 58.8% 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. The number of shares of Common Stock deemed outstanding
at the Effective Time includes 1,545,631 shares of Common Stock to be issued
by XLI upon exercise of options and warrants that have exercise prices less
than the anticipated Merger Cash amount payable upon exercise.
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<PAGE> 36
(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.
(3) Includes 17,500 shares issuable upon exercise of stock options, and 138,000
shares issuable upon exercise of warrants. Immediately prior to the
Effective Time, Mr. D'Amelio's right to exercise an additional 44,167 stock
options shall vest.
(4) Includes 12,500 shares issuable upon exercise of stock options. Immediately
prior to the Effective Time, Mr. Salava's right to exercise an additional
24,167 stock options shall vest.
(5) Includes 12,500 shares issuable upon exercise of stock options, and 40,000
shares issuable upon exercise of warrants. Immediately prior to the
Effective Time, Mr. Salerno's right to exercise an additional 12,500 stock
options shall vest.
(6) Includes 10,000 shares issuable upon exercise of stock options. Immediately
prior to the Effective Time, Mr. Allen's right to exercise an additional
60,001 stock options shall vest.
(7) Includes 171,505 shares issuable upon exercise of warrants.
(8) Consists solely of shares issuable upon exercise of stock options.
Immediately prior to the Effective Time, Dr. Katz's right to exercise an
additional 15,000 stock options shall vest.
(9) Includes 5,000 shares issuable upon exercise of stock options. Immediately
prior to the Effective Time, Mr. Spoto's right to exercise an additional
10,000 stock options shall vest.
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<PAGE> 37
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 in its entirety 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 also has a software design center in Boca Raton, Florida and a mixed signal
design center in Austin, Texas. Oak currently has over 450 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
34
<PAGE> 38
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, and Oak's Annual Report on
Form 10-K for the fiscal year ended June 30,1996.
2. Oak's Quarterly Report on Form 10-Q for the quarter ended September
30, 1997, a copy of which is attached as Appendix D.
3. Oak's Form 8-K dated January 22, 1998, a copy of which is attached
as Appendix D.
35
<PAGE> 39
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, 1996, a copy of which is attached as Appendix C, and XLI's
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995.
2. XLI's Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1997, a copy of which is attached as Appendix C, and XLI's
Quarterly Report on Form 10-QSB for the quarter ended June 30, 1997.
3. XLI's Form 8-K dated November 17, 1997.
4. XLI's Form 8-K dated February 3, 1998.
All documents filed by XLI 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.
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, and Oak's Annual Report on
Form 10-K for the fiscal year ended June 30, 1996.
2. Oak's Quarterly Report on Form 10-Q for the quarter ended September
30, 1997, a copy of which is attached as Appendix D.
3. Oak's Form 8-K dated January 22, 1998, a copy of which is attached
as Appendix D.
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.
36
<PAGE> 40
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> 41
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> 42
<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> 43
<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> 44
<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> 45
<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> 46
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> 47
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> 48
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> 49
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> 50
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
Sidney S. Faulkner................. Treasurer, Chief Financial Officer and
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> 51
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> 52
<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).
7
<PAGE> 53
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
8
<PAGE> 54
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
9
<PAGE> 55
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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<PAGE> 56
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
33
<PAGE> 79
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
34
<PAGE> 80
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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<PAGE> 81
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.
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<PAGE> 82
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> 83
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> 84
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 CLARK 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
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> 85
RESEARCH INVESTMENT TRUST
(CONTINUED)
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: STOCKHOLDER REPRESENTATIVES
Date: 1/22/98 /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:----------------------------
------------------------------------
40
<PAGE> 86
Date: 1/21/98 /s/ Vincent J. Spoto
- ------------------------------------ ------------------------------------
VINCENT J. SPOTO
ADDRESS:----------------------------
------------------------------------
41
<PAGE> 87
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>
42
<PAGE> 88
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 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.
B-1
<PAGE> 89
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 losses incurred on any
investment or reinvestment made in accordance with the terms of this Escrow
Agreement.
B-2
<PAGE> 90
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.
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
B-3
<PAGE> 91
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 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
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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 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.
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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 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
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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 OAK TECHNOLOGY, INC.
By: By:
- ------------------------------------ ------------------------------------
Its: Its:
- ------------------------------------ ------------------------------------
STOCKHOLDER REPRESENTATIVES:
- ------------------------------------ ------------------------------------
Daniel J. Allen Joseph L. Katz
- ------------------------------------ ------------------------------------
Adam L. Carley Vincent J. Spoto
- ------------------------------------
Anthony D. D'Amelio
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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<PAGE> 98
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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<PAGE> 99
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. STATE STREET BANK AND TRUST COMPANY
By: By:
- ------------------------------------ ------------------------------------
Its: Its:
- ------------------------------------ ------------------------------------
STOCKHOLDER REPRESENTATIVES:
- ------------------------------------ ------------------------------------
Daniel J. Allen Joseph L. Katz
- ------------------------------------ ------------------------------------
Adam L. Carley Vincent J. Spoto
- ------------------------------------
Anthony D. D'Amelio
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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 ss.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 ss.251 (other than a merger effected pursuant to
ss.251(g) of this title), ss.252, ss.254, ss.258, ss.263 or ss.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 ss.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
secs.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 ss.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.
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(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 ss.228 or
ss.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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(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> 108
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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APPENDIX C
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
------------------------
(MARK ONE)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
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)
------------------------
<TABLE>
<S> <C>
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)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (508) 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, 1996 were
$898,618.
As of March 12, 1997, 1,778,646 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
$83,830 and $3,102 respectively.
================================================================================
<PAGE> 110
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 the desktop image processing market. XLI's mission is to
be a leading provider of high technology products for printers, digital copiers,
scanners, 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. The Company'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
- Product solutions for both laser and inkjet print engines
- 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
The Company provides its proprietary precision dot positioning technology
in the form of Application Specific Integrated Circuits ("ASICs") and VHDL Core
Modules (design modules that can be used by Company's customers to develop their
own ASICs that incorporate multiple applications, including the Company's).
These ASICs are incorporated by the Company's customers into controller boards
that are imbedded into the printing device as an integral component.
ASIC & VHDL Developments
The Company's initial ASIC co-developed with Samsung Electronics as part of
a 1995 development agreement, was completed in early 1996. This ASIC is
appropriate for both printer and multi-function applications. As part of it's
agreement with Samsung, XLI retained the right to sell this ASIC in the market.
A second agreement has been reached with Samsung to develop the next generation
ASIC using the latest XLI enhancement technology. The first ASIC using this
latest XLI technology is expected to be available for sale in the second or
third quarter of 1997.
The Company entered into two licensing and royalty agreements with Pipeline
Associates, Inc. in 1996. The first agreement allows Pipeline to incorporate XLI
enhancement technology into certain Pipeline product offerings. The second
agreement is a co-development agreement for a new "Superchip" for anticipated
release in 1997. Both Pipeline and XLI will have the right to market this ASIC
with XLI receiving royalty payments on Pipeline sales.
In late 1996, XLI and Xionics Document Technologies, Inc., entered into a
licensing and royalty agreement pursuant to which Xionics may incorporate XLI
technology into certain Xionics product offerings. Xionics is a controller
design supplier to the OEM printer market. Also in late 1996 XLI reached a
licensing and royalty agreement with a Japanese printer manufacturer to supply
the Company's technology in the form of VHDL for incorporation into a custom
ASIC.
The licensing of XLI enhancement technology in the form of ASICs and VHDL
core modules is expected to be the major development and sales focus for the
Company for the foreseeable future.
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Laserpix and Photojet Boards
The Company's Laserpix and Photojet board products are sold primarily
through Value Added Resellers (VARs) in specialty medical and scientific imaging
markets. The Company's fingerprinting products consist of an XLI Laserpix board
with special features. As resolutions of standard laser printers have improved,
the revenue from this market segment has been gradually becoming a smaller
portion of the total XLI business. There are no new product introductions
planned for the board business as the Company continues to focus its attention
on the mass market OEM printer enhancement market.
Flat Panel Display Scaling/Enhancement
XLI reached an agreement with Samsung Electronics in late 1996 to use the
XLI technology to improve the scaling/enhancement of flat panel stand-alone
displays. There can be no assurance that the Company will be able to
successfully apply its technology to flat panel displays.
PRODUCT DEVELOPMENT
Through development partnerships with companies in the Far East and in the
United States, XLI is developing a series of ASICs for the OEM printer and
printer controller market. These new ASICs are being designed to incorporate a
digital precision modulator that requires no external components or high speed
clocks. The edge enhancement (including fax enhancement which was added this
past year) and modulator technology is expected to form the foundation for other
chip offerings in the next few years.
COMPETITION
XLI's primary competitors in providing printing enhancement solutions have
been DP-Tek Development Corp., LLC and Destiny Technology Corporation. The
Company's most significant competitor had been DP-Tek. Dp-Tek offered both
ASIC's and Virtual Hardware Design Language (VHDL) core technology to original
equipment manufacturers ("OEMs"). In July 1996, Hewlett Packard acquired DP-Tek
and it is anticipated that Hewlett Packard will not renew the DP-Tek licenses
with OEMs, as such licenses expire. The DP-Tek OEMs are now looking for
alternative enhancement technology (either purchased or internally developed)
which presents a wider market opportunity for XLI and other technology
providers.
The Company's focus is on providing leading edge image enhancement
technology that will effectively compete with that offered by Hewlett Packard in
its own office products. XLI does not consider Hewlett Packard as its direct
competitor, but as the market leader who is establishing the functionality and
quality requirements that its competitors (the Company's customers) must offer
in order to compete.
Destiny, XLI's main independent competitor currently, has made in-roads in
the area of low cost ASIC chips that typically produce a low level of edge
enhancement for text. At this time Destiny is not considered a competitor in the
area of high quality text and photo image enhancement.
In addition to Destiny, in-house development groups at printer
manufacturers such at Minolta and Canon also provide competition for the
Company. Although these companies do not typically license their internally
developed technology to other printer manufacturers, XLI must have technology
demonstrably superior in order to sell to these companies.
XLI believes its products have advantages that are attractive to customers.
First, XLI's products can provide high quality edge (fax, text and line art
edges) and photo image enhancement, using the Company's proprietary fine dot
positioning technology for optimal quality. Second, XLI's photo enhancement
technology (single-bit grayscale) requirements, as compared to its competitors'
products, provides both increased speed and reduced memory requirements, leading
to lower costs and shorter time to market for the OEM customer.
SALES AND MARKETING
In the United States, the Company sells its board level products through
Value Added Resellers (VAR's), OEM's, dealers and directly to end users. The
Company's boards are sold primarily for medical and
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scientific imaging where high resolution is required. ASIC and VHDL Core Module
sales are made directly to OEMs. XLI has recently retained an independent sales
agent and consultant to focus principally on major accounts in the United
States.
The Company markets its products outside the United States through
international distributors pursuant to distribution agreements covering
specified territories. XLI has recently engaged a sales agent in Japan
specifically for VHDL and ASIC sales.
XLI will continue to market, in addition to its offering in ASIC form, VHDL
Core Modules (design modules that can be used by an OEM to develop its own ASIC)
and some software products principally for the OEM and VAR markets. XLI also
plans to provide its existing board and software products to selective VAR
markets in the scientific and specialty printing markets.
CUSTOMER SUPPORT
XLI's LaserPix products are user installed with the aid of installation
manuals provided by the Company. OEM, VAR and direct customer support is
provided by the Company's full-time technical support telephone specialists who
are available during its normal business hours and who have been trained on PC
products and on most popular software applications used by its customers.
Because of features built into LaserPix and PhotoJet for ease of use and
installation, this level of support has to date been satisfactory to users and
resellers and the Company expects this level of support to continue to be
sufficient in the future.
The Company provides a one-year factory repair-or-replace warranty on all
hardware. Out-of-warranty repair is done at the Company on a fixed-fee basis.
PATENTS AND PROPRIETARY INFORMATION
The Company relies on a variety of methods to protect its products and
technology, including patent, trademark, copyright and trade secret protection.
The Company believes that patent and trade secret protection for its products is
important to its ultimate success. The Company has been awarded U.S. Patent
Number 5,109,283, which covers its innovative method of modulating the laser
device found in desktop printers to yield high-quality text, graphics and
photographic images and U.S. patent number 5,122,883, which covers the
application of the Company's technology to high-speed laser printers capable of
output of over 100 pages per minute. The Company has applied for protection for
these patents in Korea, Japan and major western European countries. In 1996 the
Company filed three patents covering new technology developed by the Company; a
single-pass color engine, color and monochrome edge enhancement, and an all
digital modulator suitable for integrated circuit implementation. The Company
intends to continue to protect its technical innovations both domestically and
internationally through patent filings. To protect its trade secrets,
proprietary software and know-how, the Company requires that all employees, key
resellers and suppliers, consultants and licensees, sign nondisclosure
agreements. The Company also relies on copyright protection for its software and
documentation. LaserPix is a registered trademark of the Company.
Although the Company 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 the Company with meaningful protection
from competitors. Even if a competitor were to infringe the Company's patents,
the costs of enforcing its patent rights may be substantial or even prohibitive.
In addition, there can be no assurance that the Company's proposed products will
not infringe the patent rights of others. The Company may be forced to expend
substantial resources if the Company is required to defend against any such
infringement claims. Furthermore, there can be no assurance that the Company
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
Technology"), a founder, stockholder and director of the Company. Dr. Carley and
the Carley Corporation, a company controlled by Dr. Carley, have assigned to the
Company all rights to the Carley Technology held by him and the Carley
Corporation in return for Common Stock and certain royalties based upon revenues
derived by the
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<PAGE> 113
Company from the Carley Technology. This royalty obligation terminates upon
payment to Carley by the Company of a cumulative total of $2.4 million. To date,
the Company has paid $414,210 pursuant to this agreement. The Company has
sublicensed to the Carley Corporation the exclusive right to use, on a royalty-
free basis, the Carley Technology for retail services in locations such as
stores, kiosks and booths for purposes including but not limited to picture
taking and reproduction.
PERSONNEL
As of March 10, 1997, the Company employed 9 people, 3 of whom were in
research and development, 1 in marketing and sales, 2 in manufacturing and
product service, and 3 in finance and administration. The Company uses part-time
technical contractors, as needed, to augment its full-time staff. Due to the
Company's limited cash flow, certain key personnel have been receiving reduced
cash compensation and have been, and will continue to be, issued stock options
and shares of Common Stock of the Company in lieu of cash compensation.
ITEM 2. DESCRIPTION OF PROPERTY
The Company'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 the
Company from an unaffiliated party for $3,293 per month under a lease that
expires in April 1999.
ITEM 3. LEGAL PROCEEDINGS
The Company 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 1996.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common stock is currently traded on the NASDAQ Bulletin Board
under the symbol "XLCC," and the Company's Series A Preferred Stock is traded on
NASDAQ Bulletin Board under the symbol "XLCCP". On January 4, 1995, the Company
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 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
BID BID
PRICE PRICE
-------- ------
<S> <C> <C>
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
1995
First Quarter.......................................... $0.12 $0.02
Second Quarter......................................... $0.2815 $0.02
Third Quarter.......................................... $0.03125 $0.02
Fourth Quarter......................................... $0.02 $0.001
</TABLE>
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<PAGE> 114
On March 12, 1997, the closing sale price of the Company's Common Stock was
$.09375 per share and there were 225 shareholders of record.
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 OR PLAN OF OPERATION
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 Company's ability to successfully
develop, test, produce and 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 attract partners in order
to exploit its products, and there can be no assurance that the Company will be
successful in attracting such partners. Additional information on 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 1996 the Company continued its efforts to minimize expenses to match
near term expected revenues. The Company continues to focus on the design and
development of ASIC, VHDL and software products for the OEM printer and printer
controller market. During 1996 the Company completed the VHDL for XLI's
Superchip that incorporates all of the Company's current enhancement technology
into one chip design. This VHDL is the core of XLI's current offerings to OEM's.
The Company hopes to increase revenue through additional corporate alliances and
additional licensing of the Superchip technology. The Company also plans to add
additional engineering resources in 1997 in order to meet the demands from
existing and anticipated OEM agreements. This will result in increased research
and development costs and may negatively affect cash flow. For the fiscal year
ended December 31, 1996, the Company had a positive cash flow from operations of
$64,316.
The Company has no current plans to undertake a debt or equity financing in
1997. Funds for development efforts will come from current or anticipated
licensing and royalty fees. If the Company is unable to fund its operations
through cash flow, the Company's development efforts and operations will be
materially adversely effected.
The following are key areas where progress has been made during the past
year:
- Maintained the reduced levels of expenses and personnel that was put
into place during 1995.
- Continued stock and option grants to retain critical staffing
levels.
- Continued focus on mass market product development with strategic
partners to maximize technology leverage and minimize expense.
- Successfully completed the first ASIC development for Samsung.
- Entered into a second ASIC development with Samsung.
- Signed major license agreements with Pipeline Associates, Xionics
and a major Japanese OEM.
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- Negotiated agreement with Pipeline for the development and
production of superchip -- XLI's next generation enhancement chip.
- Released VHDL for a complete enhancement product for OEM's to
incorporate this technology into their own chip developments.
- Signed a license agreement with Samsung for display
scaling/enhancement technology development.
- Patents filed for monochrome and color edge enhancement plus an all
digital precision modulator.
- Completed fax and single-bit gray scale enhancement algorithms.
- Filed a patent for a unique single-pass color laser engine design
concept.
- Continued de-emphasis of the XLI board products and placed all
engineering development on the core laser enhancement technology for
OEM printer and printer controller manufacturers.
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,
-------------------------
1996 1995 1994
---- ---- -----
<S> <C> <C> <C>
Revenue............................................ 100% 100% 100%
Cost of Revenue.................................... 29% 45% 118%
Research and Development........................... 32% 30% 30%
OEM Development.................................... 0% 0% 36%
Selling and Marketing.............................. 5% 11% 59%
General and Administrative......................... 51% 33% 76%
Loss from Operations............................... (16)% (19)% (219)%
Other Income (Expense)............................. (5)% (2)% (13)%
Net Loss........................................... (21)% (21)% (232)%
</TABLE>
RESULTS OF OPERATIONS
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 discontinuation of the board
product lines.
In 1996, the Company entered into two cooperative development agreements
with Samsung Electronics Co. License agreements were also signed with Pipeline
Associates and Xionics Document Technologies. These agreements resulted in
contract and license revenues of $698,250. The Company anticipates that it will
enter into additional cooperative development relationships in 1997.
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 due mostly to the 50% drop in product revenue and included in the
cost of revenue for fiscal year 1996 are inventory write-offs of $30,516.
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
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work associated with the Company's agreement with Samsung Electronics. The
Company's ongoing engineering emphasis will continue 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 51% 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 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 from in the net loss of $30,869 was
the result of lower operating expenses partially offset by reduced revenues.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994.
Revenue. Revenue for the fiscal year ended December 31, 1995 was
$1,097,550 as compared to $1,342,212 for the fiscal year ended December 31,
1994, a decrease of $244,658 or 19%. Product revenues for the fiscal year ended
December 31, 1995 were $397,550 as compared to $1,342,212 for the fiscal year
ended December 31, 1994, a decrease of $944,662 or 71%. Contract and license
revenue for the fiscal year ended December 31, 1995 was $700,000 as compared to
$0 for the fiscal year ended December 31, 1994, an increase of $700,000. The
decrease in product revenue was primarily attributable to a discontinuation of
the Company's printer and print server product lines.
In 1995, the Company entered into cooperative development agreements with
Analog Devices and Samsung Electronics Co. These agreements resulted in contract
and license revenues of $700,000.
Cost of Revenue. Cost of revenue for the fiscal year ended December 31,
1995 was $496,866 or 45% of revenue, as compared to $1,580,052 or 118% of
revenue for the fiscal year ended December 31, 1994, a decrease of $1,083,186.
Included in the cost of revenue for fiscal year 1994 are inventory and fixed
asset write-offs of approximately $389,000, and accelerated amortization of
capitalized software costs of approximately $305,000 associated with the phase
out of the printer and print server product lines.
Research and Development. Research and development expense for the fiscal
year ended December 31, 1995 was $331,279 or 30% of revenue as compared to
$398,026 or 30% of revenue for the fiscal year ended December 31, 1994. The
decrease of $66,747 was primarily attributable to an increase in development
work associated with the Company's agreement with Samsung Electronics, with the
costs being charged to "Cost of Contract and License Revenue".
Selling and Marketing. Selling and marketing expenses for the fiscal year
ended December 31, 1995 were $117,896 or 11% or revenue as compared to $794,873
or 59% of revenue for the year ended December 31, 1994. The decrease of $676,977
was primarily attributable to the reduction in personnel to support the sale and
promotion of printers and print servers and reduced expenses for promotional
activities.
General and Administrative. General and administrative expenses were
$358,040 or 33% of revenue for the fiscal year ended December 31, 1995 as
compared to $1,015,624 or 76% of revenue for the fiscal year ended December 31,
1994. The $657,584 decrease in general and administrative expenses was primarily
attributable to a reduction in salaries and professional expenses.
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Interest Expense. Net interest expense for the fiscal year ended December
31, 1995 was $24,655 or 2% of revenue as compared to $199,134 or 15% of revenue
for the fiscal year ended December 31, 1994. Interest expense for the fiscal
year ended December 31, 1995 was primarily attributable to interest accrued on
notes issued in connection with the Company's short-term financing.
Net Loss. The Company recorded a net loss of $223,457 for the fiscal year
ended December 31, 1995 as compared to a net loss of $3,116,448 for the fiscal
period ended December 31, 1994. The decrease in loss was primarily attributable
to decreased general administration, selling and marketing expenditures.
LIQUIDITY AND CAPITAL RESOURCES
For the fiscal year ended December 31, 1996, the Company had a positive
cashflow from operations of $64,316. This is primarily attributable to a
decrease in accounts receivable. At December 31, 1996 the Company had current
assets of $240,037 and current liabilities of $713,724 and a working capital
deficit of ($473,687).
During 1995, the Company entered into an agreement with the Silicon Valley
Bank to borrow against receivables. The agreement calls for interest at a
monthly rate of 2.5% and requires an advance fee of 1%. As of December 31, 1996,
there were no outstanding loan amounts payable to Silicon Valley Bank.
In May 31, 1996, the Company commenced a limited private offering to
accredited investors of subordinated nonrecourse promissory notes in an
aggregate principal amount of up to $500,000. In addition to a note, each
subscriber received a five-year warrant to purchase two shares of the Company's
Common Stock at an exercise price of $.01 per share for each dollar invested.
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, 25% 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. The offering closed on May 31, 1996 and the
Company raised a total of $283,688. Included in this amount were $13,698 of
accrued interest and $75,000 of outstanding debt that were converted into the
new promissory notes.
The Company has no current plans to raise additional capital in 1997. Funds
for development efforts will come from current or anticipated licensing and
royalty fees. If the Company is unable to fund its operations from cash flow the
Company's development efforts and operations will be materially adversely
effected.
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.
ITEM 7. FINANCIAL STATEMENTS
See Pages F-2 through F-19.
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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On January 24, 1996, the Company received confirmation from Coopers &
Lybrand of the decision by XLI that Coopers & Lybrand would not be engaged as
the Company'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 a disclaimer of opinion or disagreement
on any matter of accounting principles or practices in Coopers & Lybrand's
report on the financial statements for either of the past two years.
ITEM 9. DIRECTOR'S 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................... 67 President, Chief Executive Officer and
Chairman of the Board
James L. Salerno................... 66 Chief Financial Officer, Treasurer and
Secretary
Daniel J. Allen.................... 36 Vice President of Research and Development
Roger F. Salava.................... 60 Director of Strategic and Business Planning
Dr. Joseph L. Katz................. 54 Director and Vice President of Corporate
Planning
Vincent J. Spoto................... 51 Director
Dr. Adam Carley.................... 56 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, 67, 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 a 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, 66, 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, 36, 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, 60, 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.
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<PAGE> 119
Joseph L. Katz, 54, 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, 51, 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, 56, 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.
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 $100,000 for their services in all capacities to the Company
during the fiscal year ending December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------------------
AWARDS
--------- PAYOUTS
ANNUAL COMPENSATION OTHER RESTRICTED ----------
------------------------------ ANNUAL STOCK LTIP
NAME AND POSITION YEAR SALARY($) BONUS($) COMPENSATION($) AWARDS($) OPTIONS(#) PAYOUTS($)
- --------------------------------------------- ------- --------- -------- --------------- --------- ---------- ----------
(a) (b) (c) (d) (e) (f) (g) (h)
<S> <C> <C> <C> <C> <C> <C> <C>
Anthony D. D'Amelio.......................... 1996 $22,367 -- -- $ 2,000(a)
President, Executive Officer 1995 $27,875 $ 3,750(b) 80,000
and Chairman of the Board $ 1,562(c)
1994 $35,000 50,000
<CAPTION>
ALL OTHER
NAME AND POSITION COMPENSATION($) PRINCIPAL
- --------------------------------------------- --------------- ---------
(a) (i)
<S> <<C> <C>
Anthony D. D'Amelio..........................
President, Executive Officer
and Chairman of the Board
</TABLE>
- ---------------
(a) 200,000 Shares of Common Stock
(b) 120,000 Shares of Common Stock
(c) 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.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 12, 1997, the ownership of the
Company's Common Stock by (i) each person who is known by the Company to own of
record or beneficially more than five percent of the Company's Common Stock,
(ii) each of the Company'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
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<PAGE> 120
powers with respect to the shares indicated. As of March 11, 1997, the
Corporation had 225 Stockholders of record.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
NAME AND ADDRESS OF COMMON STOCK PERCENTAGE OF
BENEFICIAL OWNER BENEFICIALLY OWNED CLASS(1)(2)(3)
---------------------------------------------------- ------------------- --------------
<S> <C> <C>
Anthony D. D'Amelio................................. 546,221* 28.2%
101 Billerica Ave.
5 Billerica Park
N. Billerica, Massachusetts 01862
Roger Salava........................................ 134,157 7.5%
101 Billerica Ave.
5 Billerica Park
N. Billerica, Massachusetts 01862
James L. Salerno.................................... 138,584 7.7%
101 Billerica Ave.
5 Billerica Park
N. Billerica, Massachusetts 01862
Daniel Allen........................................ 105,000 5.8%
101 Billerica Ave.
5 Billerica Park
N. Billerica, Massachusetts 01862
Joseph Katz......................................... 186,422 9.6%
101 Billerica Ave.
5 Billerica Park
N. Billerica, Massachusetts 01862
Vincent Spoto....................................... 81,883 4.7%
50 Cypress Road
Wellesley, MA 02181
Adam Carley......................................... 104,917 5.8%
6 Hillside Rd.
Windham, NH 03087
All Directors, and Officers as a group
(7 persons)....................................... 849,605 47.8%
</TABLE>
- ---------------
* Does not include 5,000 shares of Series A Preferred Stock owned by Mr.
D'Amelio. No other director or officer owns directly or indirectly any
shares of the Company's Series A Preferred Stock.
(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, but are not deemed to be, outstanding for the purpose
of computing the percentage ownership of any other person shown in the
table.
(2) Does not include (i) 70,147 shares issuable upon exercise of a warrant
issued to Thomas James Associates, Inc. in connection with the Company's
initial public offering which was completed in January 1993; and (ii)
701,468 shares issuable upon exercise of the warrants included on the units
sold to the public as part of the Company's initial public offering in
January 1993.
(3) Does not include 36,298 shares issuable upon exercise of a warrant issued to
Thomas James Associates, Inc. in connection with the Company's offering of
Series A Preferred Shares in February 1994; and 362,984 shares issuable upon
exercise of the warrants included in the offering in February 1994.
At December 31, 1996 the Company had reserved 3,099,607 shares of Common
Stock. (For breakdown see page F-17)
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,
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<PAGE> 121
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.
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<PAGE> 122
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):
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE
- -------- ---------------------------------------------------------------------------------
<S> <C>
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
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)
10.42 License and Royalty Agreement dated November 13, 1996 between the Company and
Xionics Document Technologies, Inc. (filed on November 14, 1996)
</TABLE>
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<PAGE> 123
- ---------------
* 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, 1996.
1 -- NOVEMBER 14, 1996
The Company and Xionics Document Technologies Inc. announced on November
14, 1996 that the companies signed a Memorandum of Understanding for Xionics to
acquire XLI. Simultaneously the companies announced that Xionics has acquired a
non-exclusive license to all XLI printing technology.
2 -- NOVEMBER 14, 1996
A Licensing and Royalty Agreement was entered into by and between
Xerographic Laser Images Corp. and Xionics Document Technologies, Inc.
3 -- DECEMBER 12, 1996
Xionics Document Technologies Inc. and Xerographic Laser Images Corporation
announced on December 12, 1996 that the companies had terminated their
Memorandum of Understanding for Xionics to acquire XLI.
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<PAGE> 124
EXHIBIT 10.19.A
FIFTH AGREEMENT AMENDMENT
This amends the Agreement dated 15 January 1990 (hereinafter referred to as
the "Printer Agreement") among Carley Corporation (hereinafter referred to as
"Carley"), Xerographic Laser Images Corporation (hereinafter referred to as
"XLI"), and Informed Decisions, and all amendments prior to this Fifth Agreement
Amendment (hereinafter referred to as "Amendment") as applicable thereto. It is
noted that the Third Amendment to the Carley Agreement has been null and void
because the proposed merger with Jardine Cho, Ltd. was not completed.
WHEREAS, XLI expects it royalty ( including license fee) income from the
sale of sublicenses to increase over the next few years, and accordingly XLI
wishes to increase its profits over the next few years or more by having its
resulting royalty payments to Carley for the sale of sublicenses substantially
reduced;
WHEREAS, to reduce the possibility of future disputes concerning royalty
payments to Carley and thereby promote potential team work between XLI and
Carley, XLI wishes to simplify the determination and administration of the
royalty payments due to Carley;
WHEREAS, Carley has completely and successfully fulfilled the obligations
indicated to the Printer Agreement, and has performed very considerable and
important work for XLI's benefit beyond the scope of the Printer Agreement, and
XLI is very satisfied with and highly values these contributions by Carley to
XLI;
WHEREAS, Carley wishes to help XLI achieve improved profitability by
accepting substantially lower royalty payments for XLI's sale of sublicenses,
and is willing to have the determination and administration of the royalty
payments by XLI to Carley simplified; and
WHEREAS, both XLI and Carley wish to further clarify certain items in the
Printer Agreement and add certain items which were not addressed in the Printer
Agreement;
NOW, THEREFORE, the parties hereto agree to the following amendments to the
Printer Agreement which will be effective as of January 1, 1997:
1. Definitions: Section A. 1. of the Printer Agreement is hereby canceled
and replaced by: "Carley Technology" means both hardware and software methods
and implementations, manufacturing methods and implementations, designs,
techniques, and inventions whether patentable or not, originated, developed,
and/or significantly contributed to by Carley, comprising information,
documents, samples, models, equipment, source codes, electronically stored
information, and know-how relating to, connected with, or in any way describing
the electronic printing (including plate making) of pictures and text, including
both black-and-white and color pictures and text, to the extent to which they
are used or can be used for printing applications such as laser printers, ink
jet printers, fax, and multifunction. It also means embodiments of and changes
and improvements to Carley Technology developed by XLI and new concepts
originated by XLI which incorporate Carley Technology, including applications of
Carley Technology to specific combinations of computers and electronic printers,
and including both hardware and software. There is no claim or guarantee that
Carley Technology in aggregate or in part thereof is not public information, or
that patents resulting from Carley Technology will be held to be valid, or that
products, licenses, or sublicenses sold by XLI incorporating Carley Technology
will not be held to infringe other patents. "Carley Technology" will hereinafter
in this amendment be referred to as "Carley Printer Technology." "Carley
Non-Printer Technology" means technologies originated, developed, and/or
implemented by Carley which are used or can be used for all other applications
such as displays and communication devices ("non-printing applications"). Other
technologies originated, developed, and/or implemented by XLI not incorporating
Carley Printer Technology, independent of their application, are the property of
XLI ("XLI Technology"). It is noted here for clarity that XLI has not been
granted rights of privileges of any sort to use Carley Printer Technology for
non-printing applications.
1.1 There is no obligation, implication, or presumption of any sort
that Carley will make further contributions to Carley Printer Technology;
such contributions shall be made at the sole discretion of Carley.
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<PAGE> 125
2. Cancellations: Sections F.1., F.2., F.3., and F.5. of the Printer
Agreement are canceled in there entirety.
3. Royalty Basis: Royalties payable by XLI to Carley will be based on the
Net Cash Receipts, which shall mean cash (or cash equivalents) received by XLI
after December 31, 1996, from customers, licensees and sublicensees in
consideration for items including but not limited to hardware and software
products, services, and licenses or sublicenses, and independent of the date of
the agreement or contract granting said licenses and sublicenses, provided said
items at least partially incorporate Carley Printer Technology as defined
heretofore, less any refunds made by XLI of such cash receipts, and less import
and export duties and import and export taxes allocable to, and not exceeding,
such cash receipts when paid by XLI under contracts or agreements with third
parties for products sold, rights granted, and/or for services performed by XLI
if and only if the payment of said duties and taxes decrease profits.
3.1. If in any given month the Net Cash Receipts are negative, the
negative amount will be carried forward to future months until eliminated.
4. Royalty Payments: Royalties payable by XLI to Carley shall be paid on a
monthly basis and determined by multiplying the monthly Net Cash Receipts by
15%. Such royalty payments shall be made for each month during the last week of
the subsequent month at the latest.
4.1. As stated in the Second Agreement Amendment: Royalty payments
from XLI to Carley shall cease when an accumulated total royalty fee of
$2.4 million has been paid to Carley. The total royalty fee of $2.4 million
shall be considered a first priority fiduciary responsibility of XLI.
5. Royalties in Arrears Due Carley: As of December 31, 1996, XLI owes
Carley accrued royalties of $103,375 (based on currently available information).
Commencing in January 1997, XLI agrees to pay Carley $7,500 per month during the
last week of each calendar month until such accrued royalties are paid in full.
It is noted that Section F.10.d. of the Second Agreement Amendment may increase
the accrued royalties that XLI owes Carley.
6. Holding of Royalties: The portion of the Net Cash Receipts that are
required to be paid to Carley as royalties according to Section 4 above and the
amount required to be paid to Carley according to Section 5 above shall be
deemed bay all parties to be the property of Carley the moment they are received
by XLI and held by XLI accordingly.
7. Interest: In the event that XLI fails to pay when due the monthly
royalty payments called by Section 4 hereof and/or the monthly $7,500 payments
called for by Section 5 hereof, then such unpaid amounts shall bear interest at
the rate of 10% per annum compounded continuously until paid in full.
8. Security Interest: When the aggregated monthly royalty payments by XLI
to Carley pursuant to Sections 4 and 5 above total $200,000, Section F.9.
(Security Interest) of the Printer Agreement will be canceled in its entirety
and Carley will withdraw the UCC-1 registration.
9. Carley Work on Behalf of XLI: Carley and XLI agree that any work on
technology done by Carley exclusive of Carley Printer Technology will not be
deemed to be done on behalf of XLI unless and except under terms and conditions
mutually agreed in writing between XLI and Carley. Further, it is understood
that technology done by Carley may involve both Carley Printer Technology and
Carley Non-Printer Technology; any such Carley Non-Printer Technology done by
Carley will not be considered to be done on behalf of XLI unless and except
under terms and conditions mutually agreed to in writing between XLI and Carley.
10. Multi-Technology Patents: In the event that technology includes both
Carley Printer Technology and Carley Non-Printer Technology and patents are
applied for for such technology, then XLI and Carley shall jointly own such
patent applications and the resulting patent(s) if granted, XLI and Carley will
jointly notify the patent office of the joint ownership, and the following
provisions will then apply:
10.1. XLI will have the exclusive right to sell products based on and
to license third parties exclusively or non-exclusively or sell its
interest (with the buyer subject this Amendment) in such patent
applications and patents (if and when they are issued) for and only for
printing applications. Carley will
16
<PAGE> 126
have the exclusive right to sell products based on and to license third
parties exclusively or non-exclusively or sell its interest (with the buyer
subject to this Amendment) in such patent applications and patents (if and
when they are issued) for and only for non-printing applications.
10.2. If the patent application is initiated by XLI, XLI will have the
responsibility to pursue the issuance of such U.S. patents, and thereafter
to track the need for payment of maintenance fees for both patent
applications. XLI will pay all U.S. Patent Office fees involved in having
the patent issued and maintained, and will be reimbursed by Carley within
30 days of notification at the rate of 50% of such fees based on the small
entity basis. If the patent application is initiated by Carley, Carley will
have the responsibility to pursue the issuance of such U.S. patents, and
thereafter to track the payment for maintenance fees for both patent
applications. Carley will pay all U.S. Patent Office fees involved in
having the patent issued and maintained, and will be reimbursed by XLI
within 30 days of notification for those fees, less 50% of such fees based
on the small entity basis.
10.3. XLI and Carley will work together in responding to patent office
actions, including utilization of conference calls with the patent examiner
for substantive issues. Both must agree to responses, striving for the
broadest coverage. If a patent application is split, such resulting patents
would be jointly owned under the terms of this Amendment unless applicable
to one field only.
10.4. Either party may employ legal counsel or conduct patent or prior
art searches at their own expense. Such expense can be incurred on a shared
basis only by written consent of both parties.
10.5. Either party may apply for foreign patents at their sole
discretion and their sole expense. In such case, the party will immediately
notify the other party of such actions in writing. Such patents will be
considered jointly owned for the purpose of Sections 10.1., 10.4., 10.6.,
10.7., 10.8., and 10.9. hereof.
10.6. If either party wishes to abandon its interest in a patent
application or patent after it is issued (such as when maintenance fees
become due), it will immediately inform the other party, and relinquish its
ownership in the patent application and rights under 10.3. and 10.8. to the
other party if the other party wishes to continue it.
10.7. In the event that patent litigation and/or an injunction is
brought against XLI and/or Carley concerning the sale, use, or
manufacturing of hardware or software products and/or licensing or
sublicensing by XLI and/or Carley, then (a) if pertaining to applications
XLI will hold Carley and its principals blameless and harmless and not hold
Carley or its principals responsible for any of XLI's expenses involved, or
(b) if pertaining to non-printing applications but associated with patents
jointly owned by Carley and XLI, Carley will hold XLI and its principals
blameless and harmless and will not hold XLI or its principals responsible
for any of Carley's expenses involved.
10.8. Either party at its own choice and expense may pursue infringers
in and only in its field and collect associated damages. If an infringer is
infringing in both the printer and non-printer fields, then such pursuit
may be done jointly by written agreement, and any damages collected will be
divided proportionally according to reasonable applicability. In the event
that either party initiates infringement litigation or formal notification
to suspected infringer, that party will immediately inform the other party.
11. Other Terms
11.1. Royalty payments according to Sections 4 and 5 above shall be
deposited to Bank Boston to account #2651 408 8 (under the name of Adam L.
Carley and Leonard R. Weisberg) for the benefit of Carley unless otherwise
directed by Carley.
11.2. XLI will provide an unaudited report to Carley within thirty
days subsequent to the end of each month and calendar quarter providing the
total XLI cash receipts, the Net Cash Receipts, the exclusions according to
Section 3 above, and the basis for such exclusions. XLI will also provide
Carley according to the same schedule a record of the total new and back
royalty payments to Carley according to Sections 4 and 5 above
respectively. XLI will further provide Carley with the results of its
annual financial audit includes the Net Cash Receipts and royalty payments
to Carley, but no separate auditor's report will be required for such Net
Cash Receipts and royalty payments to Carley.
17
<PAGE> 127
11.3. Adam L. Carley may attend XLI meetings and appropriate customer
meetings. XLI will provide Adam L. Carley and Leonard R. Weisburg ( the
Carley shareholders) full access to XLI records including but not limited
to reports, Board Minutes, contracts, and financial data. Adam L. Carley
and Leonard R. Weisburg agree to keep all XLI proprietary information
confidential, and shall not disclose or use such information without the
prior written consent of XLI.
11.4. The invalidity or unenforceability of any provision of this
Amendment will not affect the validity or enforceability of any other
provision and any unenforceable provision will be deemed severable from and
shall not render unenforceable the remainder of this Amendment.
11.5. Waivers: No waiver of any right hereunder by any party shall
operate as a waiver of any other right, or of the same right with respect
to any subsequent occasion for its exercise, or of any right to damages. No
waiver by any party of any breach of this Amendment shall be held to
constitute a waiver of any other breach or a continuation of the same
breach.
11.6. Other Agreements: This Amendment, and the Printer Amendment as
amended, contain the entire understanding of the parties, written or oral,
with respect to the subject matter hereof.
11.7. Counterparts: This Amendment may be executed in counterparts,
each of which together shall constitute one and the same instrument.
11.8. Amendment: This Amendment can be amended only in writing and
with the mutual consent and agreement by both Carley and XLI and signed by
the duly authorized officers of the parties.
11.9. Disputes: In the event of any disputes between XLI and Carley
and/or their principals and agents regarding any matter governed by this
Amendment or any other matter, the parties will, if they cannon resolve the
matter by negotiation, submit the dispute to mediation/arbitration. The
provisions of Schedule "A" attached to the Printer Agreement will apply to
any mediation/arbitration.
IN WITNESS WHEREOF THE PARTIES HAVE EXECUTED THIS AMENDMENT EFFECTIVE AS OF
THE DATE SET FORTH ABOVE.
<TABLE>
<S> <C>
XLI CORPORATION:
By /s/ ANTHONY D. D'AMELIO 2/12/97
- -------------------------------------------- --------------------------------------------
Anthony D. D'Amelio Date signed
CARLEY CORPORATION
By /s/ ADAM L. CARLEY 2/12/97
- -------------------------------------------- --------------------------------------------
Adam L. Carley Date signed
By /s/ ADAM L. CARLEY 2/12/97
- -------------------------------------------- --------------------------------------------
Adam L. Carley Date signed
By /s/ LEONARD R. WEISBURG 2/11/97
- -------------------------------------------- --------------------------------------------
Leonard R. Weisburg Date signed
</TABLE>
18
<PAGE> 128
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 Form
10-KSB to be signed on its behalf by the undersigned, thereunto duly authorized,
on March 7, 1997.
XEROGRAPHIC LASER IMAGES
CORPORATION
By: /s/ ANTHONY D. D'AMELIO
------------------------------------
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 Officer and March 7, 1997
- ----------------------------------- Chairman of the Board (Principal
Anthony D. D'Amelio Executive Officer)
/s/ JAMES L. SALERNO Chief Financial Officer, Treasurer, March 7, 1997
- ----------------------------------- Secretary
James L. Salerno (Principal Financial Officer)
/s/ DR. JOSEPH KATZ Director March 7, 1997
- -----------------------------------
Dr. Joseph Katz
/s/ VINCENT J. SPOTO Director March 13, 1997
- -----------------------------------
Vincent J. Spoto
/s/ DR. ADAM L. CARLEY Director March 7, 1997
- -----------------------------------
Dr. Adam L. Carley
</TABLE>
19
<PAGE> 129
XEROGRAPHIC LASER IMAGES CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE(S)
------------
<S> <C>
Independent Auditor's Report.................................................... F-2, F-2b
Balance Sheets as of December 31, 1996 and 1995................................. F-3
Statements of Operations for the years ended December 31, 1996, 1995 and 1994... F-4
Statements of Changes in Stockholders' (Deficit) Equity for the years ended
December 31, 1996, 1995, and 1994............................................. F-5
Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994... F-6
Notes to Financial Statements................................................... F-7 to F-19
</TABLE>
F-1
<PAGE> 130
[LETTERHEAD OF WOLF & COMPANY, P.C.]
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, 1996 and 1995 and the related statements of loss,
stockholders' deficit and cash flows for each of the years in the two year
period then ended. 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. The financial statements of Xerographic
Laser Images Corporation for the year ended December 31, 1994 were audited by
other auditors whose report dated April 12, 1995 included an explanatory
paragraph that described the uncertainty of the Company's ability to continue as
a going concern.
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, 1996 and 1995 and the results of their operations
and cash flows for the years ended December 31, 1996 and 1995, 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
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.
January 17, 1997,
except for Note 9, as to which
the date is February 12, 1997
Boston, Massachusetts
F-2
<PAGE> 131
[LETTERHEAD OF COOPERS & LYBRAND L.L.P.]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Chairman of the Board and Stockholders of
Xerographic Laser Images Corporation:
We have audited the accompanying balance sheet of Xerographic Laser Images
Corporation as of December 31, 1994, and the related statements of operations,
cash flows and stockholders' deficit for the year then ended. 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 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 financial statements referred to above present fairly,
in all material respects, the financial position of Xerographic Laser Images
Corporation as of December 31, 1994, and the related statements of operations,
cash flows and stockholders' deficit for the year then ended 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
are also discussed in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
April 12, 1995
F-2b
<PAGE> 132
XEROGRAPHIC LASER IMAGES CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash............................................................ $ 219,723 $ --
Accounts receivable, less allowance for doubtful accounts of
$5,000 in 1996 and $14,033 in 1995........................... 20,314 279,271
Finished goods inventory........................................ -- 55,181
Other current assets............................................ -- 3,250
------------ ------------
Total current assets.................................... 240,037 337,702
------------ ------------
Property and equipment, net (Note 4).............................. 35,191 68,512
Other assets...................................................... 4,432 12,651
------------ ------------
Total assets............................................ $ 279,660 $ 418,865
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Cash overdraft.................................................. $ -- $ 1,432
Notes payable................................................... -- 101,000
Accounts payable................................................ 352,346 439,228
Deferred revenue (Note 5)....................................... 101,000 --
Accrued expenses................................................ 179,943 220,694
Accrued severance costs (Note 10)............................... 68,704 103,634
Current portion of capital lease obligations (Note 7)........... 11,731 12,161
------------ ------------
Total current liabilities............................... 713,724 878,149
------------ ------------
Capital lease obligations (Note 7)................................ 16,908 28,639
Subordinated notes payable (Note 16) ............................. 283,688 --
Accrued severance costs (Note 10)................................. -- 69,474
------------ ------------
Total liabilities....................................... 1,014,320 976,262
------------ ------------
Stockholders' equity (deficit) (Note 11) Series A Preferred stock,
$.01 par value; authorized 1,000,000 shares; 315,238 issued and
outstanding at December 31, 1996 and 1995, respectively......... 3,152 3,152
Common stock, $.01 par value; 30,000,000 shares authorized:
1,778,646 and 1,338,646 issued and outstanding at December 31,
1996 and 1995, respectively..................................... 17,786 13,386
Additional paid-in capital........................................ 8,434,353 8,423,428
Accumulated deficit............................................... (9,189,951) (8,997,363)
------------ ------------
Total stockholders' equity (deficit)......................... (734,660) (557,397)
------------ ------------
Total liabilities and stockholders' equity.............. $ 279,660 $ 418,865
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
2
<PAGE> 133
XEROGRAPHIC LASER IMAGES CORPORATION
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMEBER 31,
-----------------------------------------
1996 1995 1994
---------- ---------- -----------
<S> <C> <C> <C>
Revenues:
Product revenues.................................... $ 200,368 $ 397,550 $ 1,342,212
Contract and license revenues....................... 698,250 700,000 --
---------- ---------- ----------
Total revenues.............................. 898,618 1,097,550 1,342,212
---------- ---------- ----------
Cost and expenses:
Cost of product revenues............................ 176,886 294,851 1,580,052
Cost of contract and license revenue................ 81,554 202,015 --
Research and development............................ 287,748 331,279 398,026
Selling and marketing............................... 42,942 117,896 794,873
OEM development..................................... -- -- 497,867
General and administrative.......................... 456,156 358,040 1,015,624
---------- ---------- ----------
Total cost and expenses..................... 1,045,286 1,304,081 4,286,442
---------- ---------- ----------
Loss from operations.................................. (146,668) (206,531) (2,944,230)
---------- ---------- ----------
Other income (expense)
Interest expense.................................... (49,252) (24,655) (199,134)
Interest income..................................... -- 396 26,916
Other income........................................ 3,332 7,333 --
---------- ---------- ----------
Total other expense, net.................... (45,920) (16,926) (172,218)
---------- ---------- ----------
Net loss.............................................. $ (192,588) $ (223,457) $(3,116,448)
========== ========== ==========
Net loss per common share............................. $ (0.12) $ (0.18) $ (3.44)
Weighted average common and common equivalent shares
outstanding......................................... 1,565,105 1,255,314 906,143
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 134
XEROGRAPHIC LASER IMAGES CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------------- ----------------------- TOTAL
NUMBER OF NUMBER OF ADDITIONAL STOCKHOLDERS'
SHARES SHARES PAID-IN ACCUMULATED (DEFICIT)
ISSUED PAR VALUE ISSUED PAR VALUE CAPITAL DEFICIT EQUITY
--------- --------- ----------- --------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993......... -- $ -- 3,817,174 $38,172 $5,503,247 $(5,657,458) $ (116,039)
Issuance of common stock for bridge
financing.......................... -- -- 100,000 1,000 221,082 -- 222,082
Issuance of common stock in exchange
for conversion of long term debt... -- -- 40,000 400 79,600 -- 80,000
Issuance of common stock in exchange
for conversion of bridge
financing.......................... -- -- 50,000 500 99,500 -- 100,000
Issuance of common stock in exchange
for extension of long term note.... -- -- 15,000 150 18,600 -- 18,750
Issuance of Series A convertible
preferred stock.................... 850,000 8,500 -- -- 2,461,403 -- 2,469,903
Conversion of Series A Preferred
Stock into common stock............ (518,442) (5,184) 2,592,210 25,922 (20,738) -- --
Reverse common stock split on
November 29, 1994.................. -- -- (5,539,361) (55,394) 55,394 -- --
Net loss............................. -- -- -- -- -- (3,116,448) (3,116,448)
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)
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 135
XEROGRAPHIC LASER IMAGES CORPORATION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
--------- --------- -----------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss....................................................... $(192,588) $(223,457) $(3,116,448)
Adjustments to reconcile net loss to net cash used in operating
activities:
Restructuring charge........................................... -- -- 33,750
Write-offs..................................................... -- -- 305,143
Inventory write-offs........................................... 30,516 41,855 174,267
Write-offs of fixed assets..................................... -- 3,471 114,686
Bad debt adjustment & sales adjustment......................... -- -- 656,590
Depreciation and amortization.................................. 33,321 73,766 293,692
Issuance of common stock for bridge financing.................. -- -- 157,200
Issuance of common stock for services rendered................. 15,325 7,812 --
(Increase) decrease in operating assets:
Accounts receivable............................................ 258,957 (222,702) (299,590)
Inventory...................................................... 24,665 75,821 (259,383)
Other assets................................................... 11,469 6,281 (24,389)
Increase(decrease) in operating liabilities:
Accounts payable............................................... (86,882) 118,854 (180,553)
Deferred revenue............................................... 101,000 -- --
Accrued expenses............................................... (27,063) 186,467 (78,087)
Accrued severance costs........................................ (104,404) (128,221) (112,038)
Due to related parties......................................... -- -- (56,703)
--------- --------- -----------
Net cash provided (used) by operating activities................. 64,316 (60,053) (2,391,863)
--------- --------- -----------
Cash flows from investing activities:
Purchase of property and equipment............................. -- -- (15,046)
Capitalized software........................................... -- -- (60,918)
--------- --------- -----------
Net cash used by investing activities............................ -- -- (75,964)
--------- --------- -----------
Cash flows from investing activities:
Proceeds from issuance of preferred stock...................... -- -- 2,469,903
Receipts of notes payable...................................... 204,500 26,000 --
Payments of notes payable...................................... (35,500) -- (150,000)
Payments of related party notes payable........................ -- -- (205,000)
Payments under capital lease obligations....................... (12,161) (43,253) (148,168)
Net Proceeds from bridge financing............................. -- -- 500,000
Cash overdraft................................................. (1,432) 1,432 --
--------- --------- -----------
Net cash provided (used) by financing activities................. 155,407 (15,821) 2,466,735
--------- --------- -----------
Net increase (decrease) in cash.................................. 219,723 (75,874) (1,092)
Cash at beginning of period...................................... -- 75,874 76,966
--------- --------- -----------
Cash at end of period............................................ $ 219,723 $ -- $ 75,874
========= ========= ===========
Supplemental disclosure of cash flow information:
Interest paid.................................................. $ 45,616 $ 20,340 $ 24,102
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 136
XEROGRAPHIC LASER IMAGES CORPORATION
NOTES TO FINANCIAL STATEMENTS
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, 1996, 1995 and 1994, the Company
had net losses of $192,588, $223,457 and $3,116,448, respectively. The Company
had a working capital deficit of $473,687 and accumulated deficit of $734,660 at
December 31, 1996.
The Company has no current plans to undertake a debt or equity financing in
1997. Funds for development efforts will come from current or anticipated
licensing and royalty fees. If the Company is unable to fund its operations
through cash flow, the Company's development efforts and operations will be
materially adversely effected.
Management believes that progress has been made in reducing expenses and in
obtaining additional development partnership agreements which will enhance the
Company's chances of operating on a profitable basis. Despite these factors
there remains substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments that
might 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 the fair values of financial instruments, the
allowance for doubtful accounts, the valuation allowance for deferred tax assets
and the depreciable lives of property and equipment.
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.
Inventory
Inventory is 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 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.
F-7
<PAGE> 137
XEROGRAPHIC LASER IMAGES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Research and Development
Research and development costs are expensed as incurred.
Product Warranty Costs
The Company's warranty period on sales of its product is generally one
year. 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.
Net Loss Per Common Share
Net loss per common share is computed based upon the weighted average
number of common shares outstanding. Common share equivalents are not included
in the per share calculations as the effect of their inclusion would be
antidilutive. The net loss per common share for fiscal years presented have been
adjusted to reflect the six for one common stock reverse stock split as
described in Note 11.
Organization Costs
Certain costs relating to the organization of the Company were capitalized
and were amortized over 60 months using the straight-line method.
Patent and Trademark Application Costs
Certain costs relating to obtaining patents and trademarks for the
Company's technology and products have been capitalized. Amortization commences
when the patent or trademark is allowed and granted and is amortized over 60
months, which is the estimated useful life of the asset.
Capitalization of Software Costs
The Company follows Statement of Financial Accounting Standard ("SFAS") No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed." The remaining balance of Capitalized Software costs was
written off in 1994. Prior to the write-off, software costs incurred prior to
the establishment of technological feasibility were charged to research and
development expense. Software production costs incurred subsequent to the
establishment of technological feasibility were capitalized until the product
was available for general release to customers. Amortization of capitalized
software costs was charged to cost of sales over the estimated economic lives of
the related products, beginning at their initial shipment date.
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
F-8
<PAGE> 138
XEROGRAPHIC LASER IMAGES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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. Stock options granted to individuals
not classified as employees were immaterial during 1996.
3. INCOME TAXES
The Company has generated operating loss carryforwards for federal and
state income tax and federal alternative minimum tax purposes of approximately
$8,710,000 for the period June 9, 1989 (inception) through December 31, 1996.
These net operating losses will expire at various dates through 2011. The
Company has also generated research and development credits of approximately
$211,000 for the period June 9, 1989 (inception) through December 31, 1996,
which expire at various dates through 2011. 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,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................ $ 3,484,000 $ 3,460,000
Tax credit carryforwards........................ 211,000 181,000
Allowance for doubtful accounts................. 2,000 9,200
Accrued Restructuring Costs..................... 27,500 76,400
----------- -----------
Total deferred tax asset.......................... 3,724,500 3,726,600
Valuation allowance............................... (3,724,500) (3,726,600)
----------- -----------
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, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Equipment.......................................... $ 121,740 $ 121,740
Capitalized lease equipment........................ 368,964 368,964
--------- ---------
490,704 490,704
Less accumulated depreciation and amortization..... (455,513) (422,192)
--------- ---------
Property and equipment, net........................ $ 35,191 $ 68,512
========= =========
</TABLE>
F-9
<PAGE> 139
XEROGRAPHIC LASER IMAGES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. DEFERRED REVENUE
During November and December 1996 the Company received revenue for contract
and licensing agreements that included fees for support engineering services
that will be performed in 1997.
6. STOCK OPTION PLAN
The Company maintains two stock options 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
nonemployees.
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, 1996
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>
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- ----------
<S> <C> <C>
Outstanding at December 31, 1993..................... 370,583 $1.41-3.88
=========
Granted............................................ 1,029,417 .25
Cancelled.......................................... (370,583) 1.41-3.88
Terminated......................................... (201,500) .25
---------
Outstanding at December 31, 1994 giving effect to
reverse stock split on November 29, 1994........... 137,986 1.99
Granted............................................ 287,000 .03125
Canceled........................................... (74,381) 1.50
Terminated......................................... (25,638) 1.50
---------
Outstanding at December 31, 1995..................... 324,967 $ .41
=========
Granted............................................ 125,500 .02
Canceled........................................... (10,417) .03125
Terminated......................................... (1,176) 1.50
---------
Outstanding at December 31, 1996..................... 438,874 $ .30
=========
</TABLE>
At December 31, 1996, 8,936 shares are available for future grants.
F-10
<PAGE> 140
XEROGRAPHIC LASER IMAGES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Information pertaining to options outstanding at December 31, 1996 is as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------
WEIGHTED AVG.
RANGE OF REMAINING WEIGHTED AVG.
EXERCISE NUMBER CONTRACTUAL EXERCISE
PRICES OUTSTANDING LIFE PRICE
- -------------- ----------- ------------- -------------
<S> <C> <C> <C>
$ .01-$.10 402,500 2.9 years $ .03
$ 1.50-$3.00 30,375 2.4 years $ 1.54
$10.50-$22.50 5,999 1.9 years $12.16
438,874 2.8 years $ .30
</TABLE>
Options Exercisable
<TABLE>
<CAPTION>
RANGE OF WEIGHTED AVG.
EXERCISE NUMBER EXERCISE
PRICES EXERCISABLE PRICE
- -------------- ----------- -------------
<S> <C> <C>
.01-$.10 160,834 $.03
1.50-$3.00 30,375 $1.54
10.50-$22.50.. 5,999 $12.16
197,208 $.63
</TABLE>
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 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,
------------------------
1996 1995
--------- ---------
<S> <C> <C> <C>
Net loss: As Reported........................ $(192,588) $(223,457)
Pro Forma.......................... (194,138) (251,426)
Net loss: As Reported........................ (.12) (.18)
Per common share: Pro Forma.......................... (.12) (.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 $.01 and $.03
for 1996 and 1995, respectively.
7. 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 $36,100, $56,179 and $80,762 during 1996,
1995, and 1994 respectively. The Company has entered into various capital leases
for office equipment, the net book value of which were $28,638, $51,915 and
$61,458 at December 31, 1996, 1995 and 1994, respectively.
F-11
<PAGE> 141
XEROGRAPHIC LASER IMAGES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The future minimum annual lease obligations under these leases for the
respective years ending December 31 are as follows:
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES
-------------- ----------------
<S> <C> <C>
1997....................................... $ 18,528 $ 42,700
1998....................................... 18,528 37,830
1999....................................... 8,249 12,610
-------- --------
Total Obligation................. 45,305 97,074
--------
Less amount representing interest.......... (16,666)
Present value of minimum lease payments.... 28,639
Less current portion....................... (11,731)
Long-term obligation....................... $ 16,908
</TABLE>
8. RELATED PARTY TRANSACTIONS
In July 1989, the Company entered into an 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 $.01 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.
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.
Royalties expensed under the Carley Agreement were approximately $90,000,
$82,500 and $104,000 for the years ended December 31, 1996, 1995 and 1994
respectively. Cumulative royalties expensed in connection with this agreement
were $517,585 through December 31, 1996. Accrued Expenses at December 31, 1996
includes $103,375 due under the Carley Agreement.
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.
9. CAPITALIZED SOFTWARE COSTS
The Company previously capitalized software costs in connection with
certain printer related products. During 1994, the Company wrote down the
balance of capitalized software costs by $305,143, which was the remaining
balance.
F-12
<PAGE> 142
XEROGRAPHIC LASER IMAGES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. 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
will extend through November 1997. The Company paid $104,404 and $89,908 under
these agreements during 1996 and 1995, respectively.
11. 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. Each share of convertible
preferred stock is convertible into five shares of the Company's Common Stock at
any time after 90 days from the date of issue. During 1995 and to date, 534,762
shares of Series A Convertible Preferred Stock have been converted into 445,635
shares of Common Stock. At December 31, 1996, 315,238 shares of Series A
Preferred Stock remained outstanding. 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.
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, 1996 there were 1,778,646 shares of
Common Stock outstanding. 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 to
Thomas James Associates, Inc., a warrant (the "Underwriter's 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 to purchase 85,000 Units, each Unit consisting
of five shares of Common Stock, and one Class A Warrant. The Underwriter's Class
A Warrant is exercisable for a four year period commencing February 20, 1994, at
an exercise price of $4.80 per Unit.
The exercise price and the number of shares of Common Stock purchasable
upon the exercise of the IPO, Class A and Underwriter 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,
F-13
<PAGE> 143
XEROGRAPHIC LASER IMAGES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 there 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.
Giving effect to the events during 1994, 1995, and 1996, the holders of IPO
Warrants are entitled to purchase .91 share of Common Stock for each Warrant
held at a price of $7.38 per share until January 12, 1998; the holders of Class
A Warrants are entitled to purchase .43 share of Common Stock for each warrant
held at a price of $2.62 until August 22, 1997, and at $3.06 per share until
February 22, 1999; Underwriter's IPO Warrant entitles the Underwriter to
purchase 23,302 units, consisting of two shares of Common Stock and one Common
Stock Purchase Warrant at a price of $22.14; and the Underwriters Class A
Warrant entitles the Underwriter to purchase one share of Common Stock at a
price of $15.72.
The Company issued warrants to various lenders in 1992 which expire five
years from the date of issue, of which, 5,990, 1,777 and 8,319 warrants remain
outstanding at December 31, 1996, at an exercise price of $5.88, $8.46 and $5.88
per share, respectively.
At December 31, 1996, the Company had the following shares of Common Stock
reserved in the following amounts:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
---------
<S> <C>
Reserved For:
Employee Stock Options........................................ 447,810
IPO Warrants.................................................. 701,468
Underwriter's IPO Warrants.................................... 70,147
Class A Warrants.............................................. 362,984
Underwriter's Class A Warrants................................ 36,298
Lender's Warrants 1992*....................................... 16,075
Lender's Warrants 1995*....................................... 225,000
Lender's Warrants 1996*....................................... 593,462
Convertible Preferred Shares.................................. 262,698
Other Warrants................................................ 383,665
---------
Total................................................. 3,099,607
=========
</TABLE>
- ---------------
* Warrants issued to lenders including insiders
12. EXPORT REVENUES
The Company currently operates in one industry segment. Export product
revenues are generated predominantly from Europe and accounted for approximately
19%, 16% and 9% of total revenues in fiscal years 1996, 1995 and 1994,
respectively.
13. SIGNIFICANT CUSTOMERS
For the year ended December 31, 1996, 1995 and 1994, the Company did not
have any customers that accounted for greater than 10% of total product revenue.
One customer accounted for 72% of total contract and license revenues in 1996
and 59% in 1995.
F-14
<PAGE> 144
XEROGRAPHIC LASER IMAGES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
14. OTHER INCOME STATEMENT INFORMATION
Advertising costs for the years ended December 31, 1996, 1995 and 1994 were
$6,704, $1,905 and $48,440, respectively.
15. SUPPLEMENTARY CASH FLOW INFORMATION
Accrued interest converted to subordinated notes payable amounted to
$13,688. Noncash financing and investing activities are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------ --------
<S> <C> <C> <C>
Assets acquired and obligations incurred
resulting from capital lease obligations.... $ -- $ -- $ 61,458
Issuance of common stock for services
rendered.................................... 15,325 7,812 --
Issuance of common stock in connection with
bridge financing............................ -- -- 322,082
Issuance of common stock in exchange for
conversion of long term debt................ -- -- 98,750
Accrued interest converted to subordinated
notes payable............................... 13,688 -- --
</TABLE>
16. 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 $.01 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.
The Company issued 593,462 warrants in connection with the offering.
17. 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, 1996,
there were no receivables with Silicon Valley Bank.
18. 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.
F-15
<PAGE> 145
XEROGRAPHIC LASER IMAGES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Foreign customers
The Company derives a portion of its revenues from international sales (See
Note 11). The Company could be adversely affected by changes in foreign laws,
regulations, tariffs, and taxes.
[THIS SPACE IS INTENTIONALLY LEFT BLANK]
F-16
<PAGE> 146
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 September 30, 1997.
------------------
-------------------
( ) 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 (I.R.S. Employer Identification No.)
of incorporation or
organization)
101 Billerica Avenue, 5 Billerica Park, North Billerica, MA 01862
- ----------------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(508) 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 common equity, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at October 23, 1997
------- ---------------------------------
<S> <C>
Common Stock, $.01 par value
per share 2,039,310 *
Series A Convertible Preferred
Stock, $.01 par value
per share 315,238
</TABLE>
* Common stock including equivalents, options and warrants exercisable
at current market price or lower equal 3,600,969 shares.
Transitional Small Business Disclosure Format:
Yes No X
----- -----
1 of 25
<PAGE> 147
XEROGRAPHIC LASER IMAGES CORPORATION
INDEX
PAGES
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Balance Sheets as of September 30, 1997
(unaudited) and December 31, 1996 4
Statements of Operations for the nine and three
month periods ended September 30, 1997 and
1996 (unaudited) 5
Statements of Cash Flows for the nine month
periods ended September 30, 1997 and 1996
(unaudited) 6
Notes to Financial Statements
(unaudited) 7-8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9-10
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
Signatures 12
2 of 25
<PAGE> 148
Xerographic Laser Images Corporation
Balance Sheets
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
------
Current assets:
Cash $ 15,328 $ 219,723
Accounts receivable, less allowance
for doubtful accounts of $2,000 in
1997 and $5,000 in 1996 19,237 20,314
Other current assets 9,040 -
----------- -----------
Total current assets 43,605 240,037
----------- -----------
Property and equipment, net 21,157 35,191
Other assets 2,798 4,432
----------- -----------
Total assets 67,560 279,660
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- ----------------------------------------------
Current liabilities:
Accounts payable $ 300,703 $ 352,346
Deferred revenue - 101,000
Accrued expenses 238,841 179,943
Accrued severance costs 3,750 68,704
Current portion of capital leases 11,731 11,731
----------- -----------
Total current liabilities 555,025 713,724
----------- -----------
Capital lease obligations 6,488 16,908
Subordinated notes payable 283,688 283,688
----------- -----------
Total liabilities 845,201 1,014,320
----------- -----------
Stockholder's equity (deficit)
Series A Preferred stock, $.01 par
value; authorized 1,000,000 shares;
315,238 issued and outstanding at
September 30, 1997 and December 31,
1996 3,152 3,152
Common stock, $.01 par value;
30,000,000 shares authorized:
2,039,310 issued and outstanding at
September 30, 1997 and 1,778,646
issued and outstanding at
December 31, 1996 20,393 17,786
Additional paid-in capital 8,463,323 8,434,353
Accumulated deficit (9,264,509) (9,189,951)
----------- -----------
Total stockholders' equity (deficit) (777,641) (734,660)
----------- -----------
Total liabilities and stockholders'
equity (deficit) $ 67,560 $ 279,660
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
3 of 25
<PAGE> 149
Xerographic Laser Images Corporation
Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------------- -------------------------------------
September 30 September 30 September 30 September 30
1997 1996 1997 1996
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Product revenues $ 25,843 $ 57,654 $ 94,545 $ 166,495
Contract and license revenues 266,823 225,000 957,541 250,000
----------- ----------- ----------- -----------
Total revenues 292,666 282,654 1,052,086 416,495
Cost and expenses:
Cost of product revenues 4,232 33,319 26,983 105,395
Cost of contract and license rev 20,200 - 222,155 -
Research and development 125,567 90,701 393,614 248,467
Sales and marketing 11,468 13,518 32,834 33,381
General and administrative 149,257 122,693 445,700 391,212
----------- ----------- ----------- -----------
Total cost and expenses 310,725 260,231 1,121,286 778,455
Loss from operations (18,059) 22,423 (69,200) (361,960)
Other income - 326 5,789 1,826
Net interest expense (7,722) (17,132) (11,147) (29,821)
----------- ----------- ----------- -----------
Net (loss) ($ 25,781) $ 5,617 ($ 74,558) ($ 389,955)
=========== =========== =========== ===========
Net loss per common share ($ 0.01) $ 0.00 ($ 0.04) ($ 0.26)
Weighted average common and common
equivalent shares outstanding 2,039,310 1,778,647 1,908,978 1,493,925
</TABLE>
The accompanying notes are an integral part of the financial statements.
4 of 25
<PAGE> 150
Xerographic Laser Images Corporation
Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30 September 30
1997 1996
--------- ---------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss ($ 74,558) ($389,955)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 14,034 23,259
Issuance of common stock as compensation 31,577 15,325
(Increase) decrease:
Accounts receivable 1,077 123,250
Inventory - 9,154
Other assets (7,406) 4,177
Increase (decrease):
Accounts payable (51,643) 89,202
Deferred revenues (101,000) -
Accrued expenses 58,897 12,822
Accrued severance costs (64,954) (54,113)
--------- ---------
Net cash used in operating activities (193,975) (166,879)
--------- ---------
Cash flows from financing activities:
Cash overdraft - (1,432)
Proceeds from issuance of subordinated
notes - 195,000
Payments of notes payable - (5,500)
Payments under capital lease obligations (10,420) (9,228)
--------- ---------
Net cash provided (used in investing activities) (10,420) 178,840
--------- ---------
Net increase (decrease) in cash (204,395) 11,961
Cash at beginning of period 219,723 -
--------- ---------
Cash at end of period $ 15,328 $ 11,961
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 11,147 $ 22,003
</TABLE>
The accompanying notes are an integral part of the financial statements.
5 of 25
<PAGE> 151
XEROGRAPHIC LASER IMAGES CORPORATION
Notes to Financial Statements
September 30, 1997
1. Nature of Business and Basis of Presentation
The Company continues to focus on the implementation and commercialization of
the XLI SuperChip Enhancement Technology ("SuperChip Technology") in ASIC
(Application Specific Integrated Circuit) and VHDL (Virtual Hardware Description
Language) product forms. These products are targeted for the large printer and
printer controller OEM's that provide products to mass markets. SuperChip
Technology products is expected to provide the Company with a line of Increased
revenue levels for the next several years.
Prototype SuperChip ASICs (now being marketed as the XLI-2050 Chip) were
received late in the third quarter and are undergoing qualification testing by
the Company's engineers. During the fourth quarter of this year the sales
activity of the XLI-2050 will be the major focus for the Company including the
release of an XLI-2050 Test & Evaluation board for OEMs to directly evaluate the
XLI ASIC driving their own print engines. The Company has hired a Vice President
of Sales and Marketing to lead the marketing and sales of the SuperChip
Enhancement Technology on a worldwide basis. XLI plans to provide engineering
samples of the XLI-2050 to several potential OEM customers during the fourth
quarter and to have production XLI-2050 chips available in the first quarter of
1998.
During the third quarter, the Company also completed a design (funded through a
licensee non-recurring engineering development project) for a scaling/
enhancement ASIC for flat-panel displays. Prototype ASIC chips are expected in
the fourth quarter of this year. Although this 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 October 1997, the Company entered into a license agreement with Pixel Magic,
Inc. (a provider of ASIC's and controller designs to OEMs) for the SuperChip
Enhancement Technology in both the VHDL and ASIC forms. Including the agreement
with Pixel Magic, the Company has entered into six license agreements for its
SuperChip 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
6 of 25
<PAGE> 152
with the audited financial statements for the year ended December 31, 1996,
which are contained in the Company's 1996 Form 10-KSB filed with the Securities
and Exchange Commission.
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
Results of Operations
The Company's strategy is to design and develop products for the OEM market
derived from the Company's proprietary high resolution technology in
collaboration with strategic partners.
Revenues for the third quarter of 1997, which ended September 30, 1997 were
$292,666, an increase of $10,012 from 1996's third quarter revenues of $282,654.
Revenues for the nine-month period ended September 30, 1997 were $1,052,086 an
increase of $635,591 from the $416,495 of revenue recorded for the nine months
ended September 30, 1996. The Company recognized $266,823 in contract and
license revenues in connection with agreements with three major licensees in the
third quarter of 1997 and $225,000 in the third quarter of 1996.
The Company recorded a net loss of $25,781 for the third quarter of 1997, as
compared to a net profit of $5,617 for the same period in 1996. The decrease in
profitability is attributable to an increase in cost associated with generating
contract and license revenues and an increase in research and development
expense of $34,866 and an increase in general and administrative expense of
$26,564 offset by the increase in contract and license revenue of $41,823 in the
third quarter of 1997.
The Company's gross margin on product sales was 84% for the third quarter of
fiscal year 1997 compared to 42% for the same period in 1996. The gross margin
for the nine months ended September 30, 1997 was 71% compared to 37% for the
same period in 1996. This was mainly due to the board inventory being written
off in December 1996.
Research and development costs for the three month period ended September 30,
1997 were $125,567 or approximately 43% of revenues as compared to $90,701 or
approximately 32% of revenues for the third quarter of 1996. Research and
development costs for the nine months ended September 30, 1997 were $396,614, as
compared to $248,467 for the same period in 1996. The increase in research and
development costs from September 30, 1996 to September 30, 1997 of $145,147 was
due to the hiring of additional engineering personnel and purchase of
engineering development supplies. The Company's engineering emphasis will
continue to be on the development of ASICs incorporating the Company's
proprietary high resolution technology for the OEM market.
Selling and marketing expenses for the three month period ended September 30,
1997 were $11,468 or approximately 4% of revenues as compared to $13,518 or
approximately 5% of revenues for the three month period ended September 30,
1996. Selling and marketing expenses for the nine months ended September 30,
1997 were $32,834, as compared to $33,381 for the same period in 1996.
General and administrative expenses for the three-month period ended
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September 30, 1997 were $149,257 or approximately 51% of revenues as compared to
$122,693 or approximately 43% of revenues for the three-month period ended
September 30, 1996. The increase of $26,564 is attributable to an increase in
payroll expense and the increased use of independent consultants. General and
administrative expenses for the nine months ended September 30, 1997 were
$445,700 as compared to $391,212 for the same period in 1996. This increase of
$54,488 was primarily due to an increase in payroll expense and the increased
use of independent consultants.
Liquidity and Capital Resources
At September 30, 1997 the Company had current assets of $43,605, current
liabilities of $555,025 and cash of $15,328.
The Company has the option of prepaying subordinated notes at 50% interest
($141,844) prior to November 30, 1998.
The Company continues to fund its operations from available cash and from cash
flow provided from contract development agreements and technology licenses. On
October 15, 1997, the Company received a cash payment of $375,000 as a license
fee and prepaid royalties in connection with a nonexclusive license agreement
entered into by the Company.
The Company has no current plans to undertake a debt or equity financing in
1997. Funds for operations and development efforts will come from the Company's
available cash and from current or anticipated licensing and royalty fees. If
the Company is unable to fund its operations from cash flow, the Company's
development efforts and operations will be materially adversely effected.
The Company has no current commitments for any material capital expenditures.
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.
<TABLE>
<CAPTION>
Exhibit Number Title
-------------- -----
<S> <C>
10.45 Technology License and Supply
Agreement dated October 15, 1997,
between the Company and Pixel
Magic, Inc.
</TABLE>
(b) There were no reports on Form 8-K filed by the Company
during the quarter ended September 30, 1997.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Xerographic Laser Images Corporation
------------------------------------
(Company)
Date: October 29, 1997 By: /s/ James L. Salerno
-------------------- --------------------------------------
James L. Salerno, Chief Financial Officer
(Principal Financial and Accounting Officer)
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TECHNOLOGY LICENSE AND SUPPLY AGREEMENT
This Technology License and Supply Agreement (the "Agreement") is made
and entered into October 15, 1997 (the "Effective Date") by and between
Xerographic Laser Images Corporation, a Delaware corporation, with its principal
place of business at 101 Billerica Avenue, 5 Billerica Park, North Billerica,
Massachusetts 01862 ("XLI") and Pixel Magic, Inc., a Massachusetts corporation,
with its principal place of business at 300 Brickstone Square, Andover,
Massachusetts 01810 ("Pixel").
RECITALS
WHEREAS, Pixel is engaged in the development, design, manufacture and
distribution of semiconductors and related software, including semiconductors
based on compression/decompression and image processing technologies;
WHEREAS, XLI is engaged in the development, design, manufacture and
distribution of hardware and software products for the printer and printer
controller market;
WHEREAS, Pixel desires to license certain imaging processing technology
from XLI for incorporation into Pixel's products, and XLI is willing to grant
such licenses on the terms and conditions set forth in this Agreement;
WHEREAS, Pixel desires to purchase a certain chip from XLI for
incorporation into Pixel's reference designs and XLI is willing to sell such
chip to Pixel on the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual promises contained
herein and other valuable consideration the adequacy of which is hereby
acknowledged, the parties agree as follows:
ARTICLE 1
DEFINITIONS
1.1 "Affiliate" shall mean any entity which controls, is controlled by
or is under common control with Pixel. An entity shall be regarded as in control
of another entity for purposes of this Section 1.1 if it owns or controls more
than fifty percent (50%) of the shares of the subject entity entitled to vote in
the election of directors (or, in the case of an entity that is not a
corporation, for the election of the corresponding managing authority).
1.2 "Combination Product" shall mean a Superchip integrated or bundled
with other Pixel ASICs or Pixel integrated circuitry as a Pixel product offering
or Pixel reference design.
1.3 "Confidential Information" shall have the meaning as set forth in
Section 12.1 below.
1.4 "Distributor" shall have the meaning as set forth in Section 3.2
below.
1.5 "Digital Modulator" shall mean the Digital Modulator Feature
embodied in the XLI Technology as described in more detail in Exhibit A hereto.
1.6 "Digital Modulator Feature IC" shall mean an Integrated IC which
incorporates the Digital Modulator Feature.
1.7 "End User" shall mean a person or entity who acquires an Integrated
IC or Combination Product, directly or indirectly from Pixel, solely for
personal or internal use and not for resale.
1.8 "Feature" shall mean a technology feature (e.g. digital modulation
or edge enhancement) embodied in the XLI Technology as described in more detail
in Exhibit A hereto.
1.9 "Improvements" shall mean any upgrade, enhancement, extension,
revision, improvement, addition or other modification to the existing XLI
Technology related to or for the purpose of supporting color printing developed
by XLI during the eighteen month period from the Effective Date of this
Agreement.
1.10 "Integrated IC" shall mean a Pixel ASIC which incorporates any
portion of the XLI Technology, provided that, the Pixel ASIC includes
substantial functional value.
1.11 "Intellectual Property Rights" shall mean all XLI Technology
worldwide patents and other patent rights, utility models, copyrights, mask work
rights, trade secrets, and all other intellectual property rights, in whatever
form throughout the world, including without limitation all applications and
registrations with respect thereto.
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1.12 "Multiple Feature IC" shall mean an Integrated IC which
incorporates two or more Features.
1.13 "OEM" shall mean an original equipment manufacturer who acquires
an Integrated IC, Superchip or Combination Product, directly or indirectly from
Pixel, for incorporation into its product offering for resale.
1.14 "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 multifunction devices.
1.15 "Production Cost" with respect to a Superchip unit shall mean
XLI's direct and indirect costs associated with the manufacture, packaging and
storage of such Superchip unit, including the costs of quality assurance and
quality control all as determined in accordance with generally acceptable
accounting practices (GAAP).
1.16 "Specifications" shall mean the Chip Specifications and the
Technology Specifications.
1.16.1 "Chip Specifications" shall mean the technical,
functional and other specifications for the Superchips as set forth in Exhibit
B, as may be modified from time to time by mutual agreement of the parties
hereto.
1.16.2 "Technology Specifications" shall mean the technical,
functional and other specifications for the XLI Technology as set forth in
Exhibit C, as may be modified from time to time by mutual agreement of the
parties hereto.
1.17 "Superchip" shall mean any XLI proprietary chip or chipset that
meets the Chip Specifications set forth in Exhibit B and any future version
thereof incorporating, and limited to, Improvements developed by XLI at any time
prior to eighteen months from the Effective Date of this Agreement.
1.18 "Update" shall mean a version of the XLI Technology designated as
such (or with a similar term) by XLI which incorporates one or more bug
fixes/corrections or performance enhancements, but does not include additional
capability or functionality.
1.19 "VHDL" shall mean Virtual Hardware Description Language.
1.20 "XLI Technology" shall mean (i) any and all proprietary printing
technology owned or controlled by XLI as of the Effective Date of this
Agreement, including without limitation the technology described in Exhibits B
and C hereto (ii) any and all Improvements and Updates, and (iii) any and all
Intellectual Property rights in (i) and (ii).
ARTICLE 2
LICENSE FEE
2.1 Licensee Fee. In consideration of XXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXX and the rights and licenses granted to Pixel hereunder,
Pixel agrees to pay to XLI a license fee of XXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX and a prepaid royalty fee of XXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX. Such fees shall be due and payable as
follows:
2.1.1 Execution. XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX of the Effective Date.
2.1.2 Enhanced Print Quality Milestone. XXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXX within ten (10) days of XLI demonstrating Contone mode
printing utilizing the XLI Technology of quality equal to or better than DPTech
technology as shown on the Xerox c55 printer. XLI shall notify Pixel in writing
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of the occurrence of the foregoing milestone and provide Pixel any Improvements
necessary for Pixel to implement the same in its Integrated ICs. Pixel's
obligation to pay the amount required under this Section 2.1.2 is subject to
Pixel's verification that the milestone event has occurred. Notwithstanding the
verification requirement set forth in this Section 2.1.2, Pixel shall have the
right to promote and market the XLI Technology for color applications, provided
that Pixel shall not have the right to sell the XLI Technology for color
applications XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX.
2.2 Non-Refundable; Creditable. Except as provided in Section 13.4.1
below, the amounts paid or payable under this Article 2 are non-refundable
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX and any future prepaid royalties are
fully-creditable against royalties due to XLI pursuant to Section 5.1 below.
2.3 Additional Pre-paid Royalty Fee. Upon full amortization of the
initial prepaid royalty fee of XXXXXXXX, and provided further that Pixel decides
in its sole discretion to continue to exercise the license rights granted to it
in Article 3 below, then Pixel will pay to XLI an additional prepaid royalty fee
of XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX which will be fully
creditable against future royalties.
ARTICLE 3
LICENSE
3.1 License. XLI hereby grants to Pixel a non-exclusive, worldwide
right and license under the XLI Technology to (i) use, copy, modify,
reconfigure, reproduce, translate and create derivative works of the XLI
Technology for the purpose of embedding, integrating and incorporating the XLI
Technology into Integrated ICs; (ii) make, use, and sell Integrated ICs; (iii)
practice any method, process or procedure; and (iv) have any of the foregoing
performed solely on its behalf by third parties provided that such third parties
are subject to confidentiality obligations which protect against the
unauthorized use and disclosure of XLI's Confidential Information, in each case
for the purposes of selling or otherwise distributing Integrated IC's to End
Users or OEMs either on a stand-alone or on an integrated product basis. Any
improvements and Updates transferred to Pixel are included in the foregoing
license grants.
3.2 Distributors. Pixel may exercise its distribution rights granted
under this Article 3 through the use of distributors, resellers, value-added
resellers, dealers or sales representatives (each a "Distributor") and
Affiliates; provided that Pixel uses commercially reasonable efforts to ensure
that each Distributor and Affiliate complies with the applicable terms and
conditions of this Agreement.
3.3 Limitations. Except as otherwise expressly provided herein, Pixel
shall not sublicense or otherwise transfer, convey or assign any of its rights
or licenses under the XLI Technology granted hereunder; provided, however Pixel
shall have the right to sublicense its Affiliates within the scope of the rights
granted to Pixel under Section 3.1 above. Notwithstanding anything herein to the
contrary, Pixel shall not use the XLI Technology to develop Integrated ICs
containing solely or substantially only XLI Technology for sale on a stand-alone
basis. Pixel shall not, nor allow any third party to disassemble, decompile or
reverse engineer the XLI Technology or any Improvements or Updates thereto.
3.4 No Implied Licenses. Nothing in this Agreement shall be construed
as granting Pixel, by implications, estoppel or otherwise, any license or other
right to any patents, know-how or other intellectual property to XLI except for
the rights and licenses expressly granted to Pixel herein, and XLI retains all
rights not so granted.
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ARTICLE 4
TECHNOLOGY TRANSFER
Promptly upon receipt of the amount set forth in Section 2.1.1 above,
XLI shall transfer the XLI Technology to Pixel in VHDL or such other format as
Pixel may reasonably request. Thereafter, as available, for the term of this
Agreement, XLI shall transfer Improvements to Pixel in VHDL or such other format
as Pixel may reasonably request. The foregoing provisions of this Article 4
shall not limit XLI's obligations under Article 8 below.
ARTICLE 5
ROYALTIES; RECORDKEEPING
5.1 Per-Unit Royalty. Subject to the terms and conditions of this
Article 5 and in consideration for the rights and licenses granted to Pixel
under Article 3 above, Pixel shall pay to XLI the following royalties upon
Pixel, its Affiliates or Distributors' sale of an Integrated IC to an End User
or an OEM:
5.1.1 Digital Modulator Feature IC. XXXXXXXXXXXXXXXXXX for
each Digital Modulator Feature IC sold by Pixel, its Affiliates or Distributors
to an End User or an OEM; and
5.1.2 Multiple Feature IC. XXXXXXXXXXXXXXXXXXX for each
Multiple Feature IC sold by Pixel, its Affiliates or Distributors to an End User
or an OEM.
For avoidance of doubt, no royalty shall be due hereunder with respect to
transfer of an Integrated IC by or on behalf of Pixel to its Affiliates or
Distributors for resale (unless such transfer is a revenue recognition event for
Pixel), provided however the royalty shall be due upon sale of such an
Integrated IC to an End User or OEM.
5.2 Single Royalty. For avoidance of doubt, it is understood and agreed
that once the royalty has been paid hereunder with respect to a particular
Integrated IC unit, no further royalty or other payment is due to XLI for the
End User or OEM's use of such Integrated IC unit.
5.3 XXXXXXXXXXXXXXXXXXXXX.
5.3.1 Royalty. If XLI enters into an arrangement with a third
party pursuant to which XLI grants to such third party the same or substantially
the same rights to the XLI Technology on the same or substantially the same
terms and conditions as those granted to Pixel herein, at royalty rates lower
than the corresponding rates provided for in Section 5.1 above, then XLI will
promptly notify Pixel of such arrangement and give Pixel the opportunity to
substitute such lower royalty rates from the date when such lower rate is
available to such third party.
5.3.2 Enforcement. If Pixel provides XLI with written evidence
demonstrating to XLI prima facie infringement or misappropriation of any or all
of XLI's Intellectual Property Rights within the XLI Technology by a third party
that is commercializing a product in competition with Integrated ICs sold by
Pixel, its Affiliates or Distributors or which infringement results in a
material adverse effect on the business of Pixel, its Affiliates or
Distributors, Pixel may by notice request XLI to take steps to enforce such
Intellectual Property Rights. If XLI fails within six (6) months of the receipt
of such notice to either (i) cause such infringement to terminate (by entering
into a licensing arrangement with such alleged infringer or otherwise) or (ii)
initiate and thereafter maintain legal proceedings against the infringer, the
royalties due by Pixel pursuant to Section 5.1 above shall be reduced by fifty
percent (50%) with respect to sales of Integrated ICs in the geographic area(s)
in which products sold by the alleged infringer continue to compete with
Integrated ICs sold b Pixel, its Affiliates or Distributors, until such time
that said infringement has been terminated.
5.4 Returns. In the event Pixel, its Affiliates or Distributors
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distribute an Integrated IC unit for which a royalty is or has been paid and
thereafter accepts return of same Integrated IC unit, Pixel may credit the
royalty paid therefor against royalties due XLI pursuant to Section 5.1 above.
5.5 Promotional Copies. Pixel may distribute a reasonable number of
Integrated ICs as promotional, demonstration or evaluation units, without
incurring a royalty therefor to XLI under the provisions of Section 5.1 above.
5.6 Royalty Reports and Payments. After the first sale of an Integrated
IC for which royalties are payable under this Article 5, Pixel shall make
quarterly written reports to XLI within forty-five (45) days after the end of
each calendar quarter, stating in each such report the number of Single Feature
ICs and Multiple Feature ICs sold during the calendar quarter. Simultaneously
with the delivery of each such report, Pixel shall pay to XLI the total
royalties, if any, due to XLI for the period of such report. If no royalties are
due, Pixel shall so report.
5.7 Records; Inspection. Pixel shall keep complete, true and accurate
books of account and records for the purpose of determining the royalty amounts
payable under this Article 5. Such books and records shall be kept reasonably
accessible for at least three (3) years following the end of the calendar
quarter to which they pertain. Such records will be open for inspection during
such three (3)-year period by a representative or agent of XLI for the purpose
of verifying the royalty statements. XLI's representative or agent will be
obliged to execute a reasonable confidentiality agreement prior to commencing
any such inspection. Such inspections may be made no more than once each
calendar year, at reasonable times mutually agreed by Pixel and XLI. XLI shall
bear the costs and expenses of inspections conducted under this Section 5.7,
unless a variation or error producing an underpayment in royalties payable
exceeding ten percent (10%) of the amount paid for the period covered by the
inspection and any unpaid amounts that are discovered shall be paid by Pixel to
XLI within thirty (30) days after receipt of an invoice for the same. The
parties will endeavor to minimize disruption of Pixel's normal business
activities to the extent reasonably practicable.
ARTICLE 6
SUPPLY OF SUPERCHIPS
6.1 Product Supply. Subject to the terms and conditions of this
Agreement, during the term of this Agreement, XLI agrees to sell and deliver to
Pixel all of Pixel's and its OEM's requirements for units of the Superchip
solely for purposes of sale by Pixel, its Affiliates, Distributors and its OEMs
as incorporated into Combination Products. During the term of this Agreement,
XLI agrees not to discontinue production or sale to Pixel of any version of this
Superchip unless the orders from Pixel and its OEMs are less than ten thousand
(10,000) units of such version of the Superchip per six (6)-month period for six
consecutive months. In the event that XLI determines to discontinue supply of
any version of the Superchip due all or in part to Pixel's and its OEMs' failure
to meet the minimum order requirements set forth in this Section 6.1, XLI agrees
to provide written notice to Pixel of such discontinuation and shall cooperate
to allow Pixel to place final orders during a time frame agreed upon by Pixel
and XLI.
6.2 Terms and Conditions. All Superchip purchases hereunder shall be
subject to the terms and conditions of this Agreement. ANY ADDITIONAL OR
INCONSISTENT TERMS OR CONDITIONS OF ANY PURCHASE ORDER OR ACKNOWLEDGMENT GIVEN
OR RECEIVED PURSUANT TO THIS AGREEMENT SHALL HAVE NO EFFECT AND SUCH TERMS AND
CONDITIONS ARE HEREBY EXCLUDED.
6.3 Forecasts. During the term of this Agreement, Pixel shall submit to
XLI, by the fifth (5th) day of each month, a rolling written forecast of the
quantities of Superchips estimated to be required by Pixel on a month-by-month
basis for six (6) consecutive months. Pixel shall exercise every reasonable
effort to achieve an accurate forecast, but the forecast is an estimate only
provided to XLI for capacity planning purposes.
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6.4 Orders.
6.4.1 Orders by Pixel. Pixel's orders shall be made pursuant
to a written purchase order ("Purchase Order") in a form mutually acceptable to
the parties and which at a minimum, provides for Pixel's desired quantities of
Superchip units and ship dates. XLI shall deliver units of the Superchip to
Pixel on or prior to the delivery dates specified in the Purchase Order. In the
event that XLI is unable to deliver any units within (30) days of the specified
delivery date, without limitation to any other rights and remedies that Pixel
may have at law or under this Agreement, Pixel shall have the right to cancel
the order without charge and with no penalty upon written notice to XLI. The
lead time for the delivery of units of the Superchip shall not exceed sixteen
(16) weeks from the date of acknowledgment of the Purchase Order. XLI shall use
its best efforts to acknowledge each Purchase Order in writing within one week
of receipt. All orders shall be F.O.B. N. Billerica, MA.
6.4.2 Orders by OEMs. Notwithstanding anything herein to the
contrary, its is understood that Pixel may order Superchip units hereunder on
behalf of and for delivery to OEMs and such Superchips shall be made available
on the same terms and at the same Price as those for Pixel.
6.4.3 Cancellation and Rescheduling. The parties agree to
negotiate in good faith a mutually acceptable policy for cancellation and
rescheduling by Pixel of its Purchase Orders for Superchips.
6.5 Price. The price to be paid by Pixel per Superchip unit ordered by
Pixel during the term of this Agreement shall be XLI's Production Cost therefor
plus a XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX (the "Price"). Any royalty fees paid
pursuant to this Section 6.5 shall be fully creditable against the prepaid
royalty fees set forth in Sections 2.1 and 2.3.
6.6 Delivery. With respect to exact delivery dates, XLI shall use its
best efforts to ship ordered quantities of Superchips in accordance with
Purchase Orders submitted.
6.6.1 Allocation. In the event that XLI is unable to supply
both worldwide requirements of Superchips and quantities ordered by Pixel in
accordance with Section 6.4 above due to force majeure or otherwise, XLI shall
allocate the quantities of Superchips that XLI has in inventory, and that XLI is
able to produce, so that Pixel receives at least its proportional share of
available supplies as determined based on reasonable forecasts (taking into
consideration past usage and usage performance against forecast) of Pixel, XLI
and XLI's other distributors.
6.6.2 Right to Manufacture. If for three (3) consecutive
months XLI fails to supply Pixel's ordered quantities of Superchips pursuant to
acknowledged Purchase Orders, and provided that such failure is not due to any
action or inaction of Pixel, then Pixel may manufacture (or have manufactured)
pursuant to this Section 6.6.2 below the quantity of such Superchips for sale by
Pixel, its Affiliates, Distributors or OEMs as incorporated into Combination
Products. Such right shall continue in effect for the term of this Agreement.
6.6.2.1 License to Manufacture. Subject to all
other terms and conditions of this Agreement, including Section 15.3, XLI hereby
grants to Pixel, and Pixel hereby accepts a license (the "Manufacturing
License") under any and all of XLI's Intellectual Property rights, without right
of sublicense (except to the extent necessary to exercise have made rights)
necessary to make, have made, use Superchips for sale by Pixel, its
Distributors, Affiliates or OEMs as incorporated into Combination Products.
Without limiting the foregoing, it is understood that the Manufacturing License
shall terminate on any termination of this Agreement.
6.6.2.2 Exercise of Manufacturing License. Pixel
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agrees not to exercise any of its rights under the Manufacturing License except
to the extent expressly permitted in this Section 6.6.2. In such event, XLI
shall provide to Pixel copies of all documentation and other materials within
XLI's control that is reasonably necessary for Pixel to manufacture (or have
manufactured) Superchips, including design data bases and process
specifications, and shall fully cooperate with Pixel to establish alternative
supply, including sources of materials. Pixel may exercise its right to have
Superchips manufactured in accordance with this Section 6.6.2 through two third
party contract manufacturers subject to XLI's approval, not to be unreasonably
withheld; and provided that such third party manufacturers are subject to
confidentiality obligations which protect against the unauthorized use and
disclosure of XLI's Confidential Information.
6.6.2.3 Royalty. In the event that Pixel exercises
the Manufacturing License in accordance with this Section 6.6.2, Pixel agrees to
pay to XLI a XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX for each Combination Product sold
by Pixel, its Affiliates, Distributors or OEMs. Further in such event the terms
and conditions of Sections 5.2 through 5.7 shall apply mututis mutandis to such
payments.
6.7 Invoicing. XLI shall submit an invoice to Pixel upon shipment of
Superchips ordered by Pixel. All invoices shall be sent to Pixel's address for
notices hereunder, and each such invoice shall state Pixel's aggregate and unit
Price for Superchips in a given shipment, plus any insurance, taxes or other
costs incident to the purchase or shipment initially paid by XLI but to be borne
by Pixel hereunder.
6.8 Shipping, Title, Risk of Loss. XLI will ship in accordance with
Pixel's shipping instructions. In the absence of specific instructions, XLI
reserves the right to ship by the most appropriate method. Pixel is responsible
for all freight, handling, insurance and other transportation charges and agrees
to pay all such charges. For all shipments, title to the Superchip passes to
Pixel when presented by XLI or its agent to the carrier, from which point Pixel
is responsible for risk of all loss, damage to, or theft of all Superchips.
6.9 Returns. Units of Superchip received by Pixel as a result of an
error by XLI in shipment may be returned for credit. Units of the Superchip with
defects covered by the warranty may be returned for remedy under the warranty
set forth in Section 9.1.
6.10 Records; Inspection. XLI shall keep complete, true and accurate
books of account and records for the purpose of determining the Production Cost
for Superchips delivered to Pixel and its designees hereunder. Such books and
records shall be kept reasonably accessible for at least three (3) years
following the end of the calendar quarter to which they pertain. Such records
will be open for inspection during such three (3)-year period by a
representative or agent of Pixel for the purpose of verifying the royalty
statements. Pixel's representative or agent will be obliged to execute a
reasonable confidentiality agreement prior to commencing any such inspection.
Such inspections may be made no more than once each calendar year, at reasonable
times mutually agreed by XLI and Pixel. Pixel shall bear the costs and expenses
of inspections conducted under this Section 6.9, unless a variation or error
producing an overpayment in amounts payable exceeding ten percent (10%) of the
amount paid for the period covered by the inspection and any overpaid amounts
that are discovered shall be paid by XLI, together with interest on such unpaid
amounts at the rate specified in Section 7.2 below, to Pixel within thirty (30)
days after receipt of an invoice for the same. The parties will endeavor to
minimize disruption of XLI's normal business activities to the extent reasonably
practicable.
ARTICLE 7
PAYMENTS
7.1 Payment Method. All amounts payable under this Agreement
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shall be made by bank wire transfer in immediately available funds to an account
designated by XLI. All payments hereunder shall be made in U.S. dollars. Payment
for amounts invoiced pursuant to Section 6.7 above shall be made net thirty (30)
days after receipt of the invoice or Superchips invoiced therein, whichever is
later.
7.2 Taxes. The Price is to be exclusive of any tax, value-added tax,
fee, duty or governmental charge, however designated, which may be levied or
based on units of the Superchip, their sale, importation, use or possession. All
such taxes or duties shall be for the account of XLI and stated separately on
the invoice. Any withholdings or other taxes that must be withheld on behalf of
XLI with respect to amounts due to XLI pursuant to this Agreement shall be
deducted by Pixel from such amounts prior to remittance, unless XLI provides
Pixel with a valid tax exemption certificate authorized by the appropriate
taxing authority. Pixel shall furnish to XLI written evidence of any such taxes
withheld.
ARTICLE 8
SUPPORT
8.1 Support for Integrated ICs and Combined Products. The parties
acknowledge and agree that Pixel shall be responsible for providing all support
to its Distributors, End Users, OEMs and others with respect to the use and
implementation of the Integrated ICs and Combination Products.
8.2 Technical/Consulting Assistance. During the term of this Agreement,
upon reasonable notice and subject to reasonable availability, XLI shall provide
to Pixel, free of charge, up to One Hundred Twenty (120) hours of on-site
technical/consulting assistance relating to the use of or implementation of the
XLI Technology or Superchips, including the integration of the XLI Technology
into Integrated ICs and the Superchip into Combination products. XLI shall
provide additional technical/consulting assistance, as Pixel may reasonably
request and subject to XLI's reasonable availability, in excess of the One
Hundred Twenty (120) hours at the rate of $100.00 per hour. Without limiting the
foregoing, Pixel shall be responsible for all reasonable out-of-pocket expenses
incurred by XLI in providing technical/consulting assistance, including
reasonable equipment and materials costs and travel and lodging expenses.
8.3 Other Support. XLI shall, during the term of this Agreement,
provide to Pixel all necessary bug-fix maintenance and support for the XLI
Technology and Superchip provided hereunder. Maintenance and support shall
include, but not be limited to, phone, fax and e-mail support, all material
error and bug corrections, technical information and documentation necessary for
Pixel to integrate the XLI Technology into Integrated ICs and the Superchip into
Combination Products. Such maintenance and support shall be free of charge
during the first year of the Agreement and thereafter shall be subject to XLI's
standard terms and rates therefor.
8.4 Updates. XLI will provide Pixel Updates of the XLI Technology
during the term of this Agreement to the same extent that it provides them to
its other licensees.
8.5 No New Technology. Nothing in this Article 8 shall be deemed to
grant to Pixel a license or other rights in any technology or other intellectual
property of XLI except for the XLI Technology.
ARTICLE 9
WARRANTIES
9.1 Product Warranties. XLI warrants to Pixel that at the time of
delivery, and for one (1) year thereafter, the XLI Technology shall conform to
the Technology Specifications and the Superchips supplied by or on behalf of XLI
to Pixel or its designees hereunder will be free from defects in workmanship and
materials and shall conform to the Chip Specifications.
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9.1.1 Remedies.
9.1.1.1 Nonconforming Technology. In the event that
the XLI Technology fails to conform to the Technology Specifications, then Pixel
shall notify XLI in writing describing such nonconformity. XLI shall use its
best efforts to remedy such nonconformity within thirty (30) days and provide
Pixel XLI Technology which meets the Technology Specifications. If XLI is unable
to so provide Pixel with XLI Technology which meets the Technology
Specifications within such thirty (30) day period, Pixel may (i) extend such
period and XLI will continue to use its best efforts to remedy such
nonconformity during such extension or (ii) terminate its rights and licenses
hereunder with respect to the XLI Technology as set forth in Section 13.4.1
below.
9.1.1.2 Nonconforming Superchips. In the event that
any Superchip fails to conform to the Chip Specifications or contains defects in
workmanship or materials, then Pixel shall notify Pixel in writing describing
such nonconformity and/or defect and promptly return such
nonconforming/defective Superchip to the location designated by XLI and in
accordance with other reasonable instructions given by XLI. XLI shall either (i)
replace within fifteen (15) days at no charge to Pixel the nonconforming/
defective Superchip with a Superchip which conforms to the Chip Specifications
and is free of defects or (ii) refund to Pixel all amounts paid to XLI for such
nonconforming/defective Superchip and for shipping and insurance incurred in
returning such Superchip.
9.2 Representations and Warranties. XLI represents, warrants and
convenants that (i) the XLI Technology and the Superchip are the original work
and development of XLI and do not infringe on any patent, copyright, proprietary
right or trade secret of any other party; (ii) as of the Effective Date, no
action or proceeding alleging intellectual property infringement by the XLI
Technology or the Superchips has been threatened or is proceeding against XLI,
and XLI shall promptly notify Pixel in the event such action is initiated
against XLI; and (iii) XLI has the full power to enter into this Agreement, to
carry out its obligations hereunder and grant the rights and licenses granted to
Pixel pursuant to this Agreement.
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX.
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9.4 Exclusion of Other Warranties. EXCEPT FOR THE LIMITED WARRANTIES
PROVIDED IN THIS ARTICLE 9 ABOVE, NEITHER PARTY GRANTS TO THE OTHER ANY
WARRANTIES OR CONDITIONS OF ANY KIND, EXPRESS OR IMPLIED, BY STATUTE OR
OTHERWISE, REGARDING THE XLI TECHNOLOGY OR THE SUPERCHIPS, AND XLI SPECIFICALLY
DISCLAIMS ANY IMPLIED WARRANTIES OF FITNESS FOR ANY PURPOSE, MERCHANTABILITY,
AND NONINFRINGEMENT OF THIRD PARTY INTELLECTUAL PROPERTY RIGHTS.
ARTICLE 10
INDEMNIFICATION
10.1 Indemnification of Pixel. XLI shall indemnify each of Pixel, its
Affiliates, Distributors and their directors, officers, employees and customers
and the successors and assigns of any of the foregoing (the "Pixel
Indemnitees"), and hold each Pixel Indemnitee harmless from and against any and
all liabilities, damages, settlements, claims, actions, suits, penalties, fines,
costs or expenses (including, without limitation, reasonable attorneys' fees and
other expenses of litigation) incurred by any Pixel Indemnitee, arising from or
occurring as a result of: (i) claims brought by third parties alleging
infringement or misappropriation of any third party Intellectual Property Right
arising from the exercise of the rights and licenses granted by XLI hereunder
with respect to the XLI Technology or Superchips; or (ii) the gross negligence
or willful misconduct of XLI. Notwithstanding the foregoing, XLI will not have
any obligation under this Section 10.1 to the extent a claim is based upon (a)
use of other than a current unaltered release of the XLI Technology provided to
Pixel at no additional cost hereunder in accordance with this Agreement if such
infringement would have been avoided by use of the current unaltered release of
the XLI Technology, or (b) completed products or equipment or any assembly,
combination, method or process in which the XLI Technology or Superchip, as the
case may be, is used when the infringement would not result when the same are
used alone.
10.2 Indemnification of XLI. Pixel shall indemnify XLI and its
directors, officers, employees and customers and the successors and assigns of
any of the foregoing (the "XLI Indemnitees"), and hold each XLI Indemnitee
harmless from and against any and all liabilities, damages, settlements, claims,
actions, suits, penalties, fines, costs or expenses (including, without
limitation, reasonable attorneys' fees and other expenses of litigation)
incurred by any XLI Indemnitee, arising from or occurring as a result of the
gross negligence or willful misconduct of Pixel.
10.3 Procedure. A party (the "Indemnitee") that intends to claim
indemnification under this Article 10 shall promptly notify the other party (the
"Indemnitor") in writing of any loss, claim, damage, liability or action in
respect of which the Indemnitee intends to claim such indemnification, the
Indemnitor shall have sole control of the defense and/or settlement thereof. The
indemnity agreement in this Article 10 shall not apply to amounts paid in
settlement of any claim or other proceeding if such settlement is effected
without the consent of the Indemnitor, which consent shall not be unreasonably
withheld. The failure to deliver written notice to the Indemnitor within a
reasonable time after the commencement of any such action, if prejudicial to its
ability to defend such action, shall relieve such Indemnitor of any liability to
the Indemnitee under this Article 10 but the omission so to deliver written
notice to the Indemnitor shall not relieve the Indemnitor of any liability that
it may have to any Indemnitee otherwise than under this Article 10. The
Indemnitee under this Article 10 and its employees, shall cooperate fully with
the Indemnitor and its legal representatives and provide full information in the
investigation of any Claim covered by this indemnification.
ARTICLE 11
OWNERSHIP
Except as expressly licensed herein, as between the parties, XLI
retains all right, title and ownership interest in and to the XLI Technology,
the Superchip and all other modifications, derivative works, improvements,
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enhancements and new versions thereof developed by XLI, its employees, agents or
consultants and XLI shall retain any and all rights to file any patent
application thereon and Pixel shall have a nonexclusive, license under any
resulting patents without additional compensation. As between the parties, Pixel
retains all right, title and ownership interest in and to the Pixel ASIC and to
any modifications, improvements, enhancements and derivative works of the XLI
Technology created by Pixel during the term of this Agreement.
ARTICLE 12
CONFIDENTIALITY
12.1 Confidential Information. During the term of this Agreement and
for five (5) years thereafter, except as provided herein, each party shall
maintain in confidence, and shall not use for any purpose or disclose to any
third party, information disclosed by the other party in writing and marked
"Confidential" or that is disclosed orally and confirmed in writing as
confidential within fifteen (15) days following such disclosure (collectively,
"Confidential Information"). Confidential Information shall not include any
information that is: (i) already known to the receiving party at the time of
disclosure hereunder, or (ii) now or hereafter becomes publicly known other than
through acts or omissions of the receiving party, or (iii) is disclosed to the
receiving party by a third party under no obligation of confidentiality to the
disclosing party or (iv) independently developed by the receiving party.
12.2 Permitted Usage. Notwithstanding the provisions of Section 12.1
above, the receiving party may use or disclose Confidential Information of the
disclosing party to the extent necessary to exercise its rights hereunder
(including commercialization of Integrated ICs and Combination Products) or
fulfill its obligations and/or duties hereunder and in prosecuting or defending
litigation, complying with applicable governmental regulations and/or submitting
information to tax or other governmental authorities; provided that if the
receiving party is required by law to make any public disclosures of
Confidential Information of the disclosing party, to the extent it may legally
do so, it will give reasonable advance notice to the disclosing party of such
disclosure and will use its reasonable efforts to secure confidential treatment
of Confidential Information prior to its disclosure (whether through protective
orders or otherwise). A party receiving Confidential Information shall take the
same measures to prevent unauthorized disclosure and maintain the
confidentiality of such Confidential Information as it takes with respect to its
own confidential information of similar importance, but shall in no event take
less than reasonable measures.
ARTICLE 13
TERM AND TERMINATION
13.1 Term. This Agreement shall commence as of the Effective Date and
shall continue in full force and effect unless and until terminated as provided
in this Article 13 below.
13.2 Termination for Breach. In the event of a material breach of this
Agreement, the nonbreaching party shall be entitled to terminate this Agreement
by written notice to the breaching party, if such breach is not cured within
thirty (30) days after written notice is given by the nonbreaching party to the
breaching party specifying the breach. However, if the party alleged to be in
breach of this Agreement disputes such breach within such thirty (30) day period
by giving written notice thereof to the nonbreaching party, then the
nonbreaching party shall not have the right to terminate this Agreement unless
it has been determined by a court of competent jurisdiction that this Agreement
was materially breached, and the breaching party fails to comply with its
obligations hereunder within thirty (30) days after such determination.
13.3 Bankruptcy Proceedings. Either party hereto may terminate this
Agreement by notice to the other party, if (i) such other party shall make an
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assignment of substantially all of its assets for the benefit of creditors, file
a petition of bankruptcy, petitions or applies to any tribunal for the
appointment of a custodian, receiver or any trustee for such party or
substantially all of such party's assets, or shall commence any proceedings
under any dissolution or liquidation law or statute of any jurisdiction
(provided that no entity succeeds to the business of such party following such
dissolution or liquidation) whether now or hereafter in effect which is not
dismissed within sixty (60) days; or (ii) there shall have been filed any such
petition or application against such other party, or any such proceeding shall
have been commenced against such party, in which an order for relief is entered
or which remains undismissed for a period of ninety (90) days or more; or (iii)
such other party by an act or knowing failure to act shall indicate such party's
consent to, approval of or acquiescence in, any such petition, application or
proceeding or order for relief or the appointment of a custodian, receiver or
any trustee for such party, or any substantial part of any such party's
properties, or shall suffer any such custodianship, receivership or trusteeship
to continue undischarged for a period of ninety (90) days or more.
13.4 Termination by Pixel.
13.4.1 For Nonconforming Technology. In the event that the XLI
Technology fails to conform to the Technology Specifications and XLI is unable
to so provide Pixel with XLI Technology which meets the Technology
Specifications within thirty (30) days after receipt of notice of such
nonconformity or any extension thereof, Pixel may terminate its rights and
licenses under Section 3.1 above with respect to the XLI Technology effective
upon written notice to XLI. Within fifteen (15) days of termination of this
Agreement with respect to the XLI Technology, XLI shall refund to Pixel all
amounts paid pursuant to Section 2.1 above.
13.4.2 For Convenience. Notwithstanding anything herein to the
contrary, Pixel may terminate this Agreement, in its entirety or as to either
the XLI Technology or Superchip supply, at any time by giving XLI at least sixty
(60) days prior written notice. From and after the effective date of a
termination under this Section 13.4.2 with respect to XLI Technology, all of the
parties rights and obligations with respect to the XLI Technology shall
terminate, including without limitation the license granted under Section 3.1
above. From and after the effective date of a termination under this Section
13.4.2 with respect to Superchips, all of the parties rights and obligations
with respect to Superchips shall terminate, including without limitation Article
6 above. Upon a termination of this Agreement in its entirety under this Section
13.4.2, all rights and obligations of the parties shall terminate, except as
provided in Section 13.5 below.
13.5 Effect of Termination.
13.5.1 Accrued Obligations. Termination of this Agreement for
any reason shall not release any party thereto from any liability (including
without limitation royalties or other amounts due) which, at the time of such
termination, has already accrued to the other party or which is attributable to
a period prior to such termination, nor preclude either party from pursuing all
rights and remedies it may have hereunder or at law or in equity with respect to
any breach of this Agreement.
13.5.2 Inventory. In the event this Agreement is terminated
for any reason with respect to the XLI Technology or in its entirety, Pixel
shall provide XLI with a written inventory of all Integrated ICs that Pixel, its
Affiliates and Distributors have in process of manufacture, in use or in stock
and Pixel, its Affiliates and Distributors shall have the right to sell or
otherwise dispose of such Integrated ICs, all subject to the payment to XLI of
royalties pursuant to Article 5 hereof.
13.5.3 Return of Materials. All Confidential Information shall
remain the sole property of the disclosing party. Within thirty (30) days after
the effective date of termination of this Agreement, each party
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shall destroy all Confidential Information of other party, in its possession or
control and provide written certification of such destruction, or prepare such
Confidential Information for shipment to such other party, as the other party
may direct, at the other party's expense. Neither party shall make or retain any
copies of any Confidential Information of other party which may have been
entrusted to it; provided, however, each party may retain a single archive copy
of any Confidential Information solely for use by such party's legal advisors in
connection with review of its obligations hereunder.
13.5.4 Rights of Others. Notwithstanding anything herein to
the contrary, after termination of this Agreement for any reason, End Users and
OEMs shall have the right to continue to their use or other exploitation of any
and all Integrated ICs, and Superchips acquired, directly or indirectly, from
Pixel in accordance with this Agreement.
13.6 Survival. Articles 1, 10, 12, 13, 14 and 15 and Sections 5.7 and
6.10 shall survive termination of this Agreement for any reason.
ARTICLE 14
LIMITATION OF LIABILITY
EXCEPT WITH RESPECT TO A BREACH OF SECTION 9.3, ARTICLE 12 OR LIABILITY
ARISING OUT OF ARTICLE 10, IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER
OR ANY THIRD PARTY FOR COSTS OF PROCUREMENT OF SUBSTITUTE GOODS, LOST PROFITS,
OR ANY OTHER SPECIAL, CONSEQUENTIAL, OR INCIDENTAL DAMAGES, HOWEVER CAUSED AND
UNDER ANY THEORY OF LIABILITY ARISING OUT OF THIS AGREEMENT WHETHER BASED IN
CONTRACT, TORT (INCLUDING NEGLIGENCE), OR OTHERWISE. THESE LIMITATIONS SHALL
APPLY WHETHER OR NOT A PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES
AND NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY
PROVIDED HEREIN.
ARTICLE 15
MISCELLANEOUS
15.1 Governing Law. This Agreement and any dispute arising from the
performance or breach hereof shall be governed by and construed and enforced in
accordance with, the laws of the Commonwealth of Massachusetts, without
reference to conflicts of laws principles and without regard to the 1980
Convention on the International Sale of Goods.
15.2 Disputes. If XLI and Pixel are unable to resolve any disputes
between them, either XLI or Pixel may, by written notice to the other, have such
dispute referred to the chief executive officers (or equivalent) of XLI and
Pixel, for attempted resolution by good faith negotiations within twenty-one
(21) days after such notice is received. Unless otherwise mutually agreed, the
negotiations between the designated officers shall be conducted by telephone,
within three (3) days and at times within the period stated above offered by the
designated officers of Pixel to the designated officer of XLI for consideration
or vice versa. If the parties are unable to resolve such dispute in accordance
with the aforementioned procedure or within such twenty-one (21)-day period, the
parties shall submit their dispute to an independent mediator for one nonbinding
mediation session. After such nonbinding mediation session, either party shall
have the right to pursue any and all other remedies available to such party.
15.3 Force Majeure. Nonperformance of any party (except for payment
obligations) shall be excused to the extent that performance is rendered
impossible by strike, fire, earthquake, flood, governmental acts or orders or
restrictions, delay or failure of suppliers, or any other reason where failure
to perform is beyond the reasonable control and not caused by the gross
negligence or willful misconduct of the nonperforming party.
15.4 No Implied Waivers; Rights Cumulative. No failure on the
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part of XLI or Pixel to exercise and no delay in exercising any right under this
Agreement, or provided by statute or at law or in equity or otherwise, shall
impair, prejudice or constitute a waiver of any such right, nor shall any
partial exercise of any such right preclude any other or further exercise
thereof or the exercise of any other right.
15.5 Independent Contractors. The relationship of XLI and Pixel
established by this Agreement is that of independent contractors. Nothing in
this Agreement shall be construed to create any other relationship between XLI
and Pixel. Neither party shall have any right, power or authority to assume,
create or incur any expense, liability or obligation, express or implied, on
behalf of the other.
15.6 Notices. All notices, requests and other communications hereunder
shall be in writing and shall be (i) personally delivered or (ii) send by
registered or certified mail, return receipt requested, postage prepaid or (iii)
by fax confirmed by notice send by either (i) or (ii), in each case to the
respective address or fax number specified below, or such other address or fax
number as may be specified in writing to the other parties hereto:
Pixel: Pixel Magic, Inc.
300 Brickstone Square
Andover, MA 01810
Attn: Peter Besen
Fax: (508) 470-8892
with copy to: Oak Technology, Inc.
139 Kifer Court
Sunnyvale, CA 94068
Attn: General Counsel
Fax: (408) 774-5337
XLI: Xerographic Laser Images Corporation
101 Billerica Avenue
5 Billerica Park
North Billerica, MA 01862
Attn: Anthony D'Amelio
Fax: (978) 670-8835
with copy to: Warner & Stackpole
75 State St.
Boston, MA 02109
Attn: Michael Hickey
Fax: (617) 951-9151
15.7 Assignment. Neither party's rights or obligations under this
Agreement may be assigned or otherwise transferred to a third party without the
prior written consent of the other party hereto. Notwithstanding the foregoing,
either party hereto may transfer or assign its rights and obligations under this
Agreement to a successor to all or substantially all of its business or assets
relating to this Agreement whether by sale, merger, operation of law or
otherwise; provided that such assignee or transferee agrees in writing to be
bound by the terms and conditions of this Agreement. Any attempted assignment or
other transfer in violation of this Section 15.7 shall be void. Subject to the
foregoing, this Agreement shall be binding upon and inure to the benefit of the
parties hereto, their successors and assigns.
15.8 Modification. No amendment or modification of any provision of
this Agreement shall be effective unless in writing signed by all parties
hereto. No provision of this Agreement shall be varied, contradicted or
explained by any oral agreement, course of dealing or performance or any other
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matter not set forth in an agreement in writing and signed by all parties.
15.9 Severability. If any provision hereof should be held invalid,
illegal or unenforceable in any jurisdiction, all other provisions hereof shall
remain in full force and effect in such jurisdiction and shall be liberally
construed in order to carry out the intentions of the parties hereto as nearly
as may be possible. Such invalidity, illegality or unenforceability shall not
affect the validity, legality or enforceability of such provision in any other
jurisdiction.
15.10 Confidential Terms. Except as expressly provided herein, each
party agrees not to disclose any terms of this Agreement to any third party
without the consent of the other party, except as required by securities or
other applicable laws, and to such party's accountants, attorneys and other
professional advisors.
15.11 Headings. Headings used herein are for convenience only and shall
not in any way affect the construction of or be taken into consideration in
interpreting this Agreement.
15.12 Export Laws. Notwithstanding anything to the contrary contained
herein, all obligations of XLI and Pixel are subject to prior compliance with
United States export regulations and such other United States laws and
regulations as may be applicable, and to obtaining all necessary approvals
required by the applicable agencies of the government of the United States. XLI
and Pixel shall cooperate with each other and shall provide assistance to the
other as reasonably necessary to obtain any required approvals.
15.13 Entire Agreement. This Agreement, including the Exhibits attached
hereto, constitutes the entire agreement with respect to the subject mater
hereof, and supersedes all prior or contemporaneous understandings or
agreements, whether written or oral, between XLI and Pixel with respect to such
subject matter.
15.14 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, and all of which
together, shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
dully executed and delivered effective as of the Effective Date.
XEROGRAPHIC LASER IMAGES PIXEL MAGIC, INC.
CORPORATION
("XLI") ("Pixel")
By: /S/Anthony D. D'Amelio By: /S/ Peter Besen
------------------------ -------------------------
Name: A. D. D'Amelio Name: Peter Besen
------------------------ -------------------------
Title: President & CEO Title: President
------------------------ -------------------------
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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
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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.
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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
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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.
9
<PAGE> 179
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> 180
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> 181
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.
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<PAGE> 182
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> 183
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.
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<PAGE> 184
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> 185
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> 186
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
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$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%
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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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<PAGE> 189
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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<PAGE> 191
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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<PAGE> 192
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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<PAGE> 193
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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<PAGE> 194
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> 195
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
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<PAGE> 196
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.
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<PAGE> 197
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.
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<PAGE> 198
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> 199
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> 200
<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> 201
<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> 202
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> 203
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> 204
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> 205
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> 206
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> 207
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> 208
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> 209
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> 210
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> 211
(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> 212
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> 213
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> 214
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> 215
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> 216
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> 217
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> 218
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> 219
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> 220
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> 221
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> 222
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> 223
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> 224
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> 225
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> 226
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> 227
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> 228
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
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 September 30, 1997, there were outstanding 41,745,450 shares of the
Registrant's Common Stock, par value $0.001 per share.
<PAGE> 229
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Part I - Financial Information Page
Item 1. Financial Statements
<S> <C> <C>
Consolidated Balance Sheets as of September 30, 1997
and June 30, 1997.......................................................... 3
Consolidated Statements of Operations for the
Three Months ended September 30, 1997 and 1996............................. 4
Consolidated Statements of Cash Flows for the
Three Months Ended September 30, 1997 and 1996............................. 5
Notes to Consolidated Financial Statements................................. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............................. 11
Part II - Other Information
Item 1. Legal Proceedings.......................................................... 23
Item 2. Changes in Securities and Use of Proceeds.................................. 24
Item 6. Exhibits and Reports on Form 8-K........................................... 25
Signatures ........................................................................... 29
- ----------
Exhibit Index ........................................................................... 30
- -------------
</TABLE>
2
<PAGE> 230
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
ASSETS
<TABLE>
<CAPTION>
September 30, June 30,
1997 1997
------------- --------
<S> <C> <C>
Current assets: (Unaudited)
Cash and cash equivalents ..................................... $ 91,440 $ 87,609
Short-term investments ........................................ 55,349 57,660
Accounts receivable, net of allowance for doubtful accounts of
$663 and $663, respectively ................................. 27,002 24,872
Inventories ................................................... 10,520 12,322
Current portion of foundry deposits ........................... 15,415 15,015
Deferred tax asset ............................................ 4,350 4,350
Prepaid expenses and other current assets ..................... 4,434 4,107
-------- --------
Total current assets ........................................ 208,510 205,935
Property and equipment, net ...................................... 22,597 19,958
Foundry deposits ................................................. 18,745 19,145
Investment in foundry venture .................................... 39,618 39,618
Other assets ..................................................... 2,956 2,939
-------- --------
Total assets ................................................ $292,426 $287,595
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt ........... $ 6,619 $ 7,264
Accounts payable .............................................. 14,569 16,144
Accrued expenses .............................................. 8,582 9,882
Income taxes payable .......................................... 6,660 3,893
Deferred revenue .............................................. 532 584
-------- --------
Total current liabilities ................................... 36,962 37,767
Long-term debt ................................................... 2,400 2,496
Deferred income taxes ............................................ 4,151 6,344
Other long-term liabilities ...................................... 2,265 2,291
-------- --------
Total liabilities ........................................... 45,778 48,898
-------- --------
Stockholders' equity:
Preferred stock, $0.001 par value; 2,000,000 shares authorized;
none issued and outstanding as of September 30, 1997 and
June 30, 1997 ............................................. -- --
Common stock, $0.001 par value; 60,000,000 shares authorized;
41,745,450 and 41,086,754 shares issued and outstanding as of
September 30, 1997 and June 30, 1997, respectively .......... 42 41
Additional paid-in capital .................................... 161,658 159,901
Retained earnings ............................................. 84,948 78,755
-------- --------
Total stockholders' equity .................................. 246,648 238,697
-------- --------
Total liabilities and stockholders' equity .................. $292,426 $287,595
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 231
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------
1997 1996
-------- --------
<S> <C> <C>
Net revenues ....................................... $ 43,293 $ 18,926
Cost of revenues ................................... 20,755 10,216
-------- --------
Gross profit .................................. 22,538 8,710
Research and development expenses .................. 10,831 8,094
Selling, general and administrative expenses ....... 6,311 4,293
-------- --------
Operating income (loss) ....................... 5,396 (3,677)
Nonoperating income ................................ 4,131 1,134
-------- --------
Income (loss) before income taxes ............. 9,527 (2,543)
Income taxes (benefit) ............................. 3,334 (890)
-------- --------
Net income (loss) ............................. $ 6,193 $ (1,653)
======== ========
Net income (loss) per share ........................ $ 0.15 $ (0.04)
======== ========
Shares used in computing net income (loss) per share 42,569 40,297
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 232
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) .............................................. $ 6,193 $ (1,653)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ................................ 1,577 1,273
Inventory related adjustments ................................ 1,077 (1,990)
Equity in loss of unconsolidated affiliates .................. -- 119
Deferred income taxes ........................................ (2,193) (1,146)
Changes in operating assets and liabilities:
Accounts receivable ........................................ (2,130) 4,908
Inventories ................................................ 725 4,726
Prepaid expenses and other current assets .................. (429) 534
Accounts payable and accrued expenses ...................... (2,875) (2,018)
Income taxes payable, deferred revenue and other liabilities 3,016 312
-------- --------
Net cash provided by operating activities ................ 4,961 5,065
-------- --------
Cash flows from investing activities:
Purchases of short-term investments .......................... (21,401) (11,340)
Proceeds from matured short-term investments ................. 23,712 10,182
Additions to property and equipment, net ..................... (4,131) (1,336)
Utilization of foundry deposits .............................. -- 934
Other assets ................................................. -- (21)
-------- --------
Net cash used in investing activities .................... (1,820) (1,581)
-------- --------
Cash flows from financing activities:
Issuance of debt ............................................... 1,551 10,362
Repayment of debt .............................................. (2,292) (12,409)
Issuance of common stock, net .................................. 1,431 480
-------- --------
Net cash provided by (used in) financing activities ........ 690 (1,567)
-------- --------
Net increase in cash and cash equivalents ......................... 3,831 1,917
Cash and cash equivalents, beginning of period .................... 87,609 44,934
-------- --------
Cash and cash equivalents, end of period .......................... $ 91,440 $ 46,851
======== ========
Supplemental information:
Cash paid during the period:
Interest ..................................................... $ 90 $ 107
======== ========
Income taxes ................................................. $ 2,322 $ 20
======== ========
Noncash investing and financing activities:
Benefit related to stock plans ................................. $ 327 $ 281
======== ========
Adjustment to foundry commitments .............................. $ -- $(14,400)
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 233
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. EQUITY AND NET INCOME PER SHARE
Net income per share has been computed using the weighted average number of
shares of common stock and dilutive common equivalent shares from stock options
and warrants outstanding (using the treasury stock method).
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards 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 and that diluted EPS will not
differ materially from fully diluted earnings per share as presented in the
accompanying consolidated financial statements.
3. INVENTORIES
Inventories are stated at the lower of cost (first in, first out) or market
and consisted of the following (in thousands):
September 30, June 30,
1997 1997
------- -------
Purchased parts and work in process.. $ 4,226 $ 5,521
Finished goods ...................... 6,294 6,801
------- -------
$10,520 $12,322
======= =======
6
<PAGE> 234
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
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.
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.
7
<PAGE> 235
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
4. CONTINGENCIES (CONTINUED)
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.
5. 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 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 to date through a certain committed amount of wafer
purchases in the years 1997, 1998, and 1999 or a portion of the prepayment will
be forfeited. 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 $34.2 million as of September
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.
8
<PAGE> 236
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
5. FOUNDRY AGREEMENTS AND INVESTMENT IN FOUNDRY VENTURE (CONTINUED)
Investment in Foundry Venture
In October 1995, the Company entered into a series of agreements with
United Microelectronics Corporation ("UMC") to form, along with other investors,
a separate Taiwanese company, United Integrated Circuits Corporation ("UICC"),
for the purpose of building and managing a semiconductor manufacturing facility
in the Science Based Industrial Park in Hsin Chu City, Taiwan, Republic of
China. 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 under this agreement of approximately $11.3
million, based on current exchange rates, is due during the quarter ended
December 31, 1997. The Company has entered into a forward contract which is
effectively a hedge against the final payment. If for any reason the Company
does not make all or a portion of this final payment, a loss may have to be
recognized upon settlement of the forward contract during the quarter ended
December 31, 1997. Investment in the foundry venture was approximately $39.6
million as of September 30, 1997. Upon completion of the final payment of
approximately $11.3 million, the Company expects to have invested a total of
approximately $51 million for 9.3% of the total available shares of the venture.
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. 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.
On October 3, 1997, a fire damaged the UICC facility causing an
undetermined amount of damage to the manufacturing equipment and to the
building. Representations by UICC management indicate that all of the equipment
and a significant portion of the building were completely destroyed. UICC
management and it's insurance carrier are in the process of determining whether
the losses are covered by insurance, and therefore, at this time, no assurance
can be given that the losses are covered by insurance. Any uninsured losses
recorded by UICC as a result of the fire would have a significant impact on the
value of the investment and could have a material adverse effect on the
Company's business, operating results and financial condition. No charge to
reflect any impairment of the investment has been recorded as of September 30,
1997. 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, however there can be no assurance that
such substitute foundry capacity will be available to the Company. 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.
9
<PAGE> 237
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
6. SETTLEMENT AWARDS
In September 1997, the Company received $2.6 million pursuant to a
Settlement Agreement entered into on July 31, 1997 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 based on the
Company's belief that certain CD-ROM controllers infringed one or more of the
Company's patents. Proceeds from this settlement were recorded as miscellaneous
income and are included in nonoperating income for the period ended September
30, 1997.
10
<PAGE> 238
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Except for the historical financial information contained herein, the matters
discussed in this Quarterly Report on Form 10-Q may be considered
"forward-looking" statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as
amended. Such statements include declarations regarding the intent, belief or
current expectations of the Company and its management. Prospective investors
are cautioned that any such forward-looking statements are not guarantees of
future performance and involve a number of risks and uncertainties. Actual
results could differ materially from those indicated by such forward-looking
statements. Among the important factors that could cause actual results to
differ materially from those indicated by such forward-looking statements are:
(i) that the information is of a preliminary nature and may be subject to
further adjustment, (ii) variability in the Company's quarterly operating
results, (iii) general conditions in the semiconductor industry, (iv) risks
related to pending legal proceedings, (v) development by competitors of new or
superior products or the entry of new competitors into the Company's markets,
(vi) the Company's ability to diversify its product and market base by
developing and introducing new products within designated market windows at
competitive price and performance levels, (vii) willingness of prospective
customers to design the Company's products into their products, (viii)
availability of adequate foundry capacity and access to process technologies,
(ix) the Company's ability to protect its proprietary information and obtain
adequate licenses of third party technology on acceptable terms, (x) risks
related to use of independent manufacturers and third party assembly and test
vendors, (xi) dependence on key personnel, (xii) reliance on a limited number of
large customers, (xiii) dependence on sales of CD-ROM controller products, (xiv)
risks related to international business operations, (xv) ability of the Company
to maintain adequate price levels and margins with respect to its products,
(xvi) management of changing operations related to the Company's attempt to
diversify its product and market base, (xvii) current dependence on sales to the
Asian markets, (xviii) the ability to attract and retain qualified management
and technical personnel and (xix) other risks identified from time to time in
the Company's reports and registration statements filed with the Securities and
Exchange Commission, including the Annual Report on Form 10-K for the year ended
June 30, 1997.
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 pursuant to its agreements with TSMC and Chartered, the
Company's foundries generally are not obligated to supply products to the
Company for any specific period, in any specific quantity or at a specific
price.
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THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
Net Revenues. The Company's net revenues in the comparison periods were
primarily derived from sales of its CD-ROM controller products which comprised
86% and 77% of the Company's net revenues in the three months ended September
30, 1997 and 1996 respectively. Net revenues increased 129% to $43.3 million in
the three months ended September 30, 1997 from $18.9 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 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 speed drives to 6x and 8x speed drives.
Although the Company is attempting to diversify its revenue product base, 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 and a maturation of the CD-ROM controller market, the Company does
not anticipate year over year growth to continue at the same rate in the
foreseeable future. In the three months ended September 30, 1997 and 1996, sales
to the Company's top ten customers accounted for approximately 82% and 79%,
respectively, of the Company's net revenues. International sales, principally to
Taiwan, Japan, Korea and Singapore, accounted for approximately 96% and 92% of
the Company's net revenues in each of the three months ended September 30, 1997
and 1996, respectively. See "Factors That May Affect Future Results" below.
Gross Margin. Cost of revenues includes the cost of wafer fabrication,
assembly and testing performed by third-party vendors and direct and indirect
costs associated with the procurement, scheduling and quality assurance
functions performed by the Company. The Company's gross margin increased to
52.1% in the three month period ended September 30, 1997 as compared to 46.0%
during the comparable period in the prior year. Gross margin in the three month
period ended September 30, 1996 included the impact of a favorable manufacturing
cost adjustment of $1.5 million. Excluding the effect of this adjustment, gross
margin would have been 38.1%. The increase in gross margin, during the
comparison periods, is primarily the result of a product mix shift to higher
margin CD-ROM controllers during the comparison periods. The Company's overall
gross margin is subject to change due to various factors, including, among
others, competitive product pricing, yields, wafer costs, assembly and test
costs and product mix. The Company expects that ASPs for its existing products
will continue to decline over time and that ASPs for each new product will
decline significantly over the life of the product. The Company 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 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
adversely affect the Company's operating results. In addition, the Company
believes that gross margins for new products in all of its core technologies
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 34% to $10.8
million in the three months ended September 30, 1997 from $8.1 million in the
comparable period in the prior year. This increase was principally the result of
the hiring of additional technical personnel and associated
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expenses. Research and development expenses decreased as a percentage of net
revenues to 25.0% during the three months ended September 30, 1997 from 42.8% in
the comparable period in the prior year due primarily to the significant
increase in the Company's net revenues in the current period compared to the
comparable period of fiscal 1997. 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 diversify its product development in its other
core technologies: video/graphics, MPEG imaging, audio/communication and digital
imaging. As a result, the Company expects to incur higher absolute research and
development expenses in the remainder of fiscal 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 47% to $6.3 million in the three months ended
September 30, 1997 from $4.3 million in the comparable period in the prior year.
This increase was principally the result of the hiring of additional management
and administrative personnel and associated expenses. Selling, general and
administrative expenses decreased as a percentage of net revenues to 14.6% in
the three months ended September 30, 1997 from 22.7% during the comparable
period in fiscal 1997, due primarily to a significant increase in the Company's
net revenues in the comparison periods. As a result of the continuing efforts to
develop the Company's support infrastructure and hire additional senior
management personnel, the Company expects to incur higher absolute selling,
general and administrative expenses in the remainder of fiscal 1998.
Nonoperating Income. During the three months ended September 30, 1997,
nonoperating income increased to $4.1 million from $1.1 million during the
comparable three months of fiscal 1997. This increase was primarily the result
of the receipt of approximately $2.6 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 three months ended
September 30, 1997 as well as the comparable period of fiscal 1997 was 35.0%.
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 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
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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.
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
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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 Company's customers products, the number and nature of the
Company's competitors in a given market, the assertion of intellectual property
rights and general market and economic conditions. 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 products and markets. 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, twenty-two 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 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 States and thus make the possibility of piracy of the
Company's technology and products more likely. On July 21, 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
(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.
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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. 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 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 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. 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 recent 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
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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 86% and 77%
of the Company's net revenues in the three months ended September 30, 1997 and
1996, 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 associated with the PC market. In addition, given the
continued maturation of the CD-ROM controller market, the Company will continue
to experience increased price pressure for such products. In addition, there can
be no assurance that the Company will be able to sustain the current level of
such product sales or current operating margins. 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. It is anticipated that the introduction of DVD-ROM drives will
impact the demand for CD-ROM controller products. 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 Taiwan, Japan, Korea and Singapore,
accounted for approximately 96% and 92% of the Company's net revenues in each of
the three months ended September 30, 1997 and 1996, respectively. A substantial
portion of the Company's international revenues in the comparison periods were
derived from Japanese, Taiwanese and 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
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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. 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 results of operations 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 the three months ended
September 30, 1997 and 1996, sales to the Company's top ten customers accounted
for approximately 82% and 79%, 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.
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 three years, computer systems
and/or software used by many companies may need to be upgraded to comply with
such "Year 2000" requirements. The Company has no way of determining whether its
customers will be affected by these Year 2000 requirements. Therefore, the
Company can give no assurance that the Year 2000 will not result in a material
adverse effect on the Company's business, operating results and financial
condition.
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LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its cash requirements
from cash generated from operations, the sale of equity securities, bank lines
of credit and long-term and short-term debt. The Company's principal sources of
liquidity as of September 30, 1997 consisted of approximately $146.8 million in
cash, cash equivalents and short-term investments, approximately $25.0 million
in lines of credit with two Japanese financial institutions, of which $19.2
million was available as of September 30, 1997 and approximately $12.6 million
in lines of letters of credit with Taiwanese financial institutions of which
approximately $11.0 million was available as September 30, 1997.
During the three months ended September 30, 1997, operating activities
provided net cash of approximately $5.0 million. This cash resulted primarily
from net income of $6.2 million and non-cash adjustments to net income of $0.5
million, partially offset by net changes in operating assets and liabilities of
$1.7 million. Net income includes the impact of the receipt of approximately
$2.6 million recorded during the three months ended September 30, 1997 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. Investing and financing
activities utilized cash of approximately $1.1 million consisting primarily of
purchases of property and equipment of $4.1 million and net repayment of debt of
$0.7 million, partially offset by net proceeds from matured short term
investments of $2.3 million and proceeds from issuance of common stock of $1.4
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 $8.3 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. 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 to date through a certain committed amount of wafer
purchases in the years 1997, 1998, and 1999 or a portion of the prepayment will
be forfeited. 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.
20
<PAGE> 248
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 $34.2 million as of
September 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 ("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. 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 under this agreement of approximately $11.3
million, based on current exchange rates, is due during the quarter ended
December 31, 1997. The Company has entered into a forward contract which is
effectively a hedge against the final payment. If for any reason the Company
does not make all or a portion of this final payment, a loss may have to be
recognized upon settlement of the forward contract during the quarter ended
December 31, 1997. Investment in the foundry venture was approximately $39.6
million as of September 30, 1997. Upon completion of the final payment of
approximately $11.3 million, the Company expects to have invested a total of
approximately $51 million for 9.3% of the total available shares of the venture.
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,
due to the recent fire in the UICC foundry in which the Company has invested,
the Company will be unable to utilize its guaranteed capacity until sometime in
the future, if at all. 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, however there can be no
assurance that such substitute foundry capacity will be available to the
Company. 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.
21
<PAGE> 249
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.
22
<PAGE> 250
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.
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.
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.
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
23
<PAGE> 251
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 1998. In connection with this legal proceeding, the
Company expects to incur substantial legal and other expenses.
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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(d) Pursuant to Item 701 of Regulation S-K, during the period 5/14/97
(the date of the Company's Form SR previously filed) through 9/30/97, the
Company used proceeds from the sale of securities from its initial public
offering (Registration number 2-87518, effective 2/13/95) as follows:
$510,823 payment to others relating to research and development.
The Company has now completely used all the proceeds from the offering.
24
<PAGE> 252
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>
25
<PAGE> 253
<TABLE>
<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**
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)
</TABLE>
26
<PAGE> 254
<TABLE>
<S> <C>
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)**
11.01 Statement regarding computation of net income (loss)
per share
24.01 Power of Attorney (see page 55 of this Form 10-K)
</TABLE>
27.01 Financial Data Schedule
- ---------------------------
(1) Incorporated herein by reference to exhibit 3.01 of the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996.
(2) Incorporated herein by reference to exhibit 3.05 filed with the
Company's Registration Statement on Form S-1 (File No. 33-87518)
declared effective by the Securities and Exchange Commission on
February 13, 1995 (the "February 1995 Form S-1").
(3) Incorporated herein by reference to the exhibit with the same number
filed with the February 1995 Form S-1.
(4) Incorporated herein by reference to Exhibit 10.1 filed with the
Company's Registration Statement on Form S-8 (File No. 333-4334) on May
2, 1996.
(5) Incorporated herein by reference to the exhibit with the same number
filed with the Company's Annual Report on Form 10-K for the year ended
June 30, 1996.
(6) Incorporated herein by reference to Exhibit 2.1 filed with the
Company's Form 8-K dated October 2, 1995 (the "October 1995 Form 8-K").
(7) Incorporated herein by reference to Exhibit 2.2 filed with the October
1995 Form 8-K.
(8) Incorporated herein by reference to Exhibit 2.3 filed with the October
1995 Form 8-K.
(9) Incorporated herein by reference to Exhibit 10.08 filed with the
Company's Annual Report on Form 10-K for the year ended June 30, 1995.
(10) Incorporated herein by reference to Exhibit 10.08 filed with the
Company's Annual Report on Form 10-K for the year ended June 30, 1996.
(11) Incorporated herein by reference to Exhibit 10.04 filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended December
31, 1995.
(12) Confidential treatment has been granted with respect to portions of
this exhibit.
(13) Incorporated herein by reference to Exhibit 10.17 filed with the
Company's Annual Report on Form 10-K for the year ended June 30, 1996.
(14) Incorporated herein by reference to the exhibit with the same number
filed with the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996.
(15) Incorporated herein by reference to the exhibit with the same number
filed with the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1997.
(16) Incorporated herein by reference to the exhibit with the same number
filed with the Company's Annual Report on Form 10-K for the year ended
June 30, 1997.
- ---------------------------
* Indicates Management incentive plan.
** Confidential treatment granted and/or requested as to portions of the
exhibit.
27
<PAGE> 255
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended September 30, 1997.
28
<PAGE> 256
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OAK TECHNOLOGY, INC.
(Registrant)
Date: November 11, 1997
/S/ SIDNEY S. FAULKNER
-----------------------
Sidney S. Faulkner
Vice President, Finance,
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
29
<PAGE> 257
EXHIBIT INDEX
Exhibit
Number Exhibit Title
------ -------------
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**
11.01 Statement regarding computation of net
income (loss)per share
27.01 Financial Data Schedule
---------
30
<PAGE> 258
EXHIBIT 11.01
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF NET INCOME (LOSS) PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------
1997 1996
-------- --------
<S> <C> <C>
Statement of operations data:
Net income (loss) .................................... $ 6,193 $ (1,653)
======== ========
Weighted average number of common and
dilutive common equivalent shares used
in computations:
Common stock ......................................
41,321 40,297
Stock options and other common stock equivalents... 1,248 --
-------- --------
Shares used in computing net income (loss) per share ..... 42,569 40,297
======== ========
Net income (loss) per share (1) .......................... $ 0.15 $ (0.04)
======== ========
</TABLE>
(1) The difference between the primary and fully diluted shares used in
computing net income (loss) per share is not material.
<PAGE> 259
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
JANUARY 22, 1998
Date of Report (Date of earliest event reported)
OAK TECHNOLOGY, INC.
(Exact name of registrant as specified in charter)
DELAWARE 0-25298 77-0161486
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
139 KIFER COURT, SUNNYVALE, CALIFORNIA 94086
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 737-0888
N/A
(Former name or former address, if changed since last report.)
<PAGE> 260
Item 5. Other Events.
On January 22, 1998, the Registrant issued a press release announcing
simultaneously with releasing its fiscal second quarter results that it has
decided to focus its resources on its three core markets: Optical Storage,
Consumer Electronics, and Digital Office Equipment and therefore, will divest
its graphics and audio businesses. The Registrant also announced that Mr.
Richard Black will join the executive management team as president, and that it
had added Mr. Young Sohn, president of Quantum Corporation's Enterprise and
Personal Storage Group, to its Board of Directors. Furthermore the Registrant
announced that its Board of Directors approved a stock repurchase plan
authorizing the purchase of up to two million shares of the Registrant's Common
Stock.
Item 7. Exhibits.
A copy of the Registrant's press release announcing its fiscal second
quarter results, its decision to focus on its three core markets, the election
of a new president and a new member to its Board or Directors, and the
authorization of its stock repurchase plan is attached hereto as Exhibit 99.1
and incorporated herein by reference.
<PAGE> 261
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 hereunto duly authorized.
OAK TECHNOLOGY, INC.
--------------------
(Registrant)
Date: January 28, 1998 By /s/ Sidney S. Faulkner
------------------------
Name: Sidney S. Faulkner
Title: Vice President, Finance
Chief Financial Officer and Secretary
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
<PAGE> 262
INDEX TO EXHIBITS
Exhibit No. Description Page
----------- ----------- ----
99.1 Press Release disseminated January 22, 1998.
<PAGE> 263
PRESS RELEASE
CONTACTS:
INVESTOR RELATIONS EDITORIAL
Supriya Venkat Jonathan Bloom
Oak Technology, Inc. McGrath/Power Public Relations
(408) 328-6899 (408) 727-0351
[email protected] [email protected]
OAK TECHNOLOGY ANNOUNCES Q2'98 RESULTS AND BUSINESS UNIT
RESTRUCTURING
- COMPANY TO FOCUS ON THREE CORE MARKETS AND DIVEST ITS INTERESTS
IN PC AUDIO AND GRAPHICS
- NEW PRESIDENT AND NEW ADDITION TO BOARD OF DIRECTORS
- UP TO TWO MILLION SHARE STOCK REPURCHASE AUTHORIZED
Sunnyvale, Calif. - January 22, 1998 - Simultaneously with releasing its fiscal
second quarter results, Oak Technology (NASDAQ: OAKT) today announced that it
would refocus its efforts by concentrating on three core markets: Optical
Storage, Consumer Electronics and Digital Office Equipment and therefore, will
divest its graphics and audio businesses. The Company also announced that it
has elected a new president and a new member to its Board of Directors.
Furthermore, the Company announced its Board of Directors has authorized the
repurchase of up to two million shares of its Common Stock.
RESULTS FOR Q2 '98
The Company today reported results for the second fiscal quarter of 1998
ending December 31, 1997. Net sales for the quarter were $49.4 million, an
increase of 4 percent over the second fiscal quarter of 1997 net sales of
$47.6 million. Net income of $7.6 million compares to net income of $13.2
million in the comparable period of fiscal 1997. Diluted net income per
share of $0.18 compares with net income of $0.31 per diluted share in the
second quarter of fiscal 1997. Net income for the quarter ending December
31, 1997 includes non-operating income of approximately $4.8 million or $0.07
per diluted share net of taxes, resulting from a favorable legal settlement.
Net income for the second quarter of fiscal 1997 includes the impact of
favorable inventory-related adjustments of approximately $14.5 million to
cost of revenues.
<PAGE> 264
OAK ANNOUNCES Q2 '98 RESULTS AND BUSINESS RESTRUCTURING-2
The Optical Storage business continued to account for the largest portion of
Oak's business, representing approximately 80 percent of the Company's revenues
during the fiscal second quarter. The business continues to experience pressure
from new competitors entering the market, pressure from the sub-$1000 PC segment
for lower-cost components, and the effects of a strong dollar versus Asian
currencies. Due to these factors as well as lower PC unit demand after the
holiday season, the company expects it may incur a loss from operations in the
March quarter.
FOCUS ON THREE CORE MARKETS; DIVESTITURE OF PC AUDIO AND GRAPHICS INTERESTS
The Company has made a strategic decision to focus all its resources on its
three core markets: Optical Storage, Consumer Electronics, and Digital Office
Equipment. As a result of this decision, the Company plans to divest its
interests in PC audio and graphics.
"In order to extend our leadership positions in the Optical Storage and
Digital Office Equipment markets and expand our presence in the Consumer
Electronics market, we have decided to focus all of our resources on these
strategically important core markets," stated David D. Tsang, chairman and chief
executive officer of Oak Technology. "For our PC audio and graphics divisions,
we are actively seeking interested parties that can leverage these businesses
with their own to achieve maximum value," further stated Tsang.
"Our PC audio and graphics businesses combined accounted for less than 5
percent of this quarter's revenues and approximately 20 percent of operating
expenses," continued Tsang. "The audio and graphics semiconductor markets are
highly competitive and we believe they offer limited opportunities for Oak. We
also believe that there is value in what we have developed and that for the
right company, acquiring these businesses can offer a tremendous head start."
ADDITIONS TO THE EXECUTIVE MANAGEMENT TEAM AND BOARD
The Company also announced today Mr. Richard Black will join Oak's
executive management team as president. Mr. Black joined the Company's Board of
Directors in 1987 and will continue to serve as a director. He has been
president and CEO of three large companies, two with sales in excess of one
billion dollars. His management experience spans diverse fields such as
electronic publishing equipment and software, networking hardware,
semiconductors, and interactive video software.
The Company also stated that it has added Mr.Young Sohn, president of
Quantum Corporation's Enterprise and Personal Storage Group, to its Board of
Directors. Mr. Sohn was president and managing director of Quantum Asia-Pacific
until June 1994. Prior to joining Quantum in 1992, he spent nine years as a
marketing and sales executive at Intel Corporation.
<PAGE> 265
OAK ANNOUNCES Q2 '98 RESULTS AND BUSINESS RESTRUCTURING-3
"I am excited to announce these new additions to the Oak team," said Tsang.
"with Rick as part of the executive management team, I expect to concentrate on
strategic direction and key customer relationships while Rick will be
responsible for the day-to-day operations of the Company. In addition, we look
forward to utilizing Mr. Sohn's industry experience on our Board to help guide
the Company as we move forward."
STOCK REPURCHASE PLAN
The Company's Board of Directors today approved a stock repurchase plan
authorizing the purchase of up to two million shares of Oak Technology Common
Stock. Repurchases will be made from time to time in open market or privately
negotiated transactions. The plan authorizes, but does not require, Oak to
purchase all two million shares. Actual repurchases in any period will depend on
market conditions and other factors and could be in substantially lesser
amounts. The repurchase program is authorized for one year, unless further
extended by the Board.
BUSINESS REVIEW FOR SECOND FISCAL QUARTER '98
OPTICAL STORAGE
During the quarter, the Company demonstrated its continued commitment to
expanding its product offerings as well as achieving higher levels of product
integration in Optical Storage. The OTI-9325, announced in the second quarter,
is an integrated, high-performance three-in-one CD-ROM controller. Although
integrated products have higher ASPs (average selling prices) than the Company's
single-function products, gross margins will continue to come under pressure
from the competitive environment of this market. During the quarter, the Company
continued to ship its OTI-975 CD-RW controller which is used in leading CD-RW
drives in the market today, and sampled the OTI-9800 DVD-ROM controller.
CONSUMER ELECTRONICS
The Company's Consumer Electronics business comprises Oak's existing MPEG-1
decoders used in VideoCD players, MPEG-2/Dolby Digital decoders for the DVD
player market, and DVD navigation software. This month, Oak announced the
OTI-257, a highly integrated, low-cost solution for VideoCD players including
karaoke support. "Oak is committed to investing the necessary resources to be
competitive in this market and we intend to leverage our MPEG technology with
our strong Optical Storage expertise to deliver complete solutions for this
developing market," explained Tsang.
DIGITAL OFFICE EQUIPMENT
Oak believes the Digital Office Equipment market offers growth
opportunities and is pursuing these through its Pixel Magic subsidiary.
During the quarter, Pixel announced design wins at JetFax and Xerox. Last
month, Pixel announced the signing of a letter of intent to acquire
Xerographic Laser Images (XLI) which develops products that produce enhanced
resolution output from printers, copiers, fax systems and multifunction
peripherals. The Company expects to complete this acquisition by the end of
its fiscal year.
<PAGE> 266
OAK ANNOUNCES Q2 '98 RESULTS AND BUSINESS RESTRUCTURING-4
THE FOREGOING STATEMENTS CONTAIN FORWARD-LOOKING STATEMENTS MADE PURSUANT TO THE
SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
FACTORS THAT COULD CAUSE ACTUAL OUTCOME TO DIFFER MATERIALLY FROM THOSE SET
FORTH INCLUDE, WITHOUT LIMITATION, MARKET CONDITIONS IN THE PERSONAL COMPUTER
AND SEMICONDUCTOR INDUSTRIES, THE DEGREE OF COMPETITIVENESS OF THE COMPANY'S
CUSTOMERS, LEVELS OF INVENTORY HELD BY THE COMPANY'S CUSTOMERS, THE RATE AT
WHICH THE PC INDUSTRY MOVES TO HIGHER SPEED DRIVES AS WELL AS DVD-ROM DRIVES,
AND THE COMPANY'S CUSTOMERS' PERCEPTIONS THEREOF, ECONOMIC CONDITIONS IN ASIA,
THE COMPANY'S ABILITY TO CONTROL EXPENSES, AND OTHER RISKS THAT ARE CONTAINED IN
DOCUMENTS WHICH THE COMPANY FILES WITH THE SECURITIES AND EXCHANGE COMMISSION.
FOR A DISCUSSION OF SUCH RISKS, SEE THE COMPANY'S MOST RECENT SEC FORM 10-K AND
10-Q.
ABOUT OAK TECHNOLOGY
Founded in 1987, Oak Technology, Inc. designs, develops and markets
semiconductors and related software to original equipment manufacturers
worldwide who serve the optical storage, consumer electronics and digital office
equipment markets. Oak has a software design center in Boca Raton, Fla.; a mixed
signal design center in Austin, Texas; and subsidiaries in Japan (Oak Technology
K.K.), Taiwan (Oak Technology, Taiwan), and Andover, Mass. (Pixel Magic, Inc.).
The Company completed its initial public offering in February 1995. Additional
information about Oak Technology and its products can be found on the World Wide
Web at www.oaktech.com.
Oak Technology and the Oak logo are registered trademarks of Oak Technology,
Inc. Pixel Magic is a trademark of Oak Technology. All other product names or
Company names are mentioned for identification purposes only, and may be
trademarks of their respective holders.
# # #
<PAGE> 267
OAK ANNOUNCES Q2 '98 RESULTS AND BUSINESS RESTRUCTURING-5
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- --------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues $49,353 $47,611 $92,646 $66,537
Cost of revenues 23,233 15,225 43,988 25,441
------- ------- ------- -------
Gross profit 26,120 32,386 48,658 41,096
Research and development expenses 11,921 7,860 22,752 15,954
Selling, general, and administrative expenses 8,090 5,087 14,401 9,380
------- ------- ------- -------
Operating income 6,109 19,439 11,505 15,762
Nonoperating income 5,586 850 9,718 1,984
------- ------- ------- -------
Income before income taxes 11,695 20,289 21,223 17,746
Income taxes 4,093 7,101 7,428 6,211
------- ------- ------- -------
Net income $ 7,602 $13,188 $13,795 $11,535
------- ------- ------- -------
------- ------- ------- -------
Net income per share:
Basic $ 0.18 $ 0.33 $ 0.33 $ 0.29
------- ------- ------- -------
------- ------- ------- -------
Diluted $ 0.18 $ 0.31 $ 0.32 $ 0.27
------- ------- ------- -------
------- ------- ------- -------
Shares used in computing net income per share:
Basic 41,824 40,382 41,716 40,348
------- ------- ------- -------
------- ------- ------- -------
Diluted 42,643 42,701 42,762 42,399
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
<PAGE> 268
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
MARCH , 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 March , 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:
<TABLE>
<S> <C> <C> <C> <C>
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.
</TABLE>
(CONTINUED AND TO BE SIGNED ON THE REVERSE SIDE)
<PAGE> 269
<TABLE>
<S> <C> <C> <C> <C>
3. Appointment of Stockholder FOR all nominees WITHHOLD AUTHORITY NOMINEES: DANIEL ALLEN
Representatives listed at right to vote for all ADAM CARLEY
(except as marked to nominees listed at ANTHONY D'AMELIO
the contrary below) right JOSEPH KATZ
[ ] [ ] VINCENT SPOTO
</TABLE>
For, except vote withheld for the following nominee(s):
- --------------------------------------------------------------------------------
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: ----------------
Printed Name:
- --------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
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.
