-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F+mIdGdlxGQWYq8xfGzm//kivTafJfL2rnZniBavYCswzViLZ7SInkghhRj3x5vG k7WbCBqo8rYk8a2go3c6QA== 0000912057-97-031718.txt : 19970926 0000912057-97-031718.hdr.sgml : 19970926 ACCESSION NUMBER: 0000912057-97-031718 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970925 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: OAK TECHNOLOGY INC CENTRAL INDEX KEY: 0000824225 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 770161486 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-25298 FILM NUMBER: 97685599 BUSINESS ADDRESS: STREET 1: 139 KIFER CT CITY: SUNNYVALE STATE: CA ZIP: 94086 BUSINESS PHONE: 4087370888 MAIL ADDRESS: STREET 1: 139 KIFER COURT CITY: SUNNYVALE STATE: CA ZIP: 94086 10-K 1 FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 PART I ITEM 1. BUSINESS EXCEPT FOR THE HISTORICAL FINANCIAL INFORMATION CONTAINED HEREIN, THE MATTERS DISCUSSED IN THIS ANNUAL REPORT ON FORM 10-K MAY BE CONSIDERED "FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES ACT OF 1934, AS AMENDED. SUCH STATEMENTS INCLUDE DECLARATIONS REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF THE COMPANY AND ITS MANAGEMENT. SUCH FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS. AMONG THE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS ARE: (i) THAT THE INFORMATION IS OF A PRELIMINARY NATURE AND MAY BE SUBJECT TO FURTHER ADJUSTMENT, (ii) VARIABILITY IN THE COMPANY'S QUARTERLY OPERATING RESULTS, (iii) GENERAL CONDITIONS IN THE SEMICONDUCTOR INDUSTRY, (iv) RISKS RELATED TO PENDING LEGAL PROCEEDINGS, (v) DEVELOPMENT BY COMPETITORS OF NEW OR SUPERIOR PRODUCTS OR THE ENTRY OF NEW COMPETITORS INTO THE COMPANY'S MARKETS, (vi) THE COMPANY'S ABILITY TO DIVERSIFY ITS PRODUCT AND MARKET BASE BY DEVELOPING AND INTRODUCING NEW PRODUCTS WITHIN DESIGNATED MARKET WINDOWS AT COMPETITIVE PRICE AND PERFORMANCE LEVELS, (vii) WILLINGNESS OF PROSPECTIVE CUSTOMERS TO DESIGN THE COMPANY'S PRODUCTS INTO THEIR PRODUCTS, (viii) AVAILABILITY OF ADEQUATE FOUNDRY CAPACITY AND ACCESS TO PROCESS TECHNOLOGIES, (ix) THE COMPANY'S ABILITY TO PROTECT ITS PROPRIETARY INFORMATION AND OBTAIN ADEQUATE LICENSES OF THIRD PARTY TECHNOLOGY ON ACCEPTABLE TERMS, (x) RISKS RELATED TO USE OF INDEPENDENT MANUFACTURERS AND THIRD PARTY ASSEMBLY AND TEST VENDORS, (xi) DEPENDENCE ON KEY PERSONNEL, (xii) RELIANCE ON A LIMITED NUMBER OF LARGE CUSTOMERS, (xiii) DEPENDENCE ON SALES OF CD-ROM CONTROLLER PRODUCTS, (xiv) RISKS RELATED TO INTERNATIONAL BUSINESS OPERATIONS, (xv) ABILITY OF THE COMPANY TO MAINTAIN ADEQUATE PRICE LEVELS AND MARGINS WITH RESPECT TO ITS PRODUCTS, (xvi) MANAGEMENT OF CHANGING OPERATIONS RELATED TO THE COMPANY'S ATTEMPT TO DIVERSIFY ITS PRODUCT AND MARKET BASE, (xvii) RISKS RELATED TO PRODUCT DEFECTS, (xviii) THE ABILITY TO ATTRACT AND RETAIN QUALIFIED MANAGEMENT AND TECHNICAL PERSONNEL AND (xix) OTHER RISKS IDENTIFIED FROM TIME TO TIME IN THE COMPANY'S REPORTS AND REGISTRATION STATEMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. GENERAL Oak Technology, Inc. (the "Company") designs, develops and markets high- performance integrated semiconductors and related software solutions to original equipment manufacturers (OEMs) worldwide that serve the PC, consumer electronics and digital office equipment markets. The Company provides semiconductor products for these markets by leveraging its expertise in five core technologies: optical storage, MPEG imaging, video/graphics, audio/communications and digital imaging. The Company's products typically consist of hardware, firmware, and software to provide a complete solution for customers. The Company was incorporated in California on July 2, 1987 and reincorporated in Delaware on February 8, 1995. The Company's principal executive offices are located at 139 Kifer Court, Sunnyvale, California 94086 and its telephone number is (408) 737-0888. The Company has wholly owned subsidiaries in Japan (Oak Technology K.K.), Taiwan (Oak Technology Taiwan) and Andover, Massachusetts (Pixel Magic, Inc.). Except where otherwise indicated, references to the "Company" refer to Oak Technology, Inc., a Delaware corporation, its California predecessor and their subsidiaries. BUSINESS STRATEGY The Company's objective is to be a leading supplier of high-performance, integrated semiconductors and related software that address segments of the PC, consumer electronics, and digital office equipment markets. The Company's strategy for achieving this objective includes the following elements: MAINTAIN AND LEVERAGE LEADERSHIP POSITION IN CD-ROM MARKET AND EXPAND INTO ADDITIONAL OPTICAL STORAGE MARKET SEGMENTS The Company pioneered the IDE/ATAPI CD-ROM controller chip in 1993 and is one of the industry's largest merchant suppliers of CD-ROM controllers. The Company has established customer relationships with many of the leading CD-ROM drive manufacturers and, through these relationships, seeks to obtain input directly from its customers regarding the optimal features for its next generation of optical storage controllers. Based on such input, the Company has invested substantial resources in developing and introducing to market CD-ROM controllers with advanced features and higher levels of integration. During the fiscal year ended June 30, 1997 ("fiscal 1997"), the Company began to expand into additional optical storage market segments with the introduction of optical storage semiconductors for use in CD-Recordable (CD-R) and CD-ReWritable (CD-RW) drives. The Company is seeking to leverage its current leadership position in the CD-ROM and CD-R/RW controller markets by pursuing the development of additional optical storage semiconductors for use in such emerging markets as DVD-ROM drives and DVD players. 2 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 3 OTI-911 have begun to decline and the Company expects that sales will continue to decline as the Company's customers require optical storage controllers with faster transfer rates, higher perfomance 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 de-scrambling, 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 Direct3DTM 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. 4 - 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 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. 5 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 6 Company expects to design products for .25 micron 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 7 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 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: June 30, --------------------------------------- 1997 1996 1995 ------------ ------------ ----------- Japan. . . . . . . . . . . . . . . . . 40.3% 66.1% 51.3% Other international. . . . . . . . . . 56.1 31.5 41.4 North America. . . . . . . . . . . . . 3.6 2.4 7.3 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 8 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 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 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 10 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 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 ITEM 2. PROPERTIES The Company's executive offices and its principal marketing, sales and product development operations are located in approximately 80,000 square feet of leased space in Sunnyvale, California under a noncancelable operating lease that expires in December 2001. The Company is currently seeking additional space in which to move all or a portion of the Company's employees located in Sunnyvale. The Company believes that suitable additional or alternative space will be available on commercially reasonable terms, although no assurance can be given in this regard. In the event the Company relocates all the employees in Sunnyvale to a new location, it will be required to find a subtenant for its current location. If the Company fails to find a suitable subtenant or fails to locate a subtenant who will pay the entire amount of the Company's current lease rate, the Company may have to pay all or a portion of the rent on its current leased space as well as rent on its new leased space. Accordingly, the Company expects there to be an increase in its general and administrative expenses related to the cost of additional leased space and associated moving expenses. The Company owns a portion of a building in Taipei, Taiwan, and leases facilities, primarily for sales, product development, and technical support, in Andover, Massachusetts; Boca Raton, Florida; Austin, Texas and Tokyo, Japan. ITEM 3. LEGAL PROCEEDINGS The Company and various of its current and former officers and Directors are parties to several lawsuits which purport to be class actions filed on behalf of all persons who purchased or acquired the Company's stock (excluding the defendants and parties related to them) for the period July 27, 1995 through May 22, 1996. The first, a state court proceeding designated IN RE OAK TECHNOLOGY SECURITIES LITIGATION, Master File No. CV758510 pending in Santa Clara County Superior Court in Santa Clara, California, consolidates five putative class actions. This lawsuit also names as defendants several of the Company's venture capital fund investors, two of its investment bankers and two securities analysts. The plaintiffs allege violations of California securities laws and statutory deceit provisions as well as breaches of fiduciary duty and abuse of control. On December 6, 1996, the state court Judge sustained the Oak defendants' demurrer to all causes of action alleged in plaintiffs' First Amended Consolidated Complaint, but allowed plaintiffs the opportunity to amend. The plaintiff's Second Amended Consolidated Complaint was filed on August 1, 1997. The Company and various of its current and former officers and Directors are also parties to four putative class action lawsuits pending in the U.S. District Court for the Northern District of California. These actions have been consolidated as IN RE OAK TECHNOLOGY, INC. SECURITIES LITIGATION, Case No. C-96- 20552-SW(PVT). This action alleges certain violations of federal securities laws and is brought on behalf of purchasers of the Company's stock for the period July 27, 1995 through May 22, 1996. This action also names as a defendant one of the Company's investment bankers. On July 29, 1997, the federal court Judge granted the Oak defendants Motion to Dismiss the plaintiff's First Amended Consolidated Complaint, but granted plaintiffs leave to amend most claims. The plaintiff's Second Amended Consolidated Complaint was filed on September 4, 1997. Additionally, various of the Company's current and former officers and Directors are defendants in three consolidated derivative actions pending in Santa Clara County Superior Court in Santa Clara, California, entitled IN RE OAK TECHNOLOGY DERIVATIVE ACTION. This lawsuit, which asserts a claim for breach of fiduciary duty and a claim under California securities law based upon the officers' and Directors' trading in securities of the Company, has been stayed pending resolution of the class actions. In all of the putative state and federal class actions, the plaintiffs are seeking monetary damages and equitable relief. In the derivative action, the plaintiffs are also seeking an accounting for the defendants' sales of Company stock and the payment of monetary damages to the Company. All of these actions are in the early stages of proceedings and the Company is currently investigating the allegations. Based on its current information, the Company believes the suits to be without merit and will defend its position vigorously. No provision for any liability that may result upon adjudication has been made in the Company's Consolidated Financial Statements. In connection with these legal proceedings, the Company has incurred, and expects to continue to incur, substantial legal and other expenses. Shareholder suits of this kind are highly complex and can extend for a protracted period of time, which can substantially increase the cost of such litigation and divert the attention of the Company's management. On July 21, 1997, the Company filed a complaint with the International Trade Commission ("ITC") based on the Company's belief that certain CD-ROM controllers infringed one or more of the Company's patents. The complaint seeks a ban on the importation into the United States of any infringing CD-ROM controller or product containing such infringing CD-ROM controller.. A formal investigative proceeding was instituted by the ITC on August 19, 1997, naming as respondents: Winbond Electronics Corporation; Winbond Electronics North America Corporation; Wearnes Technology (Private) Ltd.; and Wearnes Electronics Malaysia Sendirian Berhad. Discovery proceedings are now ongoing and a full hearing of the matter has not yet been scheduled, but is expected to occur in mid-1998. In connection with this legal proceeding, the Company expects to incur substantial legal and other expenses. 12 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. 13 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. High Low ----------- ----------- 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 On August 29, 1997, the closing price of the Common Stock on the Nasdaq National Market was $10 7/8 per share. As of August 29, 1997, there were 330 holders of record of the Common Stock of the Company. Pursuant to a shareholder rights plan, adopted in August 1997, the Company distributed one right per share of common stock which becomes exercisable in certain events involving the acquisition of 15% or more of Oak common stock. Upon the occurrence of such an event, each right entitles its holder to purchase for $60.00 the economic equivalent of common stock of Oak or, in certain circumstances, of the acquirer, worth twice as much. In connection with the plan, 400,000 shares of preferred stock were reserved for issuance. The rights expire on August 19, 2007. All share and per share information in this Annual Report on Form 10-K give effect to a two-for-one split of the Company's Common Stock, which was effected on March 28, 1996. 14 ITEM 6. SELECTED FINANCIAL DATA OAK TECHNOLOGY, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) Year Ended June 30, ---------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- 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
As of June 30, ---------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- 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
(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. 15 SELECTED QUARTERLY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
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 ----------- ---------- ----------- ----------- ------------ --------- ---------- --------- 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 (loss). . . 3,553(8) 13,533 19,439 (3,677) (27,424) 35,524 27,355(7) 21,692 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
(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. 16 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 17 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. 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: June 30, --------------------------- 1997 1996 1995 -------- ------- ------ 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% -------- ------- ------ -------- ------- ------ FISCAL 1997 COMPARED TO FISCAL 1996 NET REVENUES. The Company's net revenues in the comparison periods were primarily derived from product sales. Net revenues decreased 32% to $167.4 million in fiscal 1997 from $248.0 million in fiscal 1996. This decrease was primarily attributable to a reduction in the unit sales and average selling prices of CD-ROM controllers in fiscal 1997 compared to fiscal 1996. The decrease in unit sales resulted from the Company receiving substantially fewer orders for its CD-ROM controller products in fiscal 1997 than in fiscal 1996. The Company believes the decline in orders is primarily attributable to a change in the ordering patterns of CD-ROM drive manufacturers and the continued maturation of the CD-ROM industry. (See "Factors That May Affect Future Results" below.) International sales, principally to Japan, Taiwan, Korea and Singapore accounted for approximately 96% and 98% of the Company's net revenues in fiscal 1997 and fiscal 1996, respectively. Sales of the Company's CD-ROM controller products accounted for 84% and 91% of net revenues in fiscal 1997 and fiscal 1996, respectively. The Company expects that international sales of its CD-ROM controller products will continue to represent a substantial majority of its net revenues for the foreseeable future. Included in net revenues for fiscal 1997 and fiscal 1996 were $0.2 million and $3.0 million, respectively of nonrefundable technology license fees. GROSS MARGIN. Cost of revenues includes the cost of wafer fabrication, assembly and testing performed by third-party vendors and direct and indirect costs associated with the procurement, scheduling and quality assurance functions performed by the Company. The Company's gross margin increased to 56.3% in fiscal 1997 from 44.2% 18 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 19 $24.0 million during the fourth quarter of fiscal 1996, partially offset by an increase in margin from CD-ROM 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 20 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 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 21 development efforts or the failure of the Company to achieve market acceptance of its new products would have a material adverse effect on the Company's business, financial condition and operating results. The Company'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. 22 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. 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 23 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. 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). 24 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 $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. 25 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: Name Age Position - ---- --- -------- 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 Mr. Tsang has been President and Chief Executive Officer of the Company since he founded the Company in July 1987 and a Director of the Company since October 1987. He has also served as Chairman of the Board of Directors of the Company since January 1991. Mr. Tsang has also held the positions of Chief Financial Officer from July 1987 to March 1993 and Secretary of the Company from July 1987 to December 1994. He also is a Director of Quality Semiconductor, Inc. and Enable Semiconductor, Inc., both developers of semiconductor products and ASE Test, a semiconductor assembly and testing company. Prior to joining Oak, Mr. Tsang was the founder and served in various positions including President, Chief Executive Officer and Chairman of Data Technology Corp., a manufacturer of disk controllers and high density disk drives, from 1979 to 1987, and co-founded Xebec, a manufacturer of disk controllers, where he was employed from 1974 to 1979. Mr. Tsang holds a B.S.E.E. degree in electrical engineering from Brigham Young University and an M.S. degree in electrical engineering from the Santa Clara University. Mr. Faulkner joined the Company as Corporate Controller in February 1991 and has served as Chief Financial Officer since March 1993. Mr. Faulkner has also held the position of Vice President, Finance since July 1994 and Secretary since December 1994. Prior to joining Oak, Mr. Faulkner was a private consultant from May 1990 to January 1991 and was Director of Quality of Falco Data Products, a computer hardware company, from 1985 to April 1990. Mr. Faulkner has also held various accounting positions with Eaton Corp. and Cordis Dow Corporation. Mr. Faulkner holds a B.S.B.A. degree in accounting from the University of Florida. Mr. Fujimoto has been General Manager, Oak Technology, K.K., the Company's Japanese subsidiary, since joining the Company in February 1991 and became a Vice President of Oak in April 1995. He has also been a Director of EDEE, a technology development company in Japan, since September 1993. Prior to joining Oak, Mr. Fujimoto served as Senior Manager, Marketing and Applications of AMD Japan from 1976 to January 1991. He holds a B.S. degree in electrical engineering from the University of Electrocommunications (Japan). Mr. Lo joined the Company as Engineering Design Manager in 1987. He has been General Manager, Oak Technology, Taiwan since 1989 and became a Vice President of Oak in April 1995. Prior to joining Oak, he was Software Manager at Convergent Technologies, a computer system manufacturer, from June 1986 to May 1987, and Software Manager at the Systems Division of ITT Corp. from May 1985 to June 1986. Mr. Lo holds a B.S. degree in electrical engineering from Seattle University, an M.S. degree in electrical engineering from the University of Washington and an M.S. degree in computer science from Rensselaer Polytechnic Institute. Mr. Taniguchi joined the Company as Director, Optical Storage Business Unit in January 1995 and has served as Vice President of Sales since July 1996. Prior to joining Oak, he was Western Regional Sales Manager for Standard Microsystems Corporation, a manufacturer of network interface boards and components, from March 1994 to January 1995; Vice President and General Manager of Ultrastor Corporation, a manufacturer of SCSI host 26 adapters and disk array controllers, from August 1993 to March 1994, and Regional Sales Director for Kenteck Information Systems, a manufacturer of laser printers, from August 1991 until August 1993. From November 1990 to August 1991, he was Vice President, Sales and Marketing for Cornerstone Imaging, and from 1986 to November 1990 he was Vice President, Sales and Marketing of Data Technology Corp., a manufacturer of disk controllers and high density disk drives. Mr. Taniguchi holds a B.S. degree in applied physics from the University of California, Los Angeles. Dr. Yang joined the Company as Director of IC Development in 1987, served as the Company's Director of Operations from January 1995 until April 1995 and has been Vice President of Operations since April 1995. Mr. Yang holds a B.S.E.E. degree from National Chiao Tung University, Hsinchu, Taiwan and a M.S.E.E. degree and a Ph.D. in electrical engineering from Washington University, St. Louis, Missouri. Mr. Koc joined the Company as Vice President and General Manager of the Optical Storage Business Unit in September 1996. Prior to joining the Company, Mr. Koc spent nine years at LSI Logic Corporation, most recently as Director of ASIC marketing. Mr. Koc holds both a B.S.E.E. and an M.S.E.E. from Middle East Technical University as well as an M.B.A. from Stanford University. Mr. Vroomen joined the Company as Vice President, Strategic Marketing in September 1997. From May 1996 to June 1997, Mr. Vroomen was Vice President and General Manager of the Consumer Digital Entertainment business unit at VLSI Technology, Inc. From November 1994 to April 1996, Mr. Vroomen was Vice President, Sales & Marketing at Array Microsystems, Inc., a developer of codec chips for digital video applications and from April 1989 to November 1994, Mr. Vroomen was at Zilog, Inc. where he was Vice President of the Computer Peripherals business unit. He holds an M.S.E.E. from the Philips International Institute in Eindhoven, the Netherlands, and a Managerial Advancement Program diploma from the University of the Witwatersrand Graduate School of Business in Johannesburg, South Africa. Dr. Hsu has been a Director of the Company since January 1991. He has been employed by H&Q Asia Pacific, the parent company of H&Q Taiwan Co., Ltd., since February 1985, most recently as Chairman. He is also a Director of Enable Semiconductor, Inc., Headway Technologies, ASE Technology Corporation, Behavior Tech Computer Corporation and AimQuest Corporation. Dr. Hsu holds a B.S. degree in physics from National Taiwan University, an M.S. degree in electrophysics from Polytechnic Institute of Brooklyn and a Ph.D. in electrical engineering from the University of California, Berkeley. Mr. Tomlinson has been a Director of the Company since June 1988. He has been a partner of Tomlinson Zisko Morosoli & Maser LLP, a law firm, since 1983. Mr. Tomlinson is also a Director of Portola Packaging, Inc., a manufacturer of tamper evident closures and related equipment. Mr. Tomlinson holds a B.A. degree in economics, an M.B.A. and a J.D. from Stanford University. Mr. Black has been a Director of the Company since November 1992 and was also a Director from December 1989 to January 1991. He has been the Chairman of the Board of Directors of ECRM Incorporated, an electronic publishing equipment manufacturer, since 1983 and a general partner of KBA Partners, L.P., an investment company, since 1987. Mr. Black holds a B.S. degree in civil engineering from Texas A&M University and an M.B.A. from Harvard University. The information required by Item 11 with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference from the Proxy Statement under the Caption "Executive Compensation And Other Matters." ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 of Form 10-K is incorporated by reference to the information contained in the section captioned "Executive Compensation and Other Matters" in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 of Form 10-K is incorporated by reference to the information contained in the section captioned "Stock Ownership of Certain Beneficial Holders and Management" in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 of Form 10-K is incorporated by reference to the information contained in the section captioned "Certain Relationships and Related Transactions" in the Proxy Statement. 27 GLOSSARY OF TECHNICAL TERMS BIOS: BASIC INPUT/OUTPUT SYSTEM. The software interface layer between the system hardware and the operating system on a PC. CD-R: COMPACT DISC RECORDABLE. CD-R drives are an extension of optical storage technology that use one-time CD-Recordable discs (as opposed to CD-ROM discs which are read-only). CD-ReWritable: CD-based drives which use special recordable and rewritable compact discs. CD-ROM: COMPACT DISC READ-ONLY MEMORY. A popular high-density storage media for digital data of all kinds, including graphics, text, video and sound. DAA: DATA ACCESS ARRANGEMENT. Provides interface and isolation barrier between modem and phone line. DCC: DISPLAY CONTROL COMMAND. Information that determines a pictures appearance (colors, contrast, sub-picture screen position, etc.) DRAM: DYNAMIC RANDOM ACCESS MEMORY. Refers to memory in a PC that stores portions of active applications and data for fast access. DSI: DATA SEARCH INFORMATION. a feature that makes it possible to search for data while maintaining seamless playback of video. DVD: DIGITAL VERSATILE DISC OR DIGITAL VIDEO DISC. A new industry standard which provides much higher levels of data (video, audio, graphics) to be stored on discs the same size as standard audio or CD-ROM discs. EDO Memory: EXTENDED DATA-OUT MEMORY. A type of memory used in PCs offering higher performance than standard DRAM. G3/G4: International fax compression standards. GUI: GRAPHICAL USER INTERFACE. A visually descriptive computer interface with icons and windows such as Microsoft Windows (as opposed to a text-based interface like DOS) that allows users to perform various tasks on a computer in a point-and-click environment. HLI: HIGHLIGHT INFORMATION. A feature that enables users to scroll through a menu bar and highlight an item of choice. IDE/ATAPI: INTEGRATED DRIVE ELECTRONICS/AT ATTACHMENT PACKET INTERFACE. A dominant PC industry-standard CD-ROM drive interface. JPEG: JOINT PHOTOGRAPHIC EXPERTS GROUP. A working committee under the guidance of the ISO that is attempting to define a proposed universal standard for the digital compression and decompression of still images for use in computer systems. Kbps: THOUSANDS OF BITS PER SECOND. A standard for describing the speed of information over transmission lines such as phone lines. MPEG: MOTION PICTURE EXPERTS GROUP. MPEG-1 and MPEG-2 are standards for the compression and decompression of video and audio data. OEM: ORIGINAL EQUIPMENT MANUFACTURER. OSD: ON-SCREEN DISPLAY. A feature that allows text and graphics to be overlaid on full-motion video. PCI: PERIPHERAL CONNECT INTERFACE. An industry standard architecture for connecting devices to a PC. PCI: PRESENTATION CONTROL INFORMATION. Information concerning the timing and presentation of a program. PCM: PULSE CODE MODULATION. A method of encoding information in a signal by varying the amplitude of pulses. RAMDAC: RANDOM ACCESS MEMORY DIGITAL-TO-ANALOG CONVERTER. A device typically integrated as part of a graphics accelerator which converts the graphics information for display to a monitor. 28 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 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: 1. Financial Statements. Page ---- 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: Exhibit Number Exhibit Title ------- ------------- 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)* 30 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 31 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 - -------------------------- (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 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 OAK TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA) ASSETS June 30, ---------------------- 1997 1996 --------- --------- 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 issues 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 --------- --------- --------- --------- See accompanying notes to consolidated financial statements. 34 OAK TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) Year Ended June 30, -------------------------------- 1997 1996 1995 --------- --------- --------- 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 --------- --------- --------- --------- --------- --------- See accompanying notes to consolidated financial statements. 35 OAK TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
Convertible Additional Retained Total Preferred Stock Common Stock Paid-in Earnings Stockholders' Shares Amount Shares Amount Capital (Deficit) Equity ---------- ------ ---------- ------ ---------- --------- ------------- 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 ---------- ------ ---------- ------ ---------- --------- ----------- ---------- ------ ---------- ------ ---------- --------- -----------
See accompanying notes to consolidated financial statements. 36 OAK TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) Year Ended June 30, -------------------------------- 1997 1996 1995 --------- --------- --------- 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 --------- --------- --------- --------- --------- --------- See accompanying notes to consolidated financial statements. 37 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 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 lessor 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 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 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): Estimated Accrued Fair Cost Interest Value --------- -------- ---------- 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 --------- -------- ---------- --------- -------- ---------- 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): Cash equivalents. . . . . . . . . . . . . . . . . . . . $ 86,825 Short-term investments. . . . . . . . . . . . . . . . . 57,660 ---------- $ 144,485 As of June 30, 1996, all investments were considered available-for-sale securities and consisted of the following (in thousands): Estimated Accrued Fair Cost Interest Value --------- -------- --------- 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 --------- -------- --------- --------- -------- --------- 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): Cash equivalents. . . . . . . . . . . . . . . . . . . . . . . $ 37,422 Short-term investments. . . . . . . . . . . . . . . . . . . . 68,350 ---------- $ 105,772 ---------- ---------- 41 OAK TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (3) BALANCE SHEET AND OPERATING STATEMENT COMPONENTS (CONTINUED) INVENTORIES Inventories consisted of the following (in thousands): June 30, --------------------- 1997 1996 -------- --------- Purchased parts and work in process. . . . . $ 5,521 $ 5,888 Finished goods . . . . . . . . . . . . . . . 6,801 8,875 --------- --------- $ 12,322 $ 14,763 --------- --------- --------- --------- 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): June 30, --------------------- 1997 1996 -------- -------- 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 --------- --------- --------- --------- ACCRUED EXPENSES Accrued expenses consisted of the following (in thousands): June 30, --------------------- 1997 1996 -------- -------- 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 -------- -------- -------- -------- 42 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):
Year Ended June 30, --------------------------------- 1997 1996 1995 -------- -------- -------- 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 -------- -------- -------- -------- -------- --------
(4) NOTES PAYABLE AND LONG-TERM DEBT Notes payable and long-term debt consisted of the following (in thousands): June 30, ----------------------- 1997 1996 -------- --------- 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 -------- -------- -------- -------- 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 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): Year Ending June 30, -------------------- 1998. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,264 1999. . . . . . . . . . . . . . . . . . . . . . . . . . . . 363 2000. . . . . . . . . . . . . . . . . . . . . . . . . . . . 193 2001. . . . . . . . . . . . . . . . . . . . . . . . . . . . 197 2002. . . . . . . . . . . . . . . . . . . . . . . . . . . . 214 Thereafter. . . . . . . . . . . . . . . . . . . . . . . . . 1,529 -------- $ 9,760 -------- -------- (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): Net liabilities assumed. . . . . . . . . . . . . . . . . . . $ (191) In-process research and development. . . . . . . . . . . . . 4,837 Purchased technology . . . . . . . . . . . . . . . . . . . . 854 -------- $ 5,500 -------- -------- 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 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): June 30, ------------------------- 1996 1995 ---------- ---------- Net revenues . . . . . . . . . . . . . . . . $ 249,170 $ 113,645 Net income . . . . . . . . . . . . . . . . . $ 39,857 $ 21,155 Net income per share . . . . . . . . . . . . $ 0.94 $ 0.67 (6) INCOME TAXES The components of the income tax expense are as follows (in thousands):
June 30, ---------------------------------- 1997 1996 1995 --------- --------- --------- 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 --------- --------- --------- --------- --------- ---------
A reconciliation between the income tax provision computed at the federal statutory rate and the effective tax rate is as follows (in thousands):
June 30, ----------------------------------- 1997 1996 1995 --------- --------- --------- 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 --------- --------- -------- --------- --------- --------
45 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): June 30, --------------------- 1997 1996 --------- --------- 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 --------- --------- --------- --------- 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 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 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 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:
Weighted Weighted Average Average Options Exercise Options Exercise Outstanding Price Exercisable Price ------------- ------------- ------------- ------------- 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 ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
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:
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 - ---------------------------------------- ---------- ----------- ----------- ---------- ---------- $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 ---------- ----------- ----------- ---------- ---------- ---------- ----------- ----------- ---------- ----------
49 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): June 30, ------------------- 1997 1996 -------- -------- 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 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: Stock Option Plans Stock Purchase Plan 1997 1996 1997 1996 ------ ------ ------ ------ 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% (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 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. Percentage of Net Revenues -------------------------- Year Ended June 30, -------------------------- 1997 1996 1995 ------ ------ ------ LG Electronics . . . . . . . . . . . . . 13% 2% - Mitsumi Electronic Co.,Ltd.. . . . . . . 14% 26% 29% Kanematsu Semiconductor Corporation. . . 7% 19% 13% NEC Home Electronics, Ltd. . . . . . . . 8% 13% 9% Percentage of Total Accounts Receivable -------------------------- As of June 30, -------------------------- 1997 1996 1995 ------ ------ ------ LG Electronics . . . . . . . . . . . . . 1% - - Mitsumi Electronic Co.,Ltd.. . . . . . . 23% 31% 32% Kanematsu Semiconductor Corporation. . . 6% 7% 21% NEC Home Electronics, Ltd. . . . . . . . 22% 20% 20% 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 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): Year Ended June 30, -------------------------- 1997 1996 1995 ------ ------ ------ 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 --------- --------- -------- --------- --------- -------- 52 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 SCHEDULE II OAK TECHNOLOGY, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (in thousands) Additions Charged to Beginning Costs and Deductions Ending Allowance for Doubtful Accounts Balance Expenses Write-Offs Balance - ------------------------------- --------- -------- ---------- ------- 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 54 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: Signature Title Date - --------- ----- ---- /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 55 EXHIBIT INDEX Sequentially Exhibit Numbered Number Exhibit Title Page - ------ ------------- ---- 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 amongthe 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 - ----------------- ** Confidential treatment granted and/or requested as to portions of the exhibit. 56 EX-3.03 2 EXH. 3.03 CERTIFICATE OF CORRECTION TO THE RESTATED CERTIFICATE OF INCORPORATION OF OAK TECHNOLOGY, INC. FILED IN THE OFFICE OF THE DELAWARE SECRETARY OF STATE ON MAY 1, 1995 OAK TECHNOLOGY, INC., a corporation organized and existing under the laws of the State of Delaware (the "Corporation") hereby certifies that: 1. The Restated Certificate of Incorporation of the Corporation (the "Restated Certificate") filed in the Office of the Secretary of State of the State of Delaware (the "Office") on May 1, 1995 requires correction, as permitted by Section 103(f) of the Delaware General Corporation Law. 2. The inaccuracies or defects in the Restated Certificate exist in Article FOURTH. Due to an inadvertent error, the Restated Certificate failed to accurately restate and integrate the provisions of the Restated Certificate of Incorporation of the Corporation filed in the Office on December 28, 1994, as amended and supplemented prior to May 1, 1995, in that a paragraph was omitted from the end of Article FOURTH of the Restated Certificate. 3. Article FOURTH of the Restated Certificate is hereby corrected by adding the following paragraph as the second and last paragraph of Article FOURTH: The Board of Directors is authorized to determine, alter or eliminate any or all of the rights, preferences, privileges and restrictions granted or imposed upon any wholly unissued series of Preferred Shares, and to fix, increase or decrease the number of shares comprising any such series and the designation thereof, or any of them, and to provide for the rights and terms of redemption or conversion of the shares of any such series. [THE REMAINDER OF THIS PAGE LEFT BLANK INTENTIONALLY] IN WITNESS WHEREOF, Oak Technology, Inc. has caused this Certificate to be signed by its duly authorized officer on this ___ day of July, 1997. OAK TECHNOLOGY, INC. By: ------------------------ Sidney Faulkner Vice President, Finance, Chief Financial Officer and Secretary EX-4.05 3 EXH. 4.05 FORM of CERTIFICATE OF DESIGNATION of SERIES A JUNIOR PARTICIPATING PREFERRED STOCK of OAK TECHNOLOGY, INC. (Pursuant to Section 151 of the Delaware General Corporation Law) ---------------------------------- OAK TECHNOLOGY, INC., a corporation organized and existing under the General Corporation Law of the State of Delaware (hereinafter called the "Corporation"), hereby certifies that the following resolution was adopted by the Board of Directors of the Corporation as required by Section 151 of the General Corporation Law at a meeting duly called and held on August 18, 1997; RESOLVED, that pursuant to the authority granted to and vested in the Board of Directors of the Corporation (hereinafter called the "Board of Directors" or the "Board") in accordance with the provisions of the Certificate of Incorporation, the Board of Directors hereby creates a series of Preferred Stock, par value $.001 per share (the "Preferred Stock"), of the Corporation and hereby states the designation and number of shares, and fixes the relative rights, preferences, and limitations thereof as follows: Series A Junior Participating Preferred Stock: Section 1. DESIGNATION AND AMOUNT. The shares of such series shall be designated as "Series A Junior Participating Preferred Stock" (the "Series A Preferred Stock") and the number of shares constituting the Series A Preferred Stock shall be four hundred thousand (400,000). Such number of shares may be increased or decreased by resolution of the Board of Directors; PROVIDED, that no decrease shall reduce the number of shares of Series A 1 Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Series A Preferred Stock. Section 2. DIVIDENDS AND DISTRIBUTIONS. (A) Subject to the rights of the holders of any shares of any series of Preferred Stock (or any similar stock) ranking prior and superior to the Series A Preferred Stock with respect to dividends, each holder of one one- thousandth (1/1,000) of a share of Series A Preferred Stock (a "Unit"), in preference to the holders of shares of Common Stock, par value $.001 per share (the "Common Stock"), of the Corporation, and of any other junior stock, shall be entitled to receive, when declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the last day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a Unit of Series A Preferred Stock, in an amount per share (rounded to the nearest cent) equal to, subject to the provision for adjustment hereinafter set forth, 1,000 times the aggregate per share amount of all cash dividends, and 1,000 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of a Unit of Series A Preferred Stock. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Corporation shall declare a dividend or distribution on the Units of Series A Preferred Stock as provided in paragraph (A) of this Section immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided, however, that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Distribution Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per Unit on the Series A Preferred Stock shall nevertheless be 2 payable on such subsequent Quarterly Dividend Payment Date. (C) Dividends shall begin to accrue and be cumulative on each outstanding Unit of Series A Participating Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such Unit of Series A Participating Preferred Stock, unless the date of issue of such Unit is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such Unit shall begin to accrue from the date of issue of such Unit, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of Units of Series A Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the Units of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such Units shall be allocated pro rata on a Unit-by-Unit basis among all such Units at the time outstanding. The Board of Directors may fix a record date for the determination of holders of Units of Series A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 60 days prior to the date fixed for the payment thereof. Section 3. VOTING RIGHTS. The holders of Units of Series A Preferred Stock shall have the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each Unit of Series A Preferred Stock shall entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per Unit to which holders of Units of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein, in any other Certificate of Designations creating a series of Preferred Stock or any similar stock, or by law, the holders of Units of Series A Preferred Stock and the holders of shares of Common Stock and any other capital stock of the Corporation having general voting rights shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. 3 (C) Except as set forth herein, or as otherwise provided by law, holders of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. Section 4. CERTAIN RESTRICTIONS. (A) Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on Units of Series A Preferred Stock outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock; (ii) declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except dividends paid ratably on the Units of Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Preferred Stock; or (iv) redeem or purchase or otherwise acquire for consideration any Units of Series A Preferred Stock, or any shares of stock ranking on a parity with the Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. 4 (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. REACQUIRED UNITS. Any Units of Series A Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such Units shall upon their cancellation become authorized but unissued Units of Preferred Stock and may be reissued as part of a new series of Preferred Stock subject to the conditions and restrictions on issuance set forth herein, in the Certificate of Incorporation, or in any other Certificate of Designations creating a series of Preferred Stock or any similar stock or as otherwise required by law. Section 6. LIQUIDATION, DISSOLUTION OR WINDING UP. (A) Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (1) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock unless, prior thereto, the holders of Units of Series A Preferred Stock shall have received $1,000 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, provided that the holders of Units of Series A Preferred Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 1,000 times the aggregate amount to be distributed per share to holders of shares of Common Stock, or (2) to the holders of shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except distributions made ratably on the Series A Preferred Stock and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of Units of Series A Preferred Stock were entitled immediately prior to such event under the proviso in clause (1) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) In the event, however, that there are not sufficient assets available to permit payment in full to the Series A Liquidation Preference and the liquidation preferences of all other series of Preferred Stock, if any, which rank on a parity with the 5 Series A Participating Preferred Stock, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences. 6 Section 7. CONSOLIDATION, MERGER, ETC. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the Units of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series A Preferred Stock shall at the same time be similarly exchanged or changed into an amount per Unit, subject to the provision for adjustment hereinafter set forth, equal to 1,000 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of Units of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 8. NO REDEMPTION. The Units of Series A Preferred Stock shall not be redeemable. Section 9. RANK. The Series A Preferred Stock shall rank, with respect to the payment of dividends and the distribution of assets, junior to all series of any other class of the Corporation's Preferred Stock. Section 10. AMENDMENT. The Amended and Restated Certificate of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Preferred Stock so as to affect them adversely without the affirmative vote of the holders of at least a majority of the outstanding Units of Series A Preferred Stock, voting together as a single class. 7 IN WITNESS WHEREOF, this Certificate of Designation is executed on behalf of the Corporation by its President and its corporate seal attested by its Chief Financial Officer this __th day of August, 1997. Name: Title: Attest: Name: Title: 8 EX-4.06 4 EXH. 4.06 OAK TECHNOLOGY, INC. AND BANKBOSTON, N.A. (RIGHTS AGENT) RIGHTS AGREEMENT DATED AS OF AUGUST 19, 1997 TABLE OF CONTENTS Page ---- Section 1. Certain Definitions........................................... 1 Section 2. Appointment of Rights Agent................................... 5 Section 3. Issue of Rights Certificates.................................. 5 Section 4. Form of Rights Certificates................................... 7 Section 5. Countersignature and Registration............................. 8 Section 6. Transfer, Split-Up, Combination and Exchange of Rights Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates.................................................. 9 Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights. 9 Section 8. Cancellation and Destruction of Rights Certificates........... 11 Section 9. Reservation and Availability of Preferred Stock............... 11 Section 10. Preferred Stock Record Date................................... 13 Section 11. Adjustment of Purchase Price, Number of Shares or Number of Rights........................................................ 13 Section 12. Certificate of Adjusted Purchase Price or Number of Shares.... 21 Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power......................................................... 22 Section 14. Fractional Rights and Fractional Shares....................... 25 Section 15. Rights of Action.............................................. 26 Section 16. Agreement of Rights Holders................................... 26 Section 17. Rights Certificate Holder Not Deemed a Stockholder............ 27 Section 18. Concerning the Rights Agent................................... 27 Section 19. Merger or Consolidation or Change of Name of Rights Agent..... 27 Section 20. Duties of Rights Agent........................................ 28 i. Page ---- Section 21. Change of Rights Agent........................................ 30 Section 22. Issuance of New Rights Certificates........................... 31 Section 23. Redemption and Termination.................................... 31 Section 24. Exchange...................................................... 32 Section 25. Notice of Certain Events...................................... 34 Section 26. Notices....................................................... 34 Section 27. Supplements and Amendments.................................... 35 Section 28. Successors.................................................... 36 Section 29. Determinations and Actions by the Board of Directors.......... 36 Section 30. Benefits of this Agreement.................................... 36 Section 31. Severability.................................................. 36 Section 32. Governing Law................................................. 37 Section 33. Counterparts.................................................. 37 Section 34. Descriptive Headings.......................................... 37 EXHIBITS Exhibit A - Form of Certificate of Designation for Series A Junior Participating Preferred Stock Exhibit B - Form of Rights Certificate Exhibit C - Summary of Rights to Purchase Preferred Stock ii. RIGHTS AGREEMENT RIGHTS AGREEMENT, dated as of August 19, 1997, between OAK TECHNOLOGY, INC., a Delaware corporation (the "Company"), and BankBoston, N.A., a national banking association (the "Rights Agent"). WHEREAS, effective August 19, 1997 (the "Rights Dividend Declaration Date"), the Board of Directors authorized and declared a distribution of one Right (each, a "Right") for each share of Common Stock (as hereinafter defined) of the Company outstanding as of the Close of Business (as hereinafter defined) on August 29, 1997 (the "Record Date"), each Right initially representing the right to purchase one one-thousandth of a share (a "Unit") of Preferred Stock (as hereinafter defined) upon the terms and subject to the conditions herein set forth, and has further authorized and directed the issuance of one Right with respect to each share of Common Stock that shall become outstanding between the Record Date and the earliest of the Distribution Date, the Redemption Date or the Final Expiration Date (as such terms are hereinafter defined). NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereby agree as follows: Section 1. CERTAIN DEFINITIONS. For purposes of this Agreement, the following terms have the meanings indicated: "Acquiring Person" shall mean any Person (as such term is hereinafter defined) who or which, together with all Affiliates and Associates (as such terms are hereinafter defined) of such Person, shall be the Beneficial Owner (as such term is hereinafter defined) of 15% or more of the shares of Common Stock of the Company then outstanding, but shall not include the Company, any Subsidiary (as such term is hereinafter defined) of the Company, any employee benefit plan of the Company or any Subsidiary of the Company, or any entity holding shares of Common Stock for or pursuant to the terms of any such plan. Notwithstanding the foregoing: (i) no Person shall become an "Acquiring Person" as the result of an acquisition of shares of Common Stock by the Company which, by reducing the number of shares outstanding, increases the proportionate number of shares beneficially owned by such Person to 15% or more of the shares of Common Stock of the Company then outstanding; PROVIDED, HOWEVER, that if a Person shall become the Beneficial Owner of 15% or more of the shares of Common Stock of the Company then outstanding by reason of share purchases by the Company and shall, after such share purchases by the Company, become the Beneficial Owner of any additional shares of Common Stock of the Company, then such Person shall be deemed to be an "Acquiring Person" thereunder; and (ii) if the Board of Directors of the Company determines (upon approval by a majority of the Continuing Directors (as such term is hereinafter defined)) in good faith that 1. a Person who would otherwise be an "Acquiring Person" as defined pursuant to the foregoing provisions of this paragraph (a), has become such inadvertently, and such Person divests as promptly as practicable a sufficient number of shares of Common Stock so that such Person would no longer be an "Acquiring Person" as defined pursuant to the foregoing provisions of this paragraph (a), then such Person shall not be deemed to be an "Acquiring Person" for any purpose of this Agreement. "Adjustment Shares" has the meaning set forth in Section 11(a)(ii). "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Exchange Act (as such term is hereinafter defined). A Person shall be deemed the "Beneficial Owner" of and shall be deemed to "beneficially own" any securities: (i) which such Person or any of such Person's Affiliates or Associates beneficially owns, directly or indirectly, for purposes of Section 13(d) of the Exchange Act and Rule 13d-3 thereunder (or any comparable or successor law or regulation); or (ii) which such Person or any of such Person's Affiliates or Associates, directly or indirectly, has (A) the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding (whether or not in writing, other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities), or upon the exercise of conversion rights, exchange rights, rights (other than the Rights), warrants or options, or otherwise; PROVIDED, HOWEVER, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, securities tendered pursuant to a tender or exchange offer made by or on behalf of such Person or any of such Person's Affiliates or Associates until such tendered securities are accepted for purchase or exchange; or (B) the right to vote pursuant to any agreement, arrangement or understanding; PROVIDED FURTHER, HOWEVER, that a Person shall not be deemed the "Beneficial Owner" of, or to "beneficially own," any security under this subparagraph (ii) as a result of an agreement, arrangement or understanding to vote such security if such agreement, arrangement or understanding: (x) arises solely from a revocable proxy given in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable provisions of the Exchange Act and the Exchange Act Regulations, and (y) is not reportable by such Person on Schedule 13D under the Exchange Act (or any comparable or successor report); or (iii) which are beneficially owned, directly or indirectly, by any other Person (or any Affiliate or Associate thereof) with which such Person (or any of such Person's Affiliates or Associates) has any agreement, arrangement or understanding, (whether or not in writing, other than customary agreements with and between underwriters and selling 2. group members with respect to a bona fide public offering of securities), for the purpose of acquiring, holding, voting (except to the extent contemplated by the proviso to subparagraph (i) of this paragraph (e)) or disposing of any securities of the Company; PROVIDED, HOWEVER, that in no case shall an officer or director of the Company be deemed (A) the Beneficial Owner of any securities beneficially owned by another officer or director of the Company solely by reason of actions undertaken by such persons in their capacity as officers or directors of the Company or (B) the Beneficial Owner of securities held of record by the trustee of any employee benefit plan of the Company or any Subsidiary of the Company for the benefit of any employee of the Company or any Subsidiary of the Company, other than the officer or director, by reason of any influence that such officer or director may have over the voting of the securities held in the plan; Notwithstanding anything in this definition of Beneficial Ownership to the contrary, the phrase "then outstanding," when used with reference to a Person's Beneficial Ownership of securities of the Company, shall mean the number of such securities then issued and outstanding together with the number of such securities not then actually issued and outstanding which such Person would be deemed to own beneficially hereunder. "Business Day" shall mean any day other than a Saturday, a Sunday, or a day on which banking institutions in the State of California or the state in which the principal office of the Rights Agent is located are authorized or obligated by law or executive order to close. "Close of Business" on any given date shall mean 5:00 P.M., Massachusettes time, on such date; PROVIDED, HOWEVER, that if such date is not a Business Day it shall mean 5:00 P.M., Massachusettes time, on the next succeeding Business Day. "Common Stock" when used with reference to the Company shall mean the shares of common stock, par value $.001, of the Company. "Common Stock" when used with reference to any Person other than the Company shall mean the capital stock (or other equity interest) with the greatest voting power of such other Person or, if such other Person is a Subsidiary of another Person, the Person or Persons which ultimately control such first-mentioned Person. "Company" shall have the meaning set forth in the recitals to this Agreement. "Continuing Director" shall mean a member of the Board of Directors of the Company who is not an Acquiring Person, or an Affiliate or Associate of an Acquiring Person, or a representative or agent of an Acquiring Person or of any such Affiliate or Associate, and who was either (i) a member of the Board of Directors prior to the date of this Agreement, or (ii) subsequently became a member of the Board of Directors and whose election or nomination for election is recommended or approved by a majority of the Continuing Directors then on the Board of Directors. "current per share market price" shall have the meaning set forth in Section 11(d)(i) 3. hereof. "Current Value" shall have the meaning set forth in Section 11(a)(iii) hereof. "Distribution Date" shall have the meaning set forth in Section 3(a) hereof. "equivalent preferred shares" shall have the meaning set forth in Section 11(b) hereof. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Exchange Act Regulations" shall mean the General Rules and Regulations under the Exchange Act. "Exchange Ratio" shall have the meaning set forth in Section 24 hereof. "Expiration Date" shall have the meaning set forth in Section 7 hereof. "Final Expiration Date" shall have the meaning set forth in Section 7(a) hereof. "NASDAQ" shall have the meaning set forth in Section 11(d). "Person" shall mean any individual, firm, corporation or other entity, and shall include any successor (by merger or otherwise) of such entity. "Preferred Stock" shall mean shares of Series A Junior Participating Preferred Stock, par value $.001, of the Company having the rights and preferences set forth in the Form of Certificate of Designation attached to this Agreement as Exhibit A. "preferred stock equivalents" shall have the meaning set forth in Section 11(a)(iii) hereto. "Purchase Price" shall have the meaning set forth in Section 7(b) hereof. "Record Date" shall have the meaning set forth in the recitals to this Agreement. "Redemption Date" shall have the meaning set forth in Section 7(a) hereof. "Redemption Price" shall have the meaning set forth in Section 23(a) hereof. "Right" shall have the meaning set forth in the recitals to this Agreement. "Rights Agent" shall have the meaning set forth in the recitals to this Agreement. 4. "Rights Certificate" shall have the meaning set forth in Section 3(a) hereof. "Rights Dividend Declaration Date" shall have the meaning set forth in the recitals to this Agreement. "Section 11(a)(ii) Event" shall mean any event described in Section 11(a)(ii)(A), (B) or (C). "Section 11(a)(ii) Trigger Date" shall have the meaning set forth in Section 11(a)(iii) hereof. "Section 13 Event" shall mean any event described in clause (i), (ii) or (iii) of Section 13(a) hereof. "Section 24(a) Exchange Ratio" has the meaning set forth in Section 24(a) hereof. "Securities Act" shall mean the Securities Act of 1933, as amended. "Shares Acquisition Date" shall mean the first date of public announcement (which, for purposes of this definition, shall include, without limitation, a report filed pursuant to Section 13(d) of the Exchange Act) by the Company or an Acquiring Person that an Acquiring Person has become such. "Spread" shall have the meaning set forth in Section 11(a)(iii) hereof. "Subsidiary" of any Person shall mean any corporation or other entity of which a majority of the voting power of the voting equity securities or equity interest is owned, directly or indirectly, by such Person. "Substitution Period" shall have the meaning set forth in Section 11(a)(iv) hereof. "Summary of Rights" shall have the meaning set forth in Section 3(b) hereof. "Trading Day" shall have the meaning set forth in Section 11(d)(i) hereof. "Triggering Event" shall mean any Section 11(a)(ii) Event or any Section 13 Event. Section 2. APPOINTMENT OF RIGHTS AGENT. The Company hereby appoints the Rights Agent to act as agent for the Company in accordance with the terms and conditions hereof, and the Rights Agent hereby accepts such appointment. The Company may from time to time appoint such co-Rights Agents as it may deem necessary or desirable, upon ten (10) days' prior written notice to the Rights Agent. The Rights Agent shall have no duty to supervise, and in no 5. event be liable for, the acts or omissions of any such co-Rights Agent. Section 3. ISSUE OF RIGHTS CERTIFICATES. (a) Until the earlier of (i) the Close of Business on the Shares Acquisition Date and (ii) the Close of Business on the tenth Business Day (or such later date as may be determined by action of the Company's Board of Directors upon approval by a majority of the Continuing Directors prior to such time as any Person becomes an Acquiring Person and of which the Company will give the Rights Agent prompt written notice) after the date that a tender or exchange offer by any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or of any Subsidiary of the Company or any entity holding shares of Common Stock for or pursuant to the terms of any such plan) is first published or sent or given within the meaning of Rule 14d-4(a) of the Exchange Act Regulations or any successor rule or of the first public announcement of the intention of any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or of any Subsidiary of the Company or any entity holding shares of Common Stock for or pursuant to the terms of any such plan) to commence, a tender or exchange offer, if upon consummation thereof such Person would be the Beneficial Owner of 15% or more of the shares of Company Common Stock then outstanding (the earlier of (i) and (ii) above being the "Distribution Date"), (x) the Rights will be evidenced (subject to the provisions of Section 3(b) hereof) by the certificates for shares of Common Stock registered in the names of the holders thereof (which certificates shall also be deemed to be Rights Certificates) and not by separate Rights Certificates, and (y) the right to receive Rights Certificates will be transferable only in connection with the transfer of shares of Common Stock. As soon as practicable after the Distribution Date, the Company will notify the Rights Agent thereof and the Company will prepare and execute, the Rights Agent will countersign, and the Company will send or cause to be sent (and the Rights Agent will, if requested, send) by first-class, insured, postage-prepaid mail, to each record holder of shares of Common Stock as of the Close of Business on the Distribution Date, at the address of such holder shown on the records of the Company, a Rights Certificate, in substantially the form of Exhibit B hereto (a "Rights Certificate"), evidencing one Right for each share of Common Stock so held. As of the Distribution Date, the Rights will be evidenced solely by such Rights Certificates. (b) On the Record Date, or as soon as practicable thereafter, the Company will send a copy of a Summary of Rights to Purchase Preferred Stock, in substantially the form of Exhibit C hereto (the "Summary of Rights"), by first-class, postage-prepaid mail, to each record holder of shares of Common Stock as of the Close of Business on the Record Date, at the address of such holder shown on the records of the Company. With respect to certificates for shares of Common Stock outstanding as of the Record Date, until the Distribution Date, the Rights will be evidenced by such certificates registered in the names of the holders thereof together with a copy of the Summary of Rights attached thereto. Until the Distribution Date (or the Expiration Date), the surrender for transfer of any certificate for shares of Common Stock outstanding on the Record Date, with or without a copy of the Summary of Rights attached thereto, shall also constitute the transfer of the Rights associated with the shares of Common Stock represented thereby. (c) Certificates for shares of Common Stock which become outstanding 6. (including, without limitation, reacquired shares of Common Stock referred to in the last sentence of this paragraph (c)) after the Record Date but prior to the earliest of the Distribution Date and the Expiration Date shall have impressed on, printed on, written on or otherwise affixed to them the following legend: This certificate also evidences and entitles the holder hereof to certain rights as set forth in a Rights Agreement between Oak Technology, Inc. and BankBoston, N.A., dated as of August 19, 1997 (the "Rights Agreement"), the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal executive offices of Oak Technology, Inc. Under certain circumstances, as set forth in the Rights Agreement, such Rights will be evidenced by separate certificates and will no longer be evidenced by this certificate. Oak Technology, Inc. will mail to the holder of this certificate a copy of the Rights Agreement without charge after receipt of a written request therefor. Under certain circumstances, as set forth in the Rights Agreement, Rights issued to any Person who becomes an Acquiring Person (as defined in the Rights Agreement), whether currently held by or on behalf of such person or by any subsequent holder, may become null and void. With respect to such certificates containing the foregoing legend, until the earlier of the Distribution Date and the Expiration Date, the Rights associated with the shares of Common Stock represented by such certificates shall be evidenced by such certificates alone, and the surrender for transfer of any such certificate shall also constitute the transfer of the Rights associated with the shares of Common Stock represented thereby. In the event that the Company purchases or acquires any shares of Common Stock after the Record Date but prior to the Distribution Date, any Rights associated with such shares of Common Stock shall be deemed cancelled and retired so that the Company shall not be entitled to exercise any Rights associated with the shares of Common Stock which are no longer outstanding. Section 4. FORM OF RIGHTS CERTIFICATES. (a) The Rights Certificates (and the forms of election to purchase Units of Preferred Stock and of assignment to be printed on the reverse thereof) shall be substantially the same as Exhibit B hereto and may have such marks of identification or designation and such legends, summaries or endorsements printed thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any applicable law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange or transaction reporting system on which the Rights may from time to time be listed, or to conform to usage. Subject to the provisions of Section 11 and Section 22 hereof, the Rights Certificates shall entitle the holders thereof to purchase the number of Units of Preferred Stock as shall be set forth therein at the price per Unit of Preferred Stock set forth therein, but the number of such Units of Preferred Stock and the Purchase Price shall be subject to adjustment as provided herein. 7. (b) Any Rights Certificate issued pursuant hereto that represents Rights beneficially owned by: (i) an Acquiring Person or any Associate or Affiliate of an Acquiring Person, (ii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee after the Acquiring Person becomes such or (iii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee prior to or concurrently with the Acquiring Person becoming such and receives such Rights pursuant to either (A) a transfer (whether or not for consideration) from the Acquiring Person to holders of equity interests in such Acquiring Person or to any Person with whom such Acquiring Person has any continuing agreement, arrangement or understanding regarding the transferred Rights or (B) a transfer which a majority of the Continuing Directors of the Company has determined is part of a plan, arrangement or understanding which has as a primary purpose or effect avoidance of Section 7(e) hereof shall contain (to the extent feasible) the following legend: The Rights represented by this Rights Certificate are or were beneficially owned by a Person who was or became an Acquiring Person or an Affiliate or Associate of an Acquiring Person (as such terms are defined in the Rights Agreement between Oak Technology, Inc. and BankBoston, N.A., as Rights Agent, dated as of August 19, 1997 (the "Rights Agreement"). Accordingly, this Rights Certificate and the Rights represented hereby may become null and void in the circumstances specified in Section 7(e) of the Rights Agreement. Section 5. COUNTERSIGNATURE AND REGISTRATION. (a) The Rights Certificates shall be executed on behalf of the Company by its Chairman of the Board or any of its Vice Presidents, either manually or by facsimile signature, shall have affixed thereto the Company's seal or a facsimile thereof, and shall be attested by the Secretary or an Assistant Secretary of the Company, either manually or by facsimile signature. The Rights Certificates shall be manually countersigned by the Rights Agent and shall not be valid for any purpose unless countersigned. In case any officer of the Company who shall have signed any of the Rights Certificates shall cease to be such officer of the Company before countersignature by the Rights Agent and issuance and delivery by the Company, such Rights Certificates, nevertheless, may be countersigned by the Rights Agent and issued and delivered by the Company with the same force and effect as though the person who signed such Rights Certificates had not ceased to be such officer of the Company; and any Rights Certificate may be signed on behalf of the Company by any person who, at the actual date of the execution of such Rights Certificate, shall be a proper officer of the Company to sign such Rights Certificate, although at the date of the execution of this Rights Agreement any such person was not such an officer. (b) Following the Distribution Date, the Rights Agent will keep or cause to be kept, at its office designated for such purpose, books for registration and transfer of the Rights Certificates issued hereunder. Such books shall show the names and addresses of the respective 8. holders of the Rights Certificates, the number of Rights evidenced on its face by each of the Rights Certificates and the date of each of the Rights Certificates. Section 6. TRANSFER, SPLIT-UP, COMBINATION AND EXCHANGE OF RIGHTS CERTIFICATES; MUTILATED, DESTROYED, LOST OR STOLEN RIGHTS CERTIFICATES. (a) Subject to the provisions of Sections 4(b), 7(e) and 14 hereof, at any time after the Close of Business on the Distribution Date, and at or prior to the Close of Business on the Expiration Date, any Rights Certificate or Rights Certificates may be transferred, split up, combined or exchanged for another Rights Certificate or Rights Certificates, entitling the registered holder to purchase a like number of Units of Preferred Stock (or, following a Triggering Event, other securities, cash or other assets, as the case may be) as the Rights Certificate or Rights Certificates surrendered then entitled such holder to purchase. Any registered holder desiring to transfer, split up, combine or exchange any Rights Certificate or Rights Certificates shall make such request in writing delivered to the Rights Agent, and shall surrender the Rights Certificate or Rights Certificates to be transferred, split up, combined or exchanged at the office of the Rights Agent designated for such purpose. Neither the Rights Agent nor the Company shall be obligated to take any action whatsoever with respect to the transfer of any such surrendered Rights Certificate until the registered holder shall have completed and signed the certificate contained in the form of assignment on the reverse side of such Rights Certificate and shall have provided such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the Company shall reasonably request. Thereupon the Rights Agent shall, subject to Sections 4(b), 7(e) and 14 hereof, countersign and deliver to the person entitled thereto a Rights Certificate or Rights Certificates, as the case may be, as so requested. The Company may require payment of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer, split up, combination or exchange of Rights Certificates. (b) Upon receipt by the Company and the Rights Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or mutilation of a Rights Certificate, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to them, and, at the Company's request, reimbursement to the Company and the Rights Agent of all reasonable expenses incidental thereto, and upon surrender to the Rights Agent and cancellation of the Rights Certificate if mutilated, the Company will make and deliver a new Rights Certificate of like tenor to the Rights Agent for delivery to the registered holder in lieu of the Rights Certificate so lost, stolen, destroyed or mutilated. Section 7. EXERCISE OF RIGHTS; PURCHASE PRICE; EXPIRATION DATE OF RIGHTS. (a) Except as provided in Sections 23(c) and 7(e), the registered holder of any Rights Certificate may exercise the Rights evidenced thereby (except as otherwise provided herein) in whole or in part at any time after the Distribution Date upon surrender of the Rights Certificate, with the form of election to purchase and certification on the reverse side thereof duly executed, to the Rights Agent at the office of the Rights Agent designated for such purpose, together with payment of the Purchase Price for each Unit of Preferred Stock as to which the Rights are exercised, at or prior to the earliest of (i) the Close of Business on the tenth anniversary hereof (the "Final Expiration 9. Date"), (ii) the time at which the Rights are redeemed as provided in Section 23 hereof (the "Redemption Date"), or (iii) the time at which such Rights are exchanged as provided in Section 24 hereof (the earlier of (i), (ii) and (iii) being the "Expiration Date"). (b) The Purchase Price for each Unit of Preferred Stock pursuant to the exercise of a Right shall initially be $60.00, shall be subject to adjustment from time to time as provided in Sections 11 and 13 hereof and shall be payable in lawful money of the United States of America in accordance with paragraph (c) below. (c) Upon receipt of a Rights Certificate representing exercisable Rights, with the form of election to purchase duly executed, accompanied by payment of the Purchase Price for the number of Units of Preferred Stock (or other securities or property, as the case may be) to be purchased and an amount equal to any applicable transfer tax required to be paid by the holder of such Rights Certificate in accordance with Section 9 hereof in cash, or by certified check or cashier's check payable to the order of the Company, the Rights Agent shall, subject to Section 20(k) hereof, thereupon promptly (i) (A) requisition from any transfer agent of the Preferred Stock (or make available, if the Rights Agent is the transfer agent for the Preferred Stock) a certificate or certificates for the number of Units of Preferred Stock to be purchased and the Company hereby irrevocably authorizes its transfer agent to comply with all such requests or (B) if the Company shall have elected to deposit the total number of Units of Preferred Stock issuable upon exercise of the Rights hereunder with a depositary agent, requisition from the depositary agent of depositary receipts representing such number of Units of Preferred Stock as are to be purchased (in which case certificates for the Units of Preferred Stock represented by such receipts shall be deposited by the transfer agent with the depositary agent) and the Company hereby directs the depositary agent to comply with such request, (ii) when appropriate, requisition from the Company the amount of cash to be paid in lieu of issuance of fractional shares in accordance with Section 14 hereof, (iii) after receipt of such certificates or depositary receipts, cause the same to be delivered to or upon the order of the registered holder of such Rights Certificate, registered in such name or names as may be designated by such holder and (iv) when appropriate, after receipt thereof, deliver such cash to or upon the order of the registered holder of such Rights Certificate. The payment of the Purchase Price (as such amount may be reduced (including to zero) pursuant to Section 11(a)(iii) hereof) may be made in cash or by certified bank check or bank draft payable to the order of the Company. In the event that the Company is obligated to issue other securities of the Company, pay cash and/or distribute other property pursuant to Section 11(a) hereof, the Company will make all arrangements necessary so that such other securities, cash and/or other property are available for distribution by the Rights Agent, if and when appropriate. (d) In case the registered holder of any Rights Certificate shall exercise less than all the Rights evidenced thereby, a new Rights Certificate evidencing Rights equivalent to the Rights remaining unexercised shall be issued by the Rights Agent to the registered holder of such Rights Certificate or to his duly authorized assigns, subject to the provisions of Section 14 hereof. (e) Notwithstanding anything in this Agreement to the contrary, from and after 10. the first occurrence of a Triggering Event, any Rights beneficially owned by (i) an Acquiring Person or an Associate or Affiliate of an Acquiring Person, (ii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee after the Acquiring Person becomes such, (iii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee prior to or concurrently with the Acquiring Person becoming such and receives such Rights pursuant to either (A) a transfer (whether or not for consideration) from the Acquiring Person to holders of equity interests in such Acquiring Person or to any Person with whom the Acquiring Person has any continuing agreement, arrangement or understanding regarding the transferred Rights or (B) a transfer which the a majority of the Continuing Directors of the Company has determined is part of a plan, arrangement or understanding which has as a primary purpose or effect the avoidance of this Section 7(e) or (iv) any subsequent transferee shall become null and void without any further action and no holder of such Rights shall have any rights whatsoever with respect to such Rights, whether under any provision of this Agreement or otherwise. The Company shall use all reasonable efforts to insure that the provisions of this Section 7(e) and Section 4(b) hereof are complied with, but shall have no liability to any holder of Rights Certificates or to any other Person as a result of its failure to make any determinations with respect to an Acquiring Person or any of such Acquiring Person's Affiliates, Associates or transferees hereunder. (f) Notwithstanding anything in this Agreement to the contrary, neither the Rights Agent nor the Company shall be obligated to undertake any action with respect to a registered holder upon the occurrence of any purported exercise as set forth in this Section 7 unless such registered holder shall have (i) completed and signed the certificate contained in the form of election to purchase set forth on the reverse side of the Rights Certificate surrendered for such exercise and (ii) provided such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the Company shall reasonably request. Section 8. CANCELLATION AND DESTRUCTION OF RIGHTS CERTIFICATES. All Rights Certificates surrendered for the purpose of exercise, transfer, split up, combination or exchange shall, if surrendered to the Company or to any of its agents, be delivered to the Rights Agent for cancellation or in cancelled form, or, if surrendered to the Rights Agent, shall be cancelled by it, and no Rights Certificates shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Rights Agreement. The Company shall deliver to the Rights Agent for cancellation and retirement, and the Rights Agent shall so cancel and retire, any other Rights Certificate purchased or acquired by the Company otherwise than upon the exercise thereof. The Rights Agent shall deliver all cancelled Rights Certificates to the Company, or shall, at the written request of the Company, destroy such cancelled Rights Certificates, and in such case shall deliver a certificate of destruction thereof to the Company. Section 9. RESERVATION AND AVAILABILITY OF PREFERRED STOCK. (a) The Company covenants and agrees that it will use its best efforts to cause to be reserved and kept available out of and to the extent of its authorized and unissued Units of Preferred Stock not reserved for another 11. purpose that will be sufficient to permit the exercise in full of all outstanding Rights. Upon the occurrence of any events resulting in an increase in the aggregate number of shares of Preferred Stock (or other equity securities of the Company) issuable upon exercise of all outstanding Rights above the number then reserved, the Company shall make appropriate increases in the number of shares so reserved. (b) If the Units of Preferred Stock to be issued and delivered upon the exercise of the Rights are at any time listed on a national securities exchange or included for quotation on any transaction reporting system, the Company shall during the period from the Distribution Date to the Expiration Date use its best efforts to cause all shares reserved for such issuance to be listed on such exchange or included for quotation on any such transaction reporting system upon official notice of issuance upon such exercise. (c) The Company shall use its best efforts to (i) file, as soon as practicable following the earliest date after the first occurrence of a Section 11(a)(ii) Event in which the consideration to be delivered by the Company upon exercise of the Rights has been determined in accordance with Section 11(a)(iii) hereof, or as soon as is required by law following the Distribution Date, as the case may be, a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the securities purchasable upon exercise of the Rights on an appropriate form, (ii) cause such registration statement to become effective as soon as practicable after such filing and (iii) cause such registration statement to remain effective (with a prospectus at all times meeting the requirements of the Securities Act) until the earlier of (A) the date as of which the Rights are no longer exercisable for such securities and (B) the Expiration Date. The Company will also take such action as may be appropriate under, or to ensure compliance with, the securities or "blue sky" laws of the various states in connection with the exercisability of the Rights. Notwithstanding any provision of this Agreement to the contrary, the Rights shall not be exercisable in any jurisdiction, unless the requisite qualification in such jurisdiction shall have been obtained, or an exemption therefrom shall be available and until a registration statement has been declared effective. (d) The Company covenants and agrees that it will take all such action as may be necessary to ensure that all Units of Preferred Stock (and, following the occurrence of a Triggering Event, any other securities that may be delivered upon exercise of rights) shall, at the time of delivery of the certificates for such Units of Preferred Stock (subject to payment of the Purchase Price), be duly and validly authorized and issued and fully paid and non-assessable. (e) The Company further covenants and agrees that it will pay when due and payable any and all federal and state transfer taxes and charges which may be payable in respect of the issuance or delivery of the Rights Certificates or of any Units of Preferred Stock upon the exercise of Rights. The Company shall not, however, be required to pay any transfer tax which may be payable in respect of any transfer or delivery of Rights Certificates to a person other than, or the issuance or delivery of certificates or depositary receipts for Units of Preferred Stock in a name other than that of, the registered holder of the Rights Certificate evidencing Rights 12. surrendered for exercise or to issue or to deliver any certificates or depositary receipts for Units of Preferred Stock upon the exercise of any Rights until any such tax shall have been paid (any such tax being payable by the holder of such Rights Certificate at the time of surrender) or until it has been established to the Company's reasonable satisfaction that no such tax is due. Section 10. PREFERRED STOCK RECORD DATE. Each person in whose name any certificate for Units of Preferred Stock (or, following the occurrence of a Triggering Event, other securities) is issued upon the exercise of Rights shall for all purposes be deemed to have become the holder of record of the Units of Preferred Stock (or, following the occurrence of a Triggering Event, other securities) represented thereby on, and such certificate shall be dated, the date upon which the Rights Certificate evidencing such Rights was duly surrendered and payment of the Purchase Price (and any applicable transfer taxes) was made; PROVIDED, HOWEVER, that if the date of such surrender and payment is a date upon which the Preferred Stock (or, following the occurrence of a Triggering Event, other securities) transfer books of the Company are closed, such person shall be deemed to have become the record holder of such shares on, and such certificate shall be dated, the next succeeding Business Day on which the Preferred Stock transfer books of the Company are open and FURTHER PROVIDED, HOWEVER, that if delivery of Units of Preferred Stock is delayed pursuant to Section 9(c), such Persons shall be deemed to have become the record holders of such Units of Preferred Stock only when such Units first become deliverable. Prior to the exercise of the Rights evidenced thereby, the holder of a Rights Certificate shall not be entitled to any rights of a stockholder of the Company with respect to securities for which the Rights shall be exercisable, including, without limitation, the right to vote, to receive dividends or other distributions or to exercise any preemptive rights, and shall not be entitled to receive any notice of any proceedings of the Company, except as provided herein. Prior to the exercise of the Rights evidenced thereby, the holder of a Rights Certificate shall not be entitled to any rights of a holder of a Unit of Preferred Stock for which the Rights shall be exercisable, including, without limitation, the right to vote, to receive dividends or other distributions or to exercise any preemptive rights, and shall not be entitled to receive any notice of any proceedings of the Company, except as provided herein. Section 11. ADJUSTMENT OF PURCHASE PRICE, NUMBER OF SHARES OR NUMBER OF RIGHTS. The Purchase Price, the number and kinds of securities covered by each Right and the number of Rights outstanding are subject to adjustment from time to time as provided in this Section 11. (a)(i) In the event the Company shall at any time after the date of this Agreement (A) declare a dividend on the Preferred Stock payable in shares of Preferred Stock, (B) subdivide the outstanding shares of Preferred Stock, (C) combine the outstanding Preferred Stock into a smaller number of shares Preferred Stock or (D) issue any shares of its capital stock in a reclassification of the Preferred Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing or surviving corporation), except as otherwise provided in this Section 11(a), the Purchase Price in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination or reclassification, and the number and kind of shares of 13. capital stock issuable on such date, shall be proportionately adjusted so that the holder of any Rights exercised after such time shall be entitled to receive the aggregate number and kind of shares of capital stock which, if such Rights had been exercised immediately prior to such date and at a time when the Preferred Stock transfer books of the Company were open, such holder would have owned upon such exercise and been entitled to receive by virtue of such dividend, subdivision, combination or reclassification; PROVIDED, HOWEVER, that in no event shall the consideration to be paid upon the exercise of one Right be less than the aggregate par value of the shares of capital stock of the Company issuable upon exercise of one Right. If an event occurs which would require an adjustment under both this Section 11(a)(i) and Section 11(a)(ii), the adjustment provided for in this Section 11(a)(i) shall be in addition to, and shall be made prior, to any adjustment required pursuant to Section 11(a)(ii). (ii) Subject to Section 24 of this Agreement, in the event that (A) any Acquiring person or any Associate or Affiliate of any Acquiring Person, at any time after the date of this Agreement, directly or indirectly, shall (1) merge into the Company or otherwise combine with the Company and the Company shall be the continuing or surviving corporation of such merger or combination and shares of Company Common Stock shall remain outstanding and unchanged, (2) in one transaction or a series of transactions, transfer any assets to the Company or any of its Subsidiaries in exchange (in whole or in part) for shares of Company Common Stock, for other equity securities of the Company or any such Subsidiary, or for securities exercisable for or convertible into shares of equity securities of the Company or any of its Subsidiaries (whether shares of Company Common Stock or otherwise) or otherwise obtain from the Company or any of its Subsidiaries, with or without consideration, any additional shares of such equity securities or securities exercisable for or convertible into such equity securities other than pursuant to a pro rata distribution to all holders of shares of Company Common Stock), (3) sell, purchase, lease, exchange, mortgage, pledge, transfer or otherwise acquire or dispose of, in one transaction or a series of transactions, to, from or with the Company or any of its Subsidiaries or any employee benefit plan maintained by the Company or any of its Subsidiaries or any trustee or fiduciary with respect to such plan acting in such capacity, assets (including securities) on terms and conditions less favorable to the Company or such Subsidiary or plan than those that could have been obtained in arm's-length negotiations with an unaffiliated third party, other than pursuant to a transaction set forth in Section 13(a) hereof, (4) sell, purchase, lease, exchange, mortgage, pledge, transfer or otherwise acquire or dispose of, in one transaction or a series of transactions, to, from or with the Company or any of its Subsidiaries or any employee benefit plan maintained by the Company or any of its Subsidiaries or any trustee or fiduciary with respect to such plan acting in such capacity (other than transactions, if any, consistent with those engaged in, as of the date hereof, by the Company and such Acquiring Person or such Associate or Affiliate), assets (including securities or intangible assets) having an aggregate fair market value of more than $5,000,000, other than pursuant to a transaction set forth in Section 13(a) hereof, (5) receive, or any designee, agent or representative of such Acquiring Person or any Affiliate 14. or Associate of such Acquiring Person shall receive, any compensation from the Company or any of its Subsidiaries other than compensation for full-time employment as a regular employee at rates in accordance with the Company's (or its Subsidiaries') past practices, or (6) receive the benefit, directly or indirectly (except proportionately as a holder of shares of Company Common Stock or as required by law or governmental regulation), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the Company or any of its Subsidiaries or any employee benefit plan maintained by the Company or any of its Subsidiaries or any trustee or fiduciary with respect to such plan acting in such capacity; or (B) any Person shall become an Acquiring Person, unless the event causing the Person to become an Acquiring Person is a transaction set forth in Section 13(a); or (C) during such time as there is an Acquiring Person, there shall be any reclassification of securities (including any reverse stock split), or recapitalization of the Company, or any merger or consolidation of the Company with any of its Subsidiaries or any other transaction or series of transactions involving the Company or any of its Subsidiaries, other than a transaction or transactions to which the provisions of Section 13(a) apply (whether or not with or into or otherwise involving an Acquiring Person), which has the effect, directly or indirectly, of increasing by more than 1% the proportionate share of the outstanding shares of any class of equity securities of the Company or any of its Subsidiaries that is directly or indirectly beneficially owned by any Acquiring Person or any Person or any Associate or Affiliate of any Acquiring Person; then promptly following the occurrence of an event described in Section 11(a)(ii)(A), (B) or (C) (a "Section 11(a)(ii) Event"), proper provision shall be made so that each holder of a Right, except as provided in Section 7(e) hereof, shall thereafter have the right to receive for each Right, upon exercise thereof in accordance with the terms of this Agreement and payment of the then-current Total Exercise Price, in lieu of the number of Units of Preferred Stock for which a Right was exercisable immediately prior to the first occurrence of a Section 11(a)(ii) Event, such number of Units of Preferred Stock as shall equal the result obtained by multiplying the then-current Purchase Price by the then number of Units of Preferred Stock for which a Right was exercisable (or would have been exercisable if the Distribution Date had occurred) immediately prior to the first occurrence of a Triggering Event, and dividing that product by 50% of the current per share market price (determined pursuant to Section 11(d) hereof) for shares of Common Stock on the date of occurrence of the Triggering Event (such number of Units of Preferred Stock being hereinafter referred to as the "Adjustment Shares"). (iii) In the event that the number of Units of Preferred Stock which are authorized by the Company's Amended and Restated Certificate of Incorporation but not outstanding or reserved for issuance for purposes other than upon exercise of the Rights are not sufficient to permit the exercise in full of the Rights, or if any necessary regulatory approval for such issuance has not been obtained by the Company, the Company shall, in lieu of issuing Units of Preferred Stock in accordance with Section 11(a)(ii) hereof, upon approval by a majority of the Continuing Directors: (A) determine the excess of (1) the value of the Units of Preferred Stock issuable upon the exercise of a Right (the "Current Value") over 15. (2) the Purchase Price (such excess being referred to as the "Spread") and (B) with respect to each Right, make adequate provision to substitute for such Units of Preferred Stock, upon exercise of the Rights, (1) cash, (2) a reduction in the Purchase Price, (3) other equity securities of the Company (including, without limitation, Common Stock or shares or units of shares of any series of preferred stock which the Board of Directors of the Company, upon approval by a majority of the Continuing Directors, has deemed to have the same value as the Units of Preferred Stock (such shares or Units of preferred stock are herein called "preferred stock equivalents"), except to the extent that the Company has not obtained any necessary regulatory approval for such issuance, (4) debt securities of the Company, except to the extent that the Company has not obtained any necessary regulatory approval for such issuance, (5) other assets or (6) any combination of the foregoing, having an aggregate value equal to the Current Value, where such aggregate value has been determined by the Board of Directors of the Company, upon approval by a majority of the Continuing Directors, based upon the advice of a nationally recognized investment banking firm selected by the Board of Directors of the Company, upon approval by a majority of the Continuing Directors; PROVIDED, HOWEVER, if the Company shall not have made adequate provision to deliver value pursuant to clause (B) above within thirty (30) days following the later of (x) occurrence of a Section 11(a)(ii) Event, and (y) the date on which the Company's right of redemption pursuant to Section 23(a) expires (the later of (x) and (y) being referred to herein as the "Section 11(a)(iii) Trigger Date"), then the Company shall be obligated to deliver, upon the surrender for exercise of a Right and without requiring payment of the Purchase Price, Units of Preferred Stock (to the extent available), and then, if necessary, cash, which Units and/or cash have an aggregate value equal to the Spread. (b) In the event that the Company shall fix a record date for the issuance of rights, options or warrants to all holders of Units of Preferred Stock entitling them (for a period expiring within 45 calendar days after such record date) to subscribe for or purchase Units of Preferred Stock (or shares having the same rights, privileges and preferences as the Preferred Stock ("equivalent preferred shares")) or securities convertible into Units of Preferred Stock or equivalent preferred shares at a price per Unit of Preferred Stock or equivalent preferred share (or having a conversion price per share, if a security convertible into Units of Preferred Stock or equivalent preferred shares) less than the then current per share market price of the Preferred Stock (as determined pursuant to Section 11(d)) on such record date, the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the number of Units of Preferred Stock outstanding on such record date plus the number of Units of Preferred Stock which the aggregate offering price of the total number of Units of Preferred Stock and/or equivalent preferred shares so to be offered (and/or the aggregate initial conversion price of the convertible securities so to be offered) would purchase at such current market price and the denominator of which shall be the number of Units of Preferred Stock outstanding on such record date plus the number of additional Units of Preferred Stock and/or equivalent preferred shares to be offered for subscription or purchase (or into which the convertible securities so to be offered are initially convertible). In case such subscription price may be paid in a consideration part or all of which shall be in a form 16. other than cash, the value of such consideration shall be as determined in good faith by a majority of the Continuing Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent and shall be binding on the Rights Agent and the holders of the Rights. Units of Preferred Stock owned by or held for the account of the Company shall not be deemed outstanding for the purpose of any such computation. Such adjustment shall be made successively whenever such a record date is fixed; and in the event that such rights, options or warrants are not so issued, the Purchase Price shall be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed. (c) In case the Company shall fix a record date for a distribution to all holders of Units of Preferred Stock (including any such distribution made in connection with a consolidation or merger in which the Company is the continuing or surviving corporation) of evidences of indebtedness, cash (other than a regular quarterly cash dividend) assets (other than a dividend payable in Units of Preferred Stock but including any dividend payable in equity securities other than Preferred Stock) or subscription rights or warrants (excluding those referred to in Section 11(d) hereof), the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the then current per share market price (as determined pursuant to Section 11(d)) of the Preferred Stock on such record date, less the fair market value (as determined in good faith by a majority of the Continuing Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent and shall be binding on the Rights Agent and the holder of rights) of the cash, assets or evidences of indebtedness to be distributed or of such subscription rights or warrants distributable in respect of a share of Preferred Stock and the denominator of which shall be such current per share market price (as determined pursuant to Section 11(d)) of a share of Preferred Stock. Such adjustments shall be made successively whenever such a record date is fixed; and in the event that such distribution is not so made, the Purchase Price shall again be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed. (d)(i) For the purpose of any computation hereunder, the "current per share market price" of any security (a "Security" for the purpose of this Section 11(d)(i)) on any date shall be deemed to be the average of the daily closing prices per share of such Security for the thirty (30) consecutive Trading Days (as such term is hereinafter defined) immediately prior to such date; PROVIDED, HOWEVER, that in the event that the "current per share market price" of the Security is determined during a period following the announcement by the issuer of such Security of (A) a dividend or distribution on such Security payable in shares of such Security or securities convertible into such shares, or (B) any subdivision, combination or reclassification of such Security and prior to the expiration of thirty (30) Trading Days after the ex-dividend date for such dividend or distribution, or the record date for such subdivision, combination or reclassification, then, and in each such case, the "current per share market price" shall be appropriately adjusted to reflect the "current market price" per share equivalent of such Security. The closing price for each day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the 17. closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the Nasdaq National Market System ("NASDAQ") or, if the Security is not listed or admitted to trading on the NASDAQ, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Security is listed or admitted to trading or, if the Security is not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the NASDAQ or such other system then in use, or, if on any such date the Security is not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Security selected by a majority of the Continuing Directors. If on any such date no market maker is making a market in the Security, the "current per share market price" of such Security on such date as determined in good faith by the Board of Directors of the Company as provided for above shall be used. The term "Trading Day" shall mean a day on which the principal national securities exchange on which the Security is listed or admitted to trading is open for the transaction of business or, if the Security is not listed or admitted to trading on any national securities exchange, a Business Day. (ii) For the purpose of any computation hereunder, the "current per share market price" of the Preferred Stock shall be determined in accordance with the method set forth in Section 11(d)(i). If the "current per share market price" of the Preferred Stock cannot be determined in the manner provided above or if the Preferred Stock is not publicly held or listed or traded in a manner described in clause (i) of this Section 11(d), the "current per share market price" of the Preferred Stock shall be conclusively deemed to be an amount equal to $1,000 (as such amount may be appropriately adjusted for such events as stock splits, stock dividends and recapitalizations with respect to shares of Company Common Stock occurring after the date of this Agreement) multiplied by the current market price per share of Company Common Stock. If shares of neither the Company Common Stock nor Preferred Stock is publicly held or so listed or traded, "current per share market price" of the Preferred Stock shall mean the fair value per share as determined in good faith by the Board of Directors of the Company, upon approval by a majority of the Continuing Directors, whose determination shall be described in a statement filed with the Rights Agent and shall be binding on the Rights Agent and the holders of the Rights. (e) No adjustment in the Purchase Price shall be required unless such adjustment would require an increase or decrease of at least 1% in the Purchase Price; PROVIDED, HOWEVER, that any adjustments which by reason of this Section 11(e) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 11 shall be made to the nearest cent or to the nearest one one-thousandth of a share of Preferred Stock or one one-hundredth of any other share or security as the case may be. Notwithstanding the first sentence of this Section 11(e), any adjustment required by this Section 11 shall be made no later than the earlier of (i) three years from the date of the transaction which 18. requires such adjustment or (ii) the Expiration Date. (f) If as a result of an adjustment made pursuant to Section 11(a)(ii) hereof, the holder of any Rights thereafter exercised shall become entitled to receive any shares of capital stock of the Company other than Units of Preferred Stock, thereafter the number of such other shares so receivable upon exercise of any Rights and the Purchase Price thereof shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Preferred Stock contained in Section 11(a), (b), (c), (d), (e), (g), (h), (i), (j), (k), (l) and (m), and the provisions of Sections 7, 9, 10, 13 and 14 with respect to the Preferred Stock shall apply on like terms to any such other shares. (g) All Rights originally issued by the Company subsequent to any adjustment made to the Purchase Price hereunder shall evidence the right to purchase, at the adjusted Purchase Price, the number of Units of Preferred Stock purchasable from time to time hereunder upon exercise of the Rights, all subject to further adjustment as provided herein. (h) Unless the Company shall have exercised its election as provided in Section 11(i), upon each adjustment of the Purchase Price as a result of the calculations made in Sections 11(b) and (c), each Right outstanding immediately prior to the making of such adjustment shall thereafter evidence the right to purchase, at the adjusted Units of Purchase Price, that number of Units of Preferred Stock (calculated to the nearest one-millionth of a share of Preferred Stock) obtained by dividing (i) the product obtained by multiplying (x) the number of Units of Preferred Stock covered by a Right immediately prior to this adjustment by (y) the Purchase Price in effect immediately prior to such adjustment of the Purchase Price by, (ii) the Purchase Price in effect immediately after such adjustment of the Purchase Price. (i) The Company may elect on or after the date of any adjustment of the Purchase Price to adjust the number of Rights, in substitution for any adjustment in the number of Units of Preferred Stock purchasable upon the exercise of a Right. Each of the Rights outstanding after such adjustment of the number of Rights shall be exercisable for the number of Units of Preferred Stock for which a Right was exercisable immediately prior to such adjustment. Each Right held of record prior to such adjustment of the number of Rights shall become that number of Rights (calculated to the nearest one one-thousandth) obtained by dividing the Purchase Price in effect immediately prior to adjustment of the Purchase Price by the Purchase Price in effect immediately after adjustment of the Purchase Price. The Company shall make a public announcement of its election to adjust the number of Rights, indicating the record date for the adjustment, and, if known at the time, the amount of the adjustment to be made. This record date may be the date on which the Purchase Price is adjusted or any day thereafter, but, if the Rights Certificates have been issued, shall be at least ten days later than the date of the public announcement. If Rights Certificates have been issued, upon each adjustment of the number of Rights pursuant to this Section 11(i), the Company shall, as promptly as practicable, cause to be distributed to holders of record of Rights Certificates on such record date Rights Certificates evidencing, subject to Section 14 hereof, the additional Rights to which such holders shall be 19. entitled as a result of such adjustment, or, at the option of the Company, shall cause to be distributed to such holders of record in substitution and replacement for the Rights Certificates held by such holders prior to the date of adjustment, and upon surrender thereof, if required by the Company, new Rights Certificates evidencing all the Rights to which such holders shall be entitled after such adjustment. Rights Certificates to be so distributed shall be issued, executed and countersigned in the manner provided for herein and shall be registered in the names of the holders of record of Rights Certificates on the record date specified in the public announcement. (j) Irrespective of any adjustment or change in the Purchase Price or the number of Units of Preferred Stock issuable upon the exercise of the Rights, the Rights Certificates theretofore and thereafter issued may continue to express the Purchase Price per Unit and the number of Units of Preferred Stock which were expressed in the initial Rights Certificates issued hereunder. (k) Before taking any action that would cause an adjustment reducing the Purchase Price below the then par value of the number of Units of Preferred Stock issuable upon exercise of the Rights, the Company shall take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable number of Units of Preferred Stock at such adjusted Purchase Price. (l) In any case in which this Section 11 shall require that an adjustment in the Purchase Price be made effective as of a record date for a specified event, the Company may elect to defer until the occurrence of such event the issuing to the holder of any Rights exercised after such record date of that number of Units of Preferred Stock and other capital stock or securities of the Company, if any, issuable upon such exercise over and above the Units of Preferred Stock and other capital stock or securities of the Company, if any, issuable upon such exercise on the basis of the Purchase Price in effect prior to such adjustment; PROVIDED, HOWEVER, that the Company shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares (fractional or otherwise) upon the occurrence of the event requiring such adjustment. (m) Anything in this Section 11 to the contrary notwithstanding, the Company shall be entitled to make such reductions in the Purchase Price, in addition to those adjustments expressly required by this Section 11, as and to the extent that it in its sole discretion shall determine to be advisable in order that any (i) consolidation or subdivision of the Preferred Stock, (ii) issuance wholly for cash of any Unit of Preferred Stock at less than the current market price, (iii) issuance wholly for cash of Preferred Stock or securities which by their terms are convertible into or exchangeable for Preferred Stock, (iv) dividends on Preferred Stock payable in Preferred Stock or (v) issuance of rights, options or warrants referred to in this Section 11, hereafter made by the Company to holders of Units of its Preferred Stock shall not be taxable to such stockholders. (n) The Company shall not, at any time after the Distribution Date, (i) consolidate with any other Person (other than a Subsidiary of the Company in a transaction 20. which complies with Section 11(o)), (ii) merge with or into any other Person (other than a Subsidiary of the Company in a transaction which complies with Section 11(o)), or (iii) sell or transfer (or permit any Subsidiary to sell or transfer), in one transaction, or a series of transactions, assets or earning power aggregating more than 50% of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to any other Person or Persons (other than the Company and/or any of its Subsidiaries in one or more transactions each of which complies with Section 11(o)), if (x) at the time of or immediately after such consolidation, merger or sale there are any rights, warrants or other instruments or securities outstanding or agreements in effect which would substantially diminish or otherwise eliminate the benefits intended to be afforded by the Rights or (y) prior to, simultaneously with or immediately after such consolidation, merger or sale, the Person which constitutes, or would constitute the "Principal Party" for purposes of Section 13(a) shall have distributed or otherwise transferred to its stockholders or other persons holding an equity interest in such Person Rights previously owned by such Person or any of its Affiliates and Associates; PROVIDED, HOWEVER, this Section 11(n) shall not affect the ability of any Subsidiary of the Company to consolidate with, merge with or into, or sell or transfer assets or earning power to, any other Subsidiary of the Company. (o) After the Distribution Date, the Company shall not, except as permitted by Section 23 or Section 26, take (or permit any Subsidiary to take) any action if at the time such action is taken it is reasonably foreseeable that such action will diminish substantially or otherwise eliminate the benefits intended to be afforded by the Rights. (p) In the event that, at any time after the date of this Agreement and prior to the Distribution Date, the Company shall (i) declare or pay any dividend on outstanding shares of Common Stock payable in shares of Common Stock or (ii) effect a subdivision, combination or consolidation of the Common Stock (by reclassification or otherwise than by payment of dividends in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in any such case the number of Units of Preferred Stock purchasable after such event upon proper exercise of each Right shall be determined by multiplying the number of Units of Preferred Stock so purchasable immediately prior to such event by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately before such event and the denominator of which is the number of shares of Common Stock outstanding immediately after such event. The adjustments provided for in this Section 11(p) shall be made successively whenever such a dividend is declared or paid or such a subdivision, combination or consolidation is effected. Section 12. CERTIFICATE OF ADJUSTED PURCHASE PRICE OR NUMBER OF SHARES. Whenever an adjustment is made as provided in Sections 11 and 13 hereof, the Company shall promptly (a) prepare a certificate setting forth such adjustment, and a brief statement of the facts accounting for such adjustment, (b) file with the Rights Agent and with each transfer agent for the shares of Common Stock or Units of Preferred Stock a copy of such certificate and (c) mail a brief summary thereof to each holder of a Rights Certificate in accordance with Section 25 hereof. Notwithstanding the foregoing sentence, the failure by the Company to make such certification or give such notice shall not affect the validity of or the force or effect of the requirement for such 21. adjustment. The Rights Agent shall be fully protected in relying on any such certificate and on any adjustment contained therein and shall not be deemed to have knowledge of such adjustment unless and until it shall have received such certificate. Section 13. CONSOLIDATION, MERGER OR SALE OR TRANSFER OF ASSETS OR EARNING POWER. (a) Except as provided in Section 13(b) hereof, in the event that, following a Shares Acquisition Date, directly or indirectly, (x) the Company shall consolidate with, or merge with and into, any other Person (other than a Subsidiary of the Company in a transaction which complies with Section 11(o)), and the Company shall not be the continuing or surviving corporation of such consolidation or merger, (y) any Person (other than a Subsidiary of the Company in a transaction which complies with Section 11(o)) shall consolidate with the Company, or merge with and into the Company and the Company shall be the continuing or surviving corporation of such consolidation or merger and, in connection with such consolidation or merger, all or part of the shares of Common Stock shall be changed into or exchanged for stock or other securities of any other Person or cash or any other property, or (z) the Company shall sell or otherwise transfer (or one or more of its Subsidiaries shall sell or otherwise transfer) to any Person or Persons (other than a Subsidiary of the Company in a transaction which complies with Section 11(o)), in one or more transactions, directly or indirectly, assets or earning power aggregating 50% or more of the assets or earning power of the Company and its Subsidiaries (taken as a whole), any such event being a "Section 13 Event," then, and in each such case, proper provision shall be made so that: (i) each holder of a Right, except as provided in Section 7(e), shall thereafter have the right to receive, upon the exercise thereof at the then current Purchase Price, such number of validly authorized and issued, fully paid and non-assessable shares of Common Stock of the Principal Party, which shares shall not be subject to any liens, encumbrances, rights of first refusal, transfer restrictions or other adverse claims, as shall be equal to the result obtained by (1) multiplying the then current Purchase Price by the number of Units of Preferred Stock for which a Right is exercisable immediately prior to the first occurrence of a Section 13 Event (or, if a Section 11(a)(ii) Event has occurred prior to the first occurrence of a Section 13 Event, multiplying the number of such Units for which a Right would be exercisable hereunder but for the occurrence of such Section 11(a)(ii) Event by the Purchase Price which would be in effect hereunder but for such first occurrence) and (2) dividing that product (which, following the direct occurrence of a Section 13 Event, shall be the "Purchase Price" for all purposes of this Agreement) by 50% of the current per share market price (determined pursuant to Section 11(d)) of the shares of Common Stock of such Principal Party on the date of consummation of such Section 13 Event; (ii) such Principal Party shall thereafter be liable for, and shall assume, by virtue of such Section 13 Event, all the obligations and duties of the Company pursuant to this Agreement; (iii) the term "Company" shall, for all purposes of this Agreement, thereafter be deemed to refer to such Principal Party, it being specifically intended that the provisions of Section 11 shall apply only to such Principal Party following the first occurrence of a Section 13 Event; (iv) such Principal Party shall take such steps (including, but not limited to, the reservation of a sufficient number of shares of its Common Stock) in connection with the consummation of any such transaction as may be necessary to ensure that the provisions of this Agreement shall thereafter be applicable to its shares of Common Stock thereafter deliverable upon the exercise of the Rights; and (v) the provisions of Section 11(a)(ii) shall be of no further effect 22. following the first occurrence of any Section 13 Event. (b) "Principal Party" shall mean: (i) in the case of any transaction described in clause (x) or (y) of the first sentence of Section 13(a), (A) the Person that is the issuer of any securities into which shares of Company Common Stock are converted in such merger or consolidation, or, if there is more than one such issuer, the issuer of shares of Common Stock that has the highest aggregate current market price (determined pursuant to Section 11(d)) and (B) if no securities are so issued, the Person that is the other party to such merger or consolidation, or, if there is more than one such Person, the Person the Common Stock of which has the highest aggregate current market price (determined pursuant to Section 11(d)); and (ii) in the case of any transaction described in clause (z) of the first sentence of Section 13(a), the Person that is the party receiving the largest portion of the assets or earning power transferred pursuant to such transaction or transactions, or, if each Person that is a party to such transaction or transactions receives the same portion of the assets or earning power transferred pursuant to such transaction or transactions or if the Person receiving the largest portion of the assets or earning power cannot be determined, whichever Person the Common Stock of which has the highest aggregate current market price (determined pursuant to Section 11(d)); PROVIDED, HOWEVER, that in any such case, (1) if the Common Stock of such Person is not at such time and have not been continuously over the preceding twelve-month period registered under Section 12 of the Exchange Act ("Registered Common Stock"), or such Person is not a corporation, and such Person is a direct or indirect Subsidiary of another Person that has Registered Common Stock outstanding, "Principal Party" shall refer to such other Person; (2) if the Common Stock of such Person is not Registered Common Stock or such Person is not a corporation, and such Person is a direct or indirect Subsidiary of another Person but is not a direct or indirect Subsidiary of another Person which has Registered Common Stock outstanding, "Principal Party" shall refer to the ultimate parent entity of such first-mentioned Person; (3) if the Common Stock of such Person is not Registered Common Stock or such Person is not a corporation, and such Person is directly or indirectly controlled by more than one Person, and one or more of such other Persons has Registered Common Stock outstanding, "Principal Party" shall refer to whichever of such other Persons is the issuer of the Registered Common Stock having the highest aggregate current per share market price (determined pursuant to Section 11(d)); and (4) if the Common Stock of such Person is not Registered Common Stock or such Person is not a corporation, and such Person is directly or indirectly controlled by more than one Person, and none of such other Persons has Registered Common Stock outstanding, "Principal Party" shall refer to whichever ultimate parent entity is the corporation having the greatest stockholders' equity or, if no such ultimate parent entity is a corporation, shall refer to whichever ultimate parent entity is the entity having the greatest net assets. 23. (c) The Company shall not consummate any such consolidation, merger, sale or transfer unless the Principal Party shall have a sufficient number of authorized shares of Common Stock which have not been issued or reserved for issuance to permit the exercise in full of the Rights in accordance with this Section 13, and unless prior thereto the Company and such Principal Party shall have executed and delivered to the Rights Agent a supplemental agreement providing for the terms set forth in paragraphs (a) and (b) of this Section 13 and further providing that the Principal Party will: (i)(A) file on an appropriate form, as soon as practicable following the execution of such agreement, a registration statement under the Securities Act with respect to the shares of Common Stock that may be acquired upon exercise of the Rights, (B) cause such registration statement to remain effective (and to include a prospectus complying with the requirements of the Securities Act) until the Expiration Date, and (C) as soon as practicable following the execution of such agreement take such action as may be required to ensure that any acquisition of such shares of Common Stock upon the exercise of the Rights complies with any applicable state securities or "blue sky" laws; and (ii) deliver to holders of the Rights historical financial statements for the Principal Party and each of its Affiliates which comply in all respects with the requirements for registration on Form 10 under the Exchange Act. (d) In case the Principal Party which is to be a party to a transaction referred to in this Section 13 has a provision in any of its authorized securities or in its Certificate of Incorporation or Bylaws or other instrument governing its corporate affairs, which provision would have the effect of (i) causing such Principal Party to issue, in connection with, or as a consequence of, the consummation of a transaction referred to in this Section 13, shares of Common Stock of such Principal Party at less than the then current market price per share (determined pursuant to Section 11(d)) or securities exercisable for, or convertible into, shares of Common Stock of such Principal Party at less than such then current marker price (other than to holders of Rights pursuant to this Section 13) or (ii) providing for any special payment, tax or similar provisions in connection with the issuance of the shares of Common Stock of such Principal Party pursuant to the provisions of this Section 13, then, in such event, the Company shall not consummate any such transaction unless prior thereto the Company and such Principal Party shall have executed and delivered to the Rights Agent a supplemental agreement providing that the provision in question of such Principal Party shall have been cancelled, waived or amended, or that the authorized securities shall be redeemed, so that the applicable provision will have no effect in connection with, or as a consequence of, the consummation of the proposed transaction. (e) The provisions of this Section 13 shall similarly apply to successive mergers or consolidations or sales or other transfers. In the event that a Section 13 Event shall occur at any time after the occurrence of a Section 11(a)(ii) Event, the Rights which have not theretofore been exercised shall thereafter become exercisable in the manner described in Section 13(a). 24. Section 14. FRACTIONAL RIGHTS AND FRACTIONAL SHARES. (a) The Company shall not be required to issue fractions of Rights or to distribute Rights Certificates which evidence fractional Rights. In lieu of such fractional Rights, there shall be paid to the registered holders of the Rights Certificates with regard to which such fractional Rights would otherwise be issuable, an amount in cash equal to the same fraction of the current market value of a whole Rights. For the purposes of this Section 14(a), the current market value of a whole Rights shall be the closing price of the Rights for the Trading Day immediately prior to the date on which such fractional Rights would have been otherwise issuable. The closing price for any day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the NASDAQ or, if the Rights are not listed or admitted to trading on the NASDAQ, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Rights are listed or admitted to trading or, if the Rights are not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by NASDAQ or such other system then in use or, if on any such date the Rights are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Rights selected by the Directors. If on any such date no such market maker is making a market in the Rights, the fair value of the Rights on such date as determined in good faith by the Board of Directors of the Company, upon approval by a majority of the Continuing Directors, shall be used. (b) The Company shall not be required to issue fractions of Preferred Stock (other than fractions which are integral multiples of one one-thousandth of a share of Preferred Stock) upon exercise of the Rights or to distribute certificates which evidence fractional Preferred Stock (other than fractions which are integral multiples of one one-thousandth of a share of Preferred Stock). Fractions of Preferred Stock in integral multiples of one one-thousandth of a share of Preferred Stock may, at the election of the Company, be evidenced by depositary receipts, pursuant to an appropriate agreement between the Company and a depositary selected by it; PROVIDED, HOWEVER, that such agreement shall provide that the holders of such depositary receipts shall have all the rights, privileges and preferences to which they are entitled as beneficial owners of the Preferred Stock represented by such depositary receipts. In lieu of fractional shares of Preferred Stock that are not integral multiples of one one-thousandth of a share of Preferred Stock, the Company shall pay to the registered holders of Rights Certificates at the time such Rights are exercised as herein provided an amount in cash equal to the same fraction of the current market value of one a share of Preferred Stock as determined pursuant to Section 11(d). (c) The holder of a Right by the acceptance of the Right expressly waives his right to receive any fractional Rights or any fractional shares upon exercise of a Right (except as provided above). Section 15. RIGHTS OF ACTION. All rights of action in respect of this Agreement, 25. excepting the rights of action given to the Rights Agent under Section 18 hereof, are vested in the respective registered holders of the Rights Certificates (and, prior to the Distribution Date, the registered holders of certificates representing shares of Common Stock); and any registered holder of any Rights Certificate (or, prior to the Distribution Date, a certificate representing shares of Common Stock), without the consent of the Rights Agent or of the holder of any other Rights Certificate (or, prior to the Distribution Date, of a certificate representing shares of Common Stock), may, in such holder's own behalf and for such holder's own benefit, enforce, and may institute and maintain any suit, action or proceeding against the Company to enforce, or otherwise act in respect of, such holder's right to exercise the Rights evidenced by such Rights Certificate in the manner provided in such Rights Certificate and in this Agreement. Without limiting the foregoing or any remedies available to the holders of Rights, it is specifically acknowledged that the holders of Rights would not have an adequate remedy at law for any breach of this Agreement and will be entitled to specific performance of the obligations hereunder, and injunctive relief against actual or threatened violations of the obligations of any Person subject to this Agreement. Section 16. AGREEMENT OF RIGHTS HOLDERS. Every holder of a Right, by accepting the same, consents and agrees with the Company and the Rights Agent and with every other holder of a Right that: (a) prior to the Distribution Date, the Rights will be transferable only in connection with the transfer of shares of the Company's Common Stock; (b) after the Distribution Date, the Rights Certificates are transferable only on the registry books of the Rights Agent if surrendered at the office of the Rights Agent designated for such purpose, duly endorsed or accompanied by a proper instrument of transfer; (c) subject to Sections 6(a) and 7(f) hereof, the Company and the Rights Agent may deem and treat the person in whose name the Rights Certificate (or, prior to the Distribution Date, the associated Common Stock certificate) is registered as the absolute owner thereof and of the Rights evidenced thereby (notwithstanding any notations of ownership or writing on the Rights Certificates or the associated Common Stock certificate made by anyone other than the Company or the Rights Agent) for all purposes whatsoever, and neither the Company nor the Rights Agent shall be affected by any notice to the contrary; and (d) notwithstanding anything in this Agreement to the contrary, neither the Company nor the Rights Agent shall have any liability to any holder of a Right or other Person as a result of its inability to perform any of its obligations under this Agreement by reason of any preliminary or permanent injunction or other order, decree or ruling issued by a court of competent jurisdiction or by a governmental, regulatory or administrative agency or commission, or any statute, rule, regulation or executive order promulgated or enacted by any governmental authority, prohibiting or otherwise restraining performance of such obligation; PROVIDED, HOWEVER, the Company must use its best efforts to have any such order, decree or ruling lifted or otherwise overturned as soon as possible. 26. Section 17. RIGHTS CERTIFICATE HOLDER NOT DEEMED A STOCKHOLDER. No holder, as such, of any Rights Certificate shall be entitled to vote, receive dividends or be deemed for any purpose the holder of the Units of Preferred Stock or any other securities of the Company which may at any time be issuable on the exercise of the Rights represented thereby, nor shall anything contained herein or in any Rights Certificate be construed to confer upon the holder of any Rights Certificate, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting stockholders (except as provided in Section 25 hereof), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by such Rights Certificate shall have been exercised in accordance with the provisions hereof. Section 18. CONCERNING THE RIGHTS AGENT. The Company agrees to pay to the Rights Agent reasonable compensation for all services rendered by it hereunder and, from time to time, on demand of the Rights Agent, its reasonable expenses and counsel fees and other disbursements incurred in the administration and execution of this Agreement and the exercise and performance of its duties hereunder. The Company also agrees to indemnify the Rights Agent for, and to hold it harmless against, any loss, liability, or expense, incurred without gross negligence, or willful misconduct on the part of the Rights Agent, for any action taken, suffered or omitted by the Rights Agent in connection with the execution, acceptance and administration of this Agreement and the exercise and performance hereunder of its duties, including the costs and expenses of defending against and appealing any claim of liability in the premises. The indemnity provided herein shall survive the termination of this Agreement and the expiration of the Rights. The costs and expenses incurred in enforcing this right of indemnification shall be paid by the Company. The Rights Agent may conclusively rely upon and shall be protected and shall incur no liability for, or in respect of any action taken, suffered or omitted by it in connection with, its administration of this Agreement and the exercise and performance of its duties hereunder in reliance upon any Rights Certificate or certificate for Units of Preferred Stock or shares of Common Stock or for other securities of the Company, instrument of assignment or transfer, power of attorney, endorsement, affidavit, letter, notice, direction, consent, certificate, statement, or other paper or document believed by it to be genuine and to be signed, executed and, where necessary, verified or acknowledged, by the proper person or persons, or otherwise upon the advice of counsel as set forth in Section 20 hereof. Section 19. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF RIGHTS AGENT. (a) Any corporation into which the Rights Agent or any successor Rights Agent may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Rights Agent or any successor Rights Agent shall be a party, or any corporation succeeding to the stock transfer or corporate trust business of the Rights Agent or any successor Rights Agent, shall be the successor to the Rights Agent under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided 27. that such corporation would be eligible for appointment as a successor Rights Agent under the provisions of Section 21 hereof. In case at the time such successor Rights Agent shall succeed to the agency created by this Agreement any of the Rights Certificates shall have been countersigned but not delivered, any such successor Rights Agent may adopt the countersignature of the predecessor Rights Agent and deliver such Rights Certificates so countersigned; and in case at that time any of the Rights Certificates shall not have been countersigned, any successor Rights Agent may countersign such Rights Certificates either in the name of the predecessor Rights Agent or in the name of the successor Rights Agent; and in all such cases such Rights Certificates shall have the full force provided in the Rights Certificates and in this Agreement. (b) In case at any time the name of the Rights Agent shall be changed and at such time any of the Rights Certificates shall have been countersigned but not delivered, the Rights Agent may adopt the countersignature under its prior name and deliver Rights Certificates so countersigned; and in case at that time any of the Rights Certificates shall not have been countersigned, the Rights Agent may countersign such Rights Certificates either in its prior name or in its changed name; and in all such cases such Rights Certificates shall have the full force provided in the Rights Certificates and in this Agreement. Section 20. DUTIES OF RIGHTS AGENT. The Rights Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions and no implied duties or obligations shall be read into this Agreement against the Rights Agent, by all of which the Company and the holders of Rights Certificates, by their acceptance thereof, shall be bound: (a) Before the Rights Agent acts or refrains from acting, it may consult with legal counsel of its choice (who may be legal counsel for the Company), and the advice or opinion of such counsel shall be full and complete authorization and protection to the Rights Agent as to any action taken, suffered or omitted by it in good faith and in accordance with such advice or opinion. (b) Whenever in the administration, exercise and performance of its duties under this Agreement the Rights Agent shall deem it necessary or desirable that any fact or matter be proved or established by the Company prior to taking, suffering or omitting any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by the Chairman of the Board, any Vice President or the Secretary of the Company and delivered to the Rights Agent; and such certificate shall be full authorization to the Rights Agent for any action taken, suffered or omitted in good faith by it under the provisions of this Agreement in reliance upon such certificate. (c) The Rights Agent shall be liable hereunder to the Company and any other Person only for its own gross negligence or willful misconduct. (d) The Rights Agent shall not be liable for or by reason of any of the 28. statements of fact or recitals contained in this Agreement or in the Rights Certificates (except its countersignature thereof) or be required to verify the same, but all such statements and recitals are and shall be deemed to have been made by the Company only. (e) The Rights Agent shall not be under any liability or responsibility in respect of the legality, validity or enforceability of this Agreement or the execution and delivery hereof (except the due execution hereof by the Rights Agent) or in respect of the legality, validity or enforceability or the execution of any Rights Certificate (except its countersignature thereof and has actual knowledge of such change or adjustment); nor shall it be liable or responsible for any breach by the Company of any covenant or condition contained in this Agreement or in any Rights Certificate; nor shall it be responsible for any change in the exercisability of the Rights (including the Rights becoming void pursuant to Section 11(a)(ii) hereof) or any adjustment in the terms of the Rights (including the manner, method or amount thereof) provided for in Section 3, 11, 13, 23 or 24, or the ascertaining of the existence of facts that would require any such change or adjustment (except with respect to the exercise of Rights evidenced by Rights Certificates after receipt of the certificate described in Section 12 hereof or has actual knowledge of such change or adjustment); nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any Units of Preferred Stock to be issued pursuant to this Agreement or any Rights Certificate or as to whether any Preferred Stock will, when issued, be validly authorized and issued, fully paid and nonassessable. (f) The Company agrees that it will perform, execute, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all such further and other acts, instruments and assurances as may reasonably be required by the Rights Agent for the carrying out or performing by the Rights Agent of the provisions of this Agreement. (g) The Rights Agent is hereby authorized and directed to accept instructions with respect to the administration, exercise and performance of its duties hereunder from the Chairman of the Board, any Vice President or the Secretary of the Company, and to apply to such officers for advice or instructions in connection with its duties, and it shall not be responsible or liable for any action taken, suffered or omitted by it in good faith in accordance with instructions of any such officer or for any delay in acting while waiting for those instructions. Any application by the Rights Agent for written instructions from the Company may, at the option of the Rights Agent, set forth in writing any action proposed to be taken or omitted by the Rights Agent under this Rights Agreement and the date on and/or after which such action shall be taken or such omission shall be effective. The Rights Agent shall not be liable for any action taken by, or omission of, the Rights Agent in accordance with a proposal included in any such application on or after the date specified in such application (which date shall not be less than five (5) Business Days after the date any officer of the Company actually received such application, unless any such officer shall have consented in writing to an earlier date) unless, prior to taking any such action (or the effective date in the case of an omission), the Rights Agent shall have received written instructions in response to such application specifying the action to be taken or omitted. 29. (h) The Rights Agent and any stockholder, director, officer or employee of the Rights Agent may buy, sell or deal in any of the Rights or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to the Company or otherwise act as fully and freely as though it were not Rights Agent under this Agreement. Nothing herein shall preclude the Rights Agent from acting in any other capacity for the Company or for any other legal entity. (i) The Rights Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys or agents, and the Rights Agent shall not be answerable or accountable for any act, default, neglect or misconduct of any such attorneys or agents or for any loss to the Company resulting from any such act, default, neglect or misconduct, provided reasonable care was exercised in the selection and continued employment thereof. (j) No provision of this Agreement shall require the Rights Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of its rights if the Rights Agent in good faith believes that repayment of such funds or adequate indemnification against such risk or liability is not reasonably assured to it. (k) If, with respect to any Rights Certificate surrendered to the Rights Agent for exercise, transfer, split up, combination or exchange, the certification on the form of assignment or form of election to purchase, as the case may be, that the Rights evidenced by the Rights Certificate are not owned by an Acquiring Person, or an Affiliate or Associate thereof, has either not been completed or in any manner indicates any other response thereto, the Rights Agent shall not take any further action with respect to such requested exercise, transfer, split up, combination or exchange, without first consulting with the Company. Section 21. CHANGE OF RIGHTS AGENT. The Rights Agent or any successor Rights Agent may resign and be discharged from its duties under this Agreement upon thirty (30) days' notice in writing mailed to the Company and to each transfer agent of the Common Stock or Preferred Stock (as to which the Rights Agent has received prior written notice) by registered or certified mail, and the Company shall mail notice thereof to the holders of the Rights Certificates by first-class mail. The Company may remove the Rights Agent or any successor Rights Agent upon thirty (30) days' notice in writing, mailed to the Rights Agent or successor Rights Agent, as the case may be, and to each transfer agent of the Common Stock or Preferred Stock (as to which the Rights Agent has received prior written notice) by registered or certified mail, and to the holders of the Rights Certificates by first-class mail. If the Rights Agent shall resign or be removed or shall otherwise become incapable of acting, the Company shall appoint a successor to the Rights Agent. If the Company shall fail to make such appointment within a period of thirty (30) days after giving notice of such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Rights Agent or by the holder of a Rights Certificate (who shall, with such notice, submit such holder's Rights Certificate for inspection by the Company), then the registered holder of any Rights Certificate may apply to any court of competent jurisdiction for the 30. appointment of a new Rights Agent. Any successor Rights Agent, whether appointed by the Company or by such a court, shall be a corporation organized and doing business under the laws of the United States or of any state of the United States, in good standing, authorized under such laws to exercise corporate trust or stock transfer powers, and subject to supervision or examination by federal or state authority and which has at the time of its appointment as Rights Agent a combined capital and surplus of at least $50 million. After appointment, the successor Rights Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Rights Agent without further act or deed; but the predecessor Rights Agent shall deliver and transfer to the successor Rights Agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Not later than the effective date of any such appointment the Company shall file notice thereof in writing with the predecessor Rights Agent and each transfer agent of the Common Stock or Preferred Stock, and mail a notice thereof in writing to the registered holders of the Rights Certificates. Failure to give any notice provided for in this Section 21, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Rights Agent or the appointment of the successor Rights Agent, as the case may be. Section 22. ISSUANCE OF NEW RIGHTS CERTIFICATES. Notwithstanding any of the provisions of this Agreement or of the Rights to the contrary, the Company may, at its option, issue new Rights Certificates evidencing Rights in such form as may be approved by its Board of Directors upon approval by a majority of the Continuing Directors, to reflect any adjustment or change in the Purchase Price and the number or kind or class of shares or other securities or property purchasable under the Rights Certificates made in accordance with the provisions of this Agreement. In addition, in connection with the issuance or sale of shares of Common Stock following the Distribution Date and prior to the Expiration Date, the Company (a) shall, with respect to shares of Common Stock so issued or sold pursuant to the exercise of stock options or under any employee benefit plan or arrangement or upon the exercise, conversion or exchange of securities of the Company currently outstanding or issued at any time in the future by the Company and (b) may, in any other case, if deemed necessary or appropriate by the Board of Directors of the Company, upon approval by a majority of the Continuing Directors, issue Rights Certificates representing the appropriate number of Rights in connection with such issuance or sale; PROVIDED, HOWEVER, that (i) no such Rights Certificate shall be issued and this sentence shall be null and void AB INITIO if, and to the extent that, such issuance or this sentence would create a significant risk of or result in material adverse tax consequences to the Company or the Person to whom such Rights Certificate would be issued or would create a significant risk of or result in such options' or employee plans' or arrangements' failing to qualify for otherwise available special tax treatment and (ii) no such Rights Certificate shall be issued if, and to the extent that, appropriate adjustment shall otherwise have been made in lieu of the issuance thereof. Section 23. REDEMPTION AND TERMINATION. (a) The Company may, at its option, upon approval by a majority of the Continuing Directors, at any time prior to the earlier of (i) the Shares Acquisition Date, or (ii) the Final Expiration Date redeem all but not less than all the then outstanding Rights at a redemption price of $.01 per Right, appropriately adjusted to reflect any 31. stock split, stock dividend or similar transaction occurring after the date hereof (such redemption price being hereinafter referred to as the "Redemption Price"), and the Company may, at its option, pay the Redemption Price either in cash, shares of Common Stock (based on the current per share market price thereof (as determined pursuant to Section 11(d) hereof) at the time of redemption), or any other form of consideration deemed appropriate by the Board of Directors; PROVIDED that, notwithstanding anything to the contrary contained in this Section 23(a), the Company may not take any action pursuant to this Section 23(a) unless (x) at the time of the action of the Board of Directors of the Company approving such redemption and the form of payment of the Redemption Price, there are then in office not less than two Continuing Directors and (y) such action is approved by a majority of the Continuing Directors then in office. The redemption of the Rights by the Board of Directors may be made effective at such time on such basis and with such conditions as a majority of the Continuing Directors in its sole discretion may establish. (b) Immediately upon the action of a majority of the Continuing Directors of the Company ordering the redemption of the Rights pursuant to paragraph (a) of this Section 23, and without any further action and without any notice, the right to exercise the Rights will terminate and the only right thereafter of the holders of Rights shall be to receive the Redemption Price. The Company shall promptly give public notice of any such redemption; PROVIDED, HOWEVER, that the failure to give, or any defect in, any such notice shall not affect the validity of such redemption. Within 10 days after such action of a majority of the Continuing Directors ordering the redemption of the Rights, the Company shall give notice of such redemption to the Rights Agent and shall mail a notice of redemption to all the holders of the then outstanding Rights at their last addresses as they appear upon the registry books of the Rights Agent or, prior to the Distribution Date, on the registry books of the transfer agent for the Common Stock. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of redemption will state the method by which the payment of the Redemption Price will be made. Neither the Company nor any of its Affiliates or Associates may redeem, acquire or purchase for value any Rights at any time in any manner other than that specifically set forth in this Section 23 or in Section 24 hereof, and other than in connection with the purchase of shares of Common Stock prior to the Distribution Date. (c) Notwithstanding anything contained in this Agreement to the contrary, the Rights shall not be exercisable pursuant to Section 7(a) at any time when the Rights are redeemable hereunder. Section 24. EXCHANGE. (a) The Company, at its option, upon approval by a majority of the Continuing Directors, at any time after any Person becomes an Acquiring Person, may exchange all or part of the then outstanding and exercisable Rights (which shall not include Rights that have become void pursuant to the provisions of Section 7(f) hereof) for Units of Preferred Stock at an exchange ratio equal to, subject to adjustment to reflect stock splits, stock dividends and similar transactions occurring after the date hereof, that number obtained by dividing the Purchase Price by the then current per share market price per Unit of Preferred Stock on the earlier of (i) the date on which any Person becomes an Acquiring Person and (ii) the date on which 32. a tender or exchange offer by any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan maintained by the Company or any of its Subsidiaries or any trustee or fiduciary with respect to such plan acting in such capacity) is first published or sent or given within the meaning of Rule 14d-4(a) of the Exchange Act Regulations or any successor rule, if upon consummation thereof such Person would be the Beneficial Owner of 15% or more of the shares of Company Common Stock then outstanding (such exchange ratio being hereinafter referred to as the "Section 24(a) Exchange Ratio"). Notwithstanding the foregoing, the Company may not effect such exchange at any time after any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan maintained by the Company or any of its Subsidiaries, or any trustee or fiduciary with respect to such plan acting in such capacity), together with all Affiliates and Associates of such Person, becomes the Beneficial Owner of 50% or more of the shares of Common Stock then outstanding. (b) Immediately upon the action of the Board of Directors of the Company ordering the exchange of any Rights pursuant to subsection (a) of this Section 24 and without any further action and without any notice, the right to exercise such Rights shall terminate and the only right thereafter of a holder of such Rights shall be to receive that number of Units of Preferred Stock equal to the number of such Rights held by such holder multiplied by the Section 24(a) Exchange Ratio. The Company shall promptly give public notice of any such exchange; PROVIDED, HOWEVER, that the failure to give, or any defect in, such notice shall not affect the validity of such exchange. The Company promptly shall mail a notice of any such exchange to all of the holders of such Rights at their last addresses as they appear upon the registry books of the Rights Agent. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of exchange will state the method by which the exchange of shares of Common Stock for Rights will be effected and, in the event of any partial exchange, the number of Rights which will be exchanged. Any partial exchange shall be effected PRO RATA based on the number of Rights (other than Rights which have become void pursuant to the provisions of Section 7(f) hereof) held by each holder of Rights. (c) In the event that the number of shares of Preferred Stock which are authorized by the Company's Certificate of Incorporation but not outstanding or reserved for issuance for purposes other than upon exercise of the Rights are not sufficient to permit any exchange of Rights as contemplated in accordance with this Section 34, the Company shall take all such action as may be necessary to authorize additional shares of Preferred Stock for issuance upon exchange of the Rights or make adequate provision to substitute (1) cash, (2) Company Common Stock or other equity securities of the Company, (3) debt securities of the Company, (4) other assets, or (5) any combination of the foregoing, having an aggregate value equal to the Adjustment Spread, where such aggregate value has been determined by a majority of the Continuing Directors. (d) The Company shall not be required to issue fractions smaller than or to distribute certificates which evidence fractions smaller than one one-thousandth of a share of Preferred Stock. In lieu thereof, the Company shall pay to the registered holders of the Rights Certificates with regard to which such fractional Units would otherwise be issuable an amount in 33. cash equal to the same fraction of the current market value (as determined pursuant to Section 11(c)(i) hereof) of one Unit of Preferred Stock. Section 25. NOTICE OF CERTAIN EVENTS. (a) In case the Company shall propose (i) to pay any dividend payable in stock of any class to the holders of its Preferred Stock or to make any other distribution to the holders of its Preferred Stock (other than a regular quarterly cash dividend), (ii) to offer to the holders of its Preferred Stock rights or warrants to subscribe for or to purchase any additional Units of Preferred Stock or shares of stock of any class or any other securities, rights or options, (iii) to effect any reclassification of its Preferred Stock (other than a reclassification involving only the subdivision of outstanding Preferred Stock), (iv) to effect any consolidation or merger into or with any other Person (other than a Subsidiary of the Company in a transaction which complies with Section 11(o)), or to effect any sale or other transfer (or to permit one or more of its Subsidiaries to effect any sale or other transfer), in one or more transactions, of 50% or more of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to, any other Person, (v) to effect the liquidation, dissolution or winding up of the Company, or (vi) to declare or pay any dividend on the Common Stock payable in shares of Common Stock or to effect a subdivision, combination or consolidation of the shares of Common Stock (by reclassification or otherwise than by payment of dividends in shares of Common Stock), then, in each such case, the Company shall give to each holder of a Rights Certificate, in accordance with Section 26 hereof, a notice of such proposed action, which shall specify the record date for the purposes of such stock dividend, or distribution of rights or warrants, or the date on which such reclassification, consolidation, merger, sale, transfer, liquidation, dissolution, or winding up is to take place and the date of participation therein by the holders of the shares of Common Stock and/or Units of Preferred Stock, if any such date is to be fixed, and such notice shall be so given in the case of any action covered by clause (i) or (ii) above at least ten (10) days prior to the record date for determining holders of the Units of Preferred Stock for purposes of such action, and in the case of any such other action, at least ten (10) days prior to the date of the taking of such proposed action or the date of participation therein by the holders of the shares of Common Stock and/or Units of Preferred Stock, whichever shall be the earlier. (b) In case any of the events set forth in Section 11(a)(ii) hereof shall occur, then the Company shall as soon as practicable thereafter give to each holder of a Rights Certificate, in accordance with Section 26 hereof, a notice of the occurrence of such event, which notice shall describe such event and the consequences of such event to holders of Rights under Section 11(a)(ii) hereof. In the event any Person becomes an Acquiring Person, the Company will promptly notify the Rights Agent thereof. 34. Section 26. NOTICES. Notices or demands authorized by this Agreement to be given or made by the Rights Agent or by the holder of any Rights Certificate to or on the Company shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Rights Agent) as follows: Oak Technology, Inc. 139 Kifer Court Sunnyvale, CA 94086 Attention: General Counsel Subject to the provisions of Section 21 hereof, any notice or demand authorized by this Agreement to be given or made by the Company or by the holder of any Rights Certificate to or on the Rights Agent shall be sent by registered or certified mail and shall be deemed given upon receipt and addressed (until another address is filed in writing with the Company) as follows: BankBoston, N.A. c/o Boston EquiServe Limited Partnership 150 Royall Street Canton, MA 02021 Attention: Shareholder Services Division Notices or demands authorized by this Agreement to be given or made by the Company or the Rights Agent to the holder of any Rights Certificate shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed to such holder at the address of such holder as shown on the registry books of the Company. Section 27. SUPPLEMENTS AND AMENDMENTS. Prior to the Distribution Date, the Company may supplement or amend this Agreement in any respect, without the approval of any holders of Rights, by action of its Board of Directors, upon approval by a majority of the Continuing Directors, and the Rights Agent shall, if the Company so directs, execute such supplement or amendment. From and after the Distribution Date, the Company may from time to time supplement or amend this Agreement without the approval of any holders of Rights, by action of its Board of Directors, upon approval by a majority of the Continuing Directors, in order (i) to cure any ambiguity, (ii) to correct or supplement any provision contained herein which may be defective or inconsistent with any other provisions herein, (iii) to shorten or lengthen any time period hereunder or (iv) to change or supplement the provisions hereunder in any manner which the Company may deem necessary or desirable and which shall not adversely affect the interests of the holders of Rights Certificates (other than an Acquiring Person or an Affiliate or Associate of an Acquiring Person), including, without limitation, to change the Purchase Price, the Redemption Price, any time periods herein specified, and any other term hereof, any such supplement or amendment to be evidenced by a writing signed by the Company and the Rights Agent; PROVIDED, 35. HOWEVER, that from and after such time as any Person becomes an Acquiring Person, this Agreement shall not be amended in any manner which would adversely affect the interests of the holders of Rights. Upon receipt of a certificate from an appropriate officer of the Company that the proposed supplement or amendment is consistent with this Section 27 and, after such time as any Person has become an Acquiring Person, that the proposed supplement or amendment does not adversely affect the interests of the holders of Rights, the Rights Agent shall execute such supplement or amendment. Section 28. SUCCESSORS. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Rights Agent shall bind and inure to the benefit of their respective successors and assigns hereunder. Section 29. DETERMINATIONS AND ACTIONS BY THE BOARD OF DIRECTORS. For all purposes of this Agreement, any calculation of the number of shares of Common Stock outstanding at any particular time, including for purposes of determining the particular percentage of such outstanding shares of Common Stock of which any Person is the Beneficial Owner, shall be made in accordance with the last sentence of Rule 13d-3(d)(1)(i) of the General Rules and Regulations under the Exchange Act. The Board of Directors of the Company shall have the exclusive power and authority to administer this Agreement and to exercise all rights and powers specifically granted to the Board, or the Company, or as may be necessary or advisable in the administration of this Agreement, including, without limitation, the right and power to (i) interpret the provisions of this Agreement and (ii) make all determinations deemed necessary or advisable for the administration of this Agreement (including a determination to redeem or not redeem the Rights or to amend the Agreement). All such actions, calculations, interpretations and determinations (including, for purposes of clause (y) below, all omissions with respect to the foregoing), which are done or made by the Board in good faith, shall (x) be final, conclusive and binding on the Company, the Rights Agent, the holders of the Rights Certificates and all other parties and (y) not subject the Board or the Continuing Directors to any liability to the holders of the Rights. Section 30. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be construed to give to any person or corporation other than the Company, the Rights Agent and the registered holders of the Rights Certificates (and, prior to the Distribution Date, shares of Common Stock) any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company, the Rights Agent and the registered holders of the Rights Certificates (and, prior to the Distribution Date, shares of Common Stock). Section 31. SEVERABILITY. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated; PROVIDED, HOWEVER, that notwithstanding anything in this Agreement to the contrary, if any such term, provision, covenant or restriction is held by such court or authority to be invalid, void or unenforceable and the Board of Directors of the Company, upon approval by a majority of the 36. Continuing Directors, determines in its good faith judgment that severing the invalid language from this Agreement would adversely affect the purpose or effect of this Agreement, the right of redemption set forth in Section 23 hereof shall be reinstated and shall not expire until the tenth business day following the date of such determination by the Board of Directors of the Company. Section 32. GOVERNING LAW. This Agreement and each Rights Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of Delaware and for all purposes shall be governed by and construed in accordance with the laws of such State applicable to contracts to be made and performed entirely within such State. Section 33. COUNTERPARTS. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. Section 34. DESCRIPTIVE HEADINGS. Descriptive headings of the several Sections of this Agreement are inserted or convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and attested, all as of the day and year first above written. ATTEST: OAK TECHNOLOGY, INC. By By ---------------------------- --------------------------- Name: Name: Title: Title ATTEST: BANKBOSTON, N.A., as Rights Agent By By ---------------------------- --------------------------- Name: Name: Title: Title 37. EXHIBIT A FORM of CERTIFICATE OF DESIGNATION of SERIES A JUNIOR PARTICIPATING PREFERRED STOCK of OAK TECHNOLOGY, INC. (Pursuant to Section 151 of the Delaware General Corporation Law) ---------------------------------- OAK TECHNOLOGY, INC., a corporation organized and existing under the General Corporation Law of the State of Delaware (hereinafter called the "Corporation"), hereby certifies that the following resolution was adopted by the Board of Directors of the Corporation as required by Section 151 of the General Corporation Law at a meeting duly called and held on August 18, 1997; RESOLVED, that pursuant to the authority granted to and vested in the Board of Directors of the Corporation (hereinafter called the "Board of Directors" or the "Board") in accordance with the provisions of the Certificate of Incorporation, the Board of Directors hereby creates a series of Preferred Stock, par value $.001 per share (the "Preferred Stock"), of the Corporation and hereby states the designation and number of shares, and fixes the relative rights, preferences, and limitations thereof as follows: Series A Junior Participating Preferred Stock: Section 1. DESIGNATION AND AMOUNT. The shares of such series shall be designated as "Series A Junior Participating Preferred Stock" (the "Series A Preferred Stock") and the number of shares constituting the Series A Preferred Stock shall be four hundred thousand (400,000). Such number of shares may be increased or decreased by resolution of the Board of Directors; PROVIDED, A-1 that no decrease shall reduce the number of shares of Series A Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Series A Preferred Stock. Section 2. DIVIDENDS AND DISTRIBUTIONS. (A) Subject to the rights of the holders of any shares of any series of Preferred Stock (or any similar stock) ranking prior and superior to the Series A Preferred Stock with respect to dividends, each holder of one one-thousandth (1/1,000) of a share of Series A Preferred Stock (a "Unit"), in preference to the holders of shares of Common Stock, par value $.001 per share (the "Common Stock"), of the Corporation, and of any other junior stock, shall be entitled to receive, when declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the last day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a Unit of Series A Preferred Stock, in an amount per share (rounded to the nearest cent) equal to, subject to the provision for adjustment hereinafter set forth, 1,000 times the aggregate per share amount of all cash dividends, and 1,000 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of a Unit of Series A Preferred Stock. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Corporation shall declare a dividend or distribution on the Units of Series A Preferred Stock as provided in paragraph (A) of this Section immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided, however, that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Distribution Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per Unit on the Series A Preferred Stock shall nevertheless be payable on such A-2 subsequent Quarterly Dividend Payment Date. (C) Dividends shall begin to accrue and be cumulative on each outstanding Unit of Series A Participating Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such Unit of Series A Participating Preferred Stock, unless the date of issue of such Unit is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such Unit shall begin to accrue from the date of issue of such Unit, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of Units of Series A Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the Units of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such Units shall be allocated pro rata on a Unit-by-Unit basis among all such Units at the time outstanding. The Board of Directors may fix a record date for the determination of holders of Units of Series A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 60 days prior to the date fixed for the payment thereof. Section 3. VOTING RIGHTS. The holders of Units of Series A Preferred Stock shall have the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each Unit of Series A Preferred Stock shall entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per Unit to which holders of Units of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein, in any other Certificate of Designations creating a series of Preferred Stock or any similar stock, or by law, the holders of Units of Series A Preferred Stock and the holders of shares of Common Stock and any other capital stock of the Corporation having general voting rights shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. A-3 (C) Except as set forth herein, or as otherwise provided by law, holders of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. Section 4. CERTAIN RESTRICTIONS. (A) Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on Units of Series A Preferred Stock outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock; (ii) declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except dividends paid ratably on the Units of Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Preferred Stock; or (iv) redeem or purchase or otherwise acquire for consideration any Units of Series A Preferred Stock, or any shares of stock ranking on a parity with the Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. A-4 (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. REACQUIRED UNITS. Any Units of Series A Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such Units shall upon their cancellation become authorized but unissued Units of Preferred Stock and may be reissued as part of a new series of Preferred Stock subject to the conditions and restrictions on issuance set forth herein, in the Certificate of Incorporation, or in any other Certificate of Designations creating a series of Preferred Stock or any similar stock or as otherwise required by law. Section 6. LIQUIDATION, DISSOLUTION OR WINDING UP. (A) Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (1) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock unless, prior thereto, the holders of Units of Series A Preferred Stock shall have received $1,000 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, provided that the holders of Units of Series A Preferred Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 1,000 times the aggregate amount to be distributed per share to holders of shares of Common Stock, or (2) to the holders of shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except distributions made ratably on the Series A Preferred Stock and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of Units of Series A Preferred Stock were entitled immediately prior to such event under the proviso in clause (1) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) In the event, however, that there are not sufficient assets available to permit payment in full to the Series A Liquidation Preference and the liquidation preferences of all other series of Preferred Stock, if any, which rank on a parity with the Series A Participating A-5 Preferred Stock, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences. Section 7. CONSOLIDATION, MERGER, ETC. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the Units of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series A Preferred Stock shall at the same time be similarly exchanged or changed into an amount per Unit, subject to the provision for adjustment hereinafter set forth, equal to 1,000 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of Units of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 8. NO REDEMPTION. The Units of Series A Preferred Stock shall not be redeemable. Section 9. RANK. The Series A Preferred Stock shall rank, with respect to the payment of dividends and the distribution of assets, junior to all series of any other class of the Corporation's Preferred Stock. Section 10. AMENDMENT. The Amended and Restated Certificate of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Preferred Stock so as to affect them adversely without the affirmative vote of the holders of at least a majority of the outstanding Units of Series A Preferred Stock, voting together as a single class. A-6 IN WITNESS WHEREOF, this Certificate of Designation is executed on behalf of the Corporation by its President and its corporate seal attested by its Chief Financial Officer this 18th day of August, 1997. ---------------------------------------- Name: Title: Attest: - ---------------------------------- Name: Title: A-7 EXHIBIT B Form of Rights Certificate Certificate No. R- ________ Rights NOT EXERCISABLE AFTER AUGUST 19, 2007 OR EARLIER IF REDEMPTION OR EXCHANGE OCCURS. THE RIGHTS ARE SUBJECT TO REDEMPTION AT THE OPTION OF THE COMPANY AT $.01 PER RIGHT AND TO EXCHANGE ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN CIRCUMSTANCES, RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT) AND ANY SUBSEQUENT HOLDER OF SUCH RIGHTS MAY BECOME NULL AND VOID. [THE RIGHTS REPRESENTED BY THIS RIGHTS CERTIFICATE ARE OR WERE BENEFICIALLY OWNED BY A PERSON WHO WAS OR BECAME AN ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT). ACCORDINGLY, THIS RIGHTS CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY MAY BECOME NULL AND VOID IN THE CIRCUMSTANCES SPECIFIED IN SUCH AGREEMENT.]*/ Rights Certificate OAK TECHNOLOGY, INC. This certifies that , or registered assigns, is the registered owner of the number of Rights set forth above, each of which entitles the owner thereof, subject to the terms, provisions and conditions of the Rights Agreement, dated as of August 19, 1997 (the "Rights Agreement"), between Oak Technology, Inc., a Delaware corporation (the "Company"), and BankBoston, N.A. (the "Rights Agent"), to purchase from the Company at any time after the Distribution Date (as such term is defined in the Rights Agreement) and prior to 5:00 P.M., California - --------------------- */ The portion of the legend in bracket shall be inserted only if applicable and shall replace the preceding sentence. B-1 time, on August 19, 2007 at the office of the Rights Agent designated for such purpose, or at the office of its successor as Rights Agent, one one-thousandth (a "Unit") of a fully paid non-assessable share of Series A Junior Participating Preferred Stock, par value $.001 per share (the "Series A Preferred Stock") of the Company, at a purchase price of $60.00 per Unit of Series A Preferred Stock (the "Purchase Price"), upon presentation and surrender of this Rights Certificate with the Form of Election to Purchase duly executed. The number of Rights evidenced by this Rights Certificate (and the number of Units of Series A Preferred Stock which may be purchased upon exercise hereof) set forth above, and the Purchase Price set forth above, are the number and Purchase Price as of August 29, 1997 based on the Series A Preferred Stock as constituted at such date. As provided in the Rights Agreement, the Purchase Price and the number of Units of Series A Preferred Stock which may be purchased upon the exercise of the Rights evidenced by this Rights Certificate are subject to modification and adjustment upon the happening of certain events. This Rights Certificate is subject to all of the terms, provisions and conditions of the Rights Agreement, which terms, provisions and conditions are hereby incorporated herein by reference and made a part hereof and to which Rights Agreement reference is hereby made for a full description of the rights, limitations of rights, obligations, duties and immunities hereunder of the Rights Agent, the Company and the holders of the Rights Certificates. Copies of the Rights Agreement are on file at the principal executive offices of the Company. This Rights Certificate, with or without other Rights Certificates, upon surrender at the office of the Rights Agent designated for such purpose, may be exchanged for another Rights Certificate or Rights Certificates of like tenor and date evidencing Rights entitling the holder to purchase a like aggregate number of Series A Preferred Stock as the Rights evidenced by the Rights Certificate or Rights Certificates surrendered shall have entitled such holder to purchase. If this Rights Certificate shall be exercised in part, the holder shall be entitled to receive upon surrender hereof another Rights Certificate or Rights Certificates for the number of whole Rights not exercised. Subject to the provisions of the Rights Agreement, the Rights evidenced by this Certificate may be redeemed by the Company at a redemption price of $.01 per Rights. No fractional shares of Series A Preferred Stock will be issued upon the exercise of any Rights or Rights evidenced hereby (other than fractions which are integral multiples of one one-thousandth of a share of Series A Preferred Stock, which may, at the election of the Company, be evidenced by depositary receipts), but in lieu thereof a cash payment will be made, as provided in the Rights Agreement. No holder of this Rights Certificate, as such, shall be entitled to vote or receive dividends or be deemed for any purpose the holder of Units of Series A Preferred Stock or of any other securities of the Company which may at any time be issuable on the exercise hereof, nor shall anything contained in the Rights Agreement or herein be construed to confer upon the holder hereof, as such, any of the rights of a stockholder of the Company or any right to vote for the B-2 election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting stockholders (except as provided in the Rights Agreement), or to receive dividends or subscription rights, or otherwise, until the Rights or Rights evidenced by this Rights Certificate shall have been exercised as provided in the Rights Agreement. This Rights Certificate shall not be valid or obligatory for any purpose until it shall have been countersigned by the Rights Agent. WITNESS the signature of the proper officers of the Company and its corporate seal. Dated as of August 19, 1997 ATTEST: OAK TECHNOLOGY, INC. By - ------------------------- -------------------------------- Name: Name: Title: Title: Countersigned: BANKBOSTON, N.A., as Rights Agent By --------------------------- Authorized Signatory B-3 Form of Reverse Side of Rights Certificate FORM OF ASSIGNMENT (To be executed by the registered holder if such holder desires to transfer the Rights Certificate.) FOR VALUE RECEIVED ______________________________ hereby sells, assigns and transfers unto ________________________________________________________________________________ (Please print name and address of transferee) this Rights Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint ________________ Attorney, to transfer the within Rights Certificate on the books of the within-named Company, with full power of substitution. Dated: , ---------------------- ---- ---------------------------------- Signature Signature Guaranteed: Signatures must be guaranteed by a participant in a Securities Transfer Association Inc. recognized signature guarantee medallion program. B-4 CERTIFICATE The undersigned hereby certifies that the Rights evidenced by this Rights Certificate are not beneficially owned by an Acquiring Person or an Affiliate or Associate thereof (as defined in the Rights Agreement). ------------------------------------- Signature ----------------------------------------------------- NOTICE The signature in the foregoing Form of Assignment must conform to the name as written upon the face of this Rights Certificate in every particular, without alteration or enlargement or any change whatsoever. In the event the certification set forth above in the Form of Assignment is not completed, the Company and the Rights Agent will deem the beneficial owner of the Rights evidenced by this Rights Certificate to be an Acquiring Person or an Affiliate or Associate thereof (as defined in the Rights Agreement) and such Assignment will not be honored. B-5 FORM OF ELECTION TO PURCHASE (To be executed if holder desires to exercise the Rights Certificate.) To OAK TECHNOLOGY, INC. The undersigned hereby irrevocably elects to exercise _________________ Rights represented by this Rights Certificate to purchase the units of Series A Preferred Stock issuable upon the exercise of such Rights and requests that certificates for such Series A Preferred Stock be issued in the name of: Please insert social security or other identifying number -------------------------------------------------- (Please print name and address) If such number of Rights shall not be all the Rights evidenced by this Rights Certificate, a new Rights Certificate for the balance remaining of such Rights shall be registered in the name of and delivered to: Please insert social security or other identifying number -------------------------------------------------- (Please print name and address) Dated: , ------------------ ---- ----------------------------------- Signature Signature Guaranteed: Signatures must be guaranteed by a participant in a Securities Transfer Association Inc. recognized signature guarantee medallion program. B-6 CERTIFICATE The undersigned hereby certifies that the Rights evidenced by this Rights Certificate are not beneficially owned by an Acquiring Person or an Affiliate or Associate thereof (as defined in the Rights Agreement). ----------------------------------- Signature ----------------------------------------------------- NOTICE The signature in the foregoing Form of Election to Purchase must conform to the name as written upon the face of this Rights Certificate in every particular, without alteration or enlargement or any change whatsoever. In the event the certification set forth above in the Form of Election to Purchase, as the case may be, is not completed, the Company and the Rights Agent will deem the beneficial owner of the Rights evidenced by this Rights Certificate to be an Acquiring Person or an Affiliate or Associate thereof (as defined in the Rights Agreement) and such Election to Purchase will not be honored. B-7 EXHIBIT C OAK TECHNOLOGY, INC. SUMMARY OF RIGHTS TO PURCHASE SHARES OF SERIES A PREFERRED STOCK On August 19, 1997, the Board of Directors of Oak Technology, Inc. (the "Company") declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of Common Stock (the "Common Stock"), par value $.001 per share, 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 $.001 per share (the "Series A Preferred Stock"), of the Company at a price of $60.00 per Unit (the "Purchase Price"), subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement dated as of August 19, 1997 (the "Rights Agreement") between the Company and BankBoston, N.A., as Rights Agent (the "Rights Agent"). Until the earlier to occur of (i) 10 days following a public announcement that a person or group of affiliated or associated persons (an "Acquiring Person") have acquired beneficial ownership of 15% or more of the outstanding Common Stock or (ii) 10 business days (or such later date as may be determined by action of the Continuing Directors prior to such time as any Person becomes an Acquiring Person) following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 15% or more of such outstanding Common Stock (the earlier of such dates being called the "Distribution Date"), the Rights will be evidenced, with respect to any of the Common Stock certificates outstanding as of the Record Date, by such Common Stock certificate with a copy of this Summary of Rights attached thereto. The Rights Agreement provides that, until the Distribution Date, the Rights will be transferred with and only with the Common Stock. Until the Distribution Date (or earlier redemption or expiration of the Rights), new Common Stock certificates issued after the Record Date, upon transfer or new issuance of Common Stock will contain a notation incorporating the Rights Agreement by reference. Until the Distribution Date (or earlier redemption or expiration of the Rights), the surrender for transfer of any certificates for Common Stock, outstanding as of the Record Date, even without such notation or a copy of this Summary of Rights being attached thereto, will also constitute the transfer of the Rights associated with the Common Stock represented by such certificate. As soon as practicable following the Distribution Date, separate certificates evidencing the Rights ("Rights Certificates") will be mailed to holders of record of the Common Stock as of the Close of Business on the Distribution Date and such separate Rights Certificates alone will evidence the Rights. The Rights are not exercisable until the Distribution Date. The Rights will expire at the close C-1. of business on August 19, 2007 (the "Final Expiration Date"), unless the Final Expiration Date is extended or unless the Rights are earlier redeemed or exchanged by the Company, in each case as described below. The Purchase Price payable, and the number of Units of Series A Preferred Stock or other securities or property issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or a subdivision, combination or reclassification of, the Series A Preferred Stock, (ii) upon the grant to holders of the Units of Series A Preferred Stock of certain rights or warrants to subscribe for or purchase Units of Series A Preferred Stock at a price, or securities convertible into Units of Series A Preferred Stock with a conversion price, less than the then current market price of the Units of Series A Preferred Stock or (iii) upon the distribution to holders of the Units of Series A Preferred Stock of evidences of indebtedness or assets (excluding regular periodic cash dividends paid out of earnings or retained earnings or dividends payable in Units of Series A Preferred Stock) or of subscription rights or warrants (other than those referred to above). The number of outstanding Rights and the number of Units of Series A Preferred Stock issuable upon exercise of each Rights are also subject to adjustment in the event of a stock split of the Common Stock or a stock dividend on the Common Stock payable in Common Stock or subdivisions, consolidations or combinations of the Common Stock occurring, in any such case, prior to the Distribution Date. Units of Series A PreFerred Stock purchasable upon exercise of the Rights will not be redeemable. Each Unit of Series A PreFerred Stock will be entitled to an aggregate dividend of 1,000 times the dividend declared per share of Common Stock. In the event of liquidation, the holders of the Units of Series A PreFerred Stock will be entitled to an aggregate payment of 1,000 times the payment made per share of Common Stock. Each Unit of Series A PreFerred Stock will have 1,000 votes, voting together with the Common Stock. Finally, in the event of any merger, consolidation or other transaction in which shares of Common Stock are exchanged, each Unit of Series A PreFerred Stock will be entitled to receive 1,000 times the amount received per share of Common Stock. These rights are protected by customary antidilution provisions. Because of the nature of the dividend, liquidation and voting rights, the value of the Series A PreFerred Stock, the Units of Series A PreFerred Stock purchasable upon exercise of each Rights should approximate the value of one share of Common Stock. In the event that, after the Rights become exercisable, the Company is acquired in a merger or other business combination transaction with an Acquiring Person or an affiliate thereof, or 50% or more of its consolidated assets or earning power are sold to an Acquiring Person or an affiliate thereof, proper provision will be made so that each holder of a Rights will thereafter have the right to receive, upon exercise thereof at the then current exercise price of the Rights, that number of shares of common stock of the acquiring company which at the time of such transaction will have a market value of two times the exercise price of the Rights. C-2. In the event that any person or group of affiliated or associated persons becomes the beneficial owner of 15% or more of the outstanding shares of Common Stock proper provision shall be made so that each holder of a Right, other than Rights beneficially owned by the Acquiring Person (which will thereafter be void), will thereafter have the right to receive upon exercise that number of shares of Common Stock or Units of Series A PreFerred Stock (or cash, other securities or property) having a market value of two times the exercise price of the Rights. At any time after the acquisition by a person or group of affiliated or associated persons of beneficial ownership of 15% or more of the outstanding shares of Common Stock and prior to the acquisition by such person or group of 50% or more of the outstanding Common Stock, the Continuing Directors of the Company may exchange all or part of the Rights (other than Rights owned by such person or group which have become void), for Units of Series A PreFerred Stock at an exchange ratio (subject to adjustment) which shall equal, subject to adjustment to reflect stock splits, stock dividends and similar transactions occurring after the date hereof, that number obtained by dividing the Purchase Price by the then current per share market price per Unit of Series A PreFerred Stock on the earlier of (i) the date on which any Person becomes an Acquiring Person and (ii) the date on which a tender or exchange offer is announced by any Person, if upon consummation thereof such Person would be the Beneficial Owner of 15% or more of the shares of Company Common Stock then outstanding. With certain exceptions, no adjustment in the Purchase Price will be required until cumulative adjustments require an adjustment of at least 1% in such Purchase Price. No fractional shares of Series A PreFerred Stock will be issued (other than fractions which are integral multiples of one one-thousandth of a shares of Series A PreFerred Stock, which may, at the election of the Company, be evidenced by depositary receipts) and, in lieu thereof, an adjustment in cash will be made based on the market price of the Units of Series A PreFerred Stock on the last trading day prior to the date of exercise. At any time within ten (10) business days after a person or group of affiliated or associated persons acquire beneficial ownership of 15% or more of the outstanding Common Stock (unless the Continuing Directors extends such ten- day period), the Board of Directors of the Company may redeem the Rights in whole, but not in part, at a price of $.01 per Right (the "Redemption Price"), upon the approval of a majority of the Continuing Directors. The redemption of the rights may be made effective at such time on such basis and with such conditions as the Directors, upon the approval of the Continuing Directors in its sole discretion may establish. Immediately upon any redemption of the Rights, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price. The Rights are also redeemable under other circumstances as specified in the Rights Agreement. The terms of the Rights may be amended by the Board of Directors of the Company without the consent of the holders of the Rights upon the approval of a majority of the Continuing Directors except that from and after a Distribution Date no such amendment may adversely affect the interests of the holders of the Rights. Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of C-3. the Company, including, without limitation, the right to vote or to receive dividends. The Rights have certain anti-takeover effects. The Rights will cause substantial dilution to a person or group that attempts to acquire the Company on terms not approved by the Company's Board of Directors, except pursuant to an offer conditioned on a substantial number of Rights being acquired. The Rights should not interfere with any merger or other business combination approved by the Board of Directors since the Rights may be redeemed by the Company at the Redemption Price prior to the occurrence of a Distribution Date. A copy of the Rights Agreement has been filed with the Securities and Exchange Commission as an Exhibit to a Registration Statement on Form 8-A. A copy of the Rights Agreement is available free of charge from the Company. This summary description of the Rights does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement, which is hereby incorporated herein by reference. C-4. EX-10.20 5 EXH. 10.20 FIRST AMENDMENT TO PLAN OF REORGANIZATION AND AGREEMENT OF MERGER THIS FIRST AMENDMENT (the "AMENDMENT") to that certain Plan of Reorganization and Agreement of Merger dated as of October 27, 1995 (the "AGREEMENT") by and among OAK TECHNOLOGY, INC., a Delaware corporation ("OAK"), OAK ACQUISITION CORPORATION, a Massachusetts corporation, PIXEL MAGIC, INC., a Massachusetts corporation ("PIXEL"), and the then shareholders of Pixel (the "SHAREHOLDERS") is entered into as of June 25, 1996 by and among Oak, Pixel and the Agents (as defined in the Agreement) appointed by the Shareholders. All capitalized terms used but not defined in this Amendment have the meanings attributed to them in the Agreement. R E C I T A L S Subject to the limitations set forth in the Agreement and pursuant to Sections 2.4 and 2.6 thereof, Oak agreed to make a quarterly payment, defined in the Agreement as the "CONTINGENT PAYMENT," to the Security Holders based on Operating Income of Pixel for a calendar quarter determined on a calendar year to date basis, which Operating Income expressly excludes operating income attributable to any VCEP Products contributed by Oak to Pixel. Oak and Pixel now desire that operating income attributable to New VCEP Product Business be included in Operating Income. Oak and Pixel desire that $312,500 attributable to VCEP Products be included in Operating Income for calendar year 1996, but that such amount not be subject to doubling as provided in Section 2.6 of the Agreement. Oak and Pixel desire that all operating income attributable to New VCEP Product Business for calendar years 1996,1997 and 1998 be included in Operating Income in the applicable years and that such amounts be subject to doubling as provided in Section 2.6 of the Agreement. This Amendment is being executed by the Agents on behalf of the Shareholders subject to the authority granted to the Agents pursuant to Section 9.1 of the Agreement. NOW, THEREFORE, in reliance on the foregoing recitals and in consideration of the mutual covenants and agreements contained herein, the parties hereto agree as follows: A G R E E M E N T 1. AMENDMENT OF SECTION 1.29 OF THE AGREEMENT. The first sentence of Section 1.29 of the Agreement is hereby amended and restated in its entirety to read as follows: 1.29 "OPERATING INCOME" means operating income of Pixel (including operating income attributable to New VCEP Product Business), as determined in accordance with GAAP consistently applied with the Pixel Annual Oak Technology, Inc./Pixel Magic, Inc. First Amendment to Agreement and Plan of Reorganization for Merger Page 2 Financials, adjusted to exclude for calendar year 1996 only operating income attributable to any VCEP Products contributed by Oak to Pixel; provided however, that Operating Income for the third (3rd) quarter of calendar year 1996 shall include the amount of One Hundred and Fifty- Six Thousand Two Hundred and Fifty Dollars ($156,250) as operating income for VCEP Products and that Operating Income for the fourth (4th) quarter of calendar year 1996 shall include the amount of One Hundred and Fifty-Six Thousand Two Hundred and Fifty Dollars ($156,250) as operating income for VCEP Products. 2. NEW SECTION OF THE AGREEMENT. A new Section 1.58 shall be added as follows: 1.58 "New VCEP Product Business" means revenue attributable to design wins for VCEP Product awarded in calendar years 1996, 1997 and 1998. New VCEP Product Business shall include designs which use the VCEP-30 (TSMC 30 Mhz Version of the VCEP) but will not include existing VCEP designs which use and/or transistion to the TSMC 20 Mhz version of the VCEP. 3. AMENDMENT OF SECTION 2.61 OF THE AGREEMENT. The first sentence of Section 2.61 of the Agreement is hereby amended and restated in its entirety to read as follows: 2.61 Subject to reduction pursuant to Section 7.4, Oak shall pay to Security Holders, for calendar years 1996, 1997 and 1998 only, two hundred percent (200%) of Operating Income in excess of the relevant Threshold Amounts for such calendar years, up to a maximum aggregate amount of Five Million Dollars ($5,000,000) for all three (3) calendar years, except that for calendar year 1996, for purposes of this section only, Operating Income shall be reduced by One Hundred and Fifty-Six Thousand Two Hundred and Fifty Dollars ($156,250). EFFECT OF THIS AMENDMENT. Except as expressly set forth in this Amendment, all the provisions of the Agreement remain in full force and effect in accordance with the terms of the Agreement. GOVERNING LAW. 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 Amendment, the construction of its terms, and the interpretation and enforcement of the rights and duties of the parties hereto. Oak Technology, Inc./Pixel Magic, Inc. First Amendment to Agreement and Plan of Reorganization for Merger Page 3 COUNTERPARTS. This Amendment may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. OAK: PIXEL: OAK TECHNOLOGY, INC., PIXEL MAGIC, INC., a Delaware corporation a Massachusetts corporation By:_____________________________ By:_____________________________ Title:__________________________ Title:__________________________ By:_____________________________ Title:__________________________ AGENTS: ________________________________ Peter D. Besen ________________________________ Don H. Shulsinger SECOND AMENDMENT TO PLAN OF REORGANIZATION AND AGREEMENT OF MERGER THIS SECOND AMENDMENT (the "AMENDMENT") to that certain Plan of Reorganization and Agreement of Merger dated as of October 27, 1995 (the "AGREEMENT") by and among OAK TECHNOLOGY, INC., a Delaware corporation ("OAK"), OAK ACQUISITION CORPORATION, a Massachusetts corporation, PIXEL MAGIC, INC., a Massachusetts corporation ("PIXEL"), and the then shareholders of Pixel (the "SHAREHOLDERS"), as amended by that certain First Amendment to the Agreement entered into in June 1996 (the "FIRST AMENDMENT"), is entered into effective as of June 13, 1997 by and among Oak, Pixel and the Agents (as defined in the Agreement) appointed by the Shareholders. All capitalized terms used but not defined in this Amendment have the meanings attributed to them in the Agreement. R E C I T A L S A. Subject to the limitations set forth in the Agreement and pursuant to Sections 2.4 and 2.6 thereof, Oak agreed to make certain quarterly payments up to a maximum aggregate amount of Five Million Dollars ($5,000,000), originally defined in the Agreement as the "Contingent Payment," to the Security Holders based on Operating Income of Pixel for a calendar quarter determined on a calendar year-to-date basis, excluding operating income attributable to any VCEP Products contributed by Oak to Pixel. B. Pursuant to the terms of the First Amendment, Oak and Pixel agreed to include in Operating Income, commencing in calendar year 1996, operating income attributable to New VCEP Product Business contributed by Oak to Pixel (with certain additional operating income attributable to VCEP Products to be included in calendar year 1996 in accordance with the terms of the First Amendment). C. Oak, Pixel and the Agents now desire to modify the Agreement, as amended by the First Amendment, to provide for payment of the Contingent Payment in two installments and to eliminate all contingencies affecting payment of the amounts provided for under the original terms of the Contingent Payment, in accordance with the terms set forth in this Amendment. D. In consideration of the elimination of all contingencies affecting payment of the amounts provided for under the original terms of the Contingent Payment, Peter D. Besen and Don H. Shulsinger have agreed to an early termination of their respective Employment Agreements, each dated as of November 6, 1995, and Peter D. Besen has agreed to be bound by the terms of his Non-Compete and Technology Transfer Agreements dated as of October 27, 1995, for an additional two years. E. This Amendment is being executed by the Agents on behalf of the Shareholders subject to the authority granted to the Agents pursuant to Section 9.1 of the Agreement. NOW, THEREFORE, in reliance on the foregoing recitals and in consideration of the mutual covenants and agreements contained herein, the parties hereto agree as follows: Oak Technology, Inc./Pixel Magic, Inc. Second Amendment to Agreement and Plan of Reorganization for Merger Page 2 A G R E E M E N T 1. DELETION OF CERTAIN DEFINITIONS. Sections 1.2, 1.6, 1.18, 1.29, 1.33, 1.47 and 1.55 are hereby deleted in their entirety. 2. DELETION OF SECTION 2.1.3 OF THE AGREEMENT. Section 2.1.3 of the Agreement is hereby deleted in its entirety. 3. AMENDMENT AND RESTATEMENT OF SECTION 2.4 OF THE AGREEMENT. Section 2.4 of the Agreement is hereby amended and restated in its entirety to read as follows: 2.4 EXCHANGE CONSIDERATION. Subject to adjustment as set forth in Section 7.4 hereof, and subject to the terms and conditions stated herein, the Shareholders and Option Holders will receive cash in the aggregate amount of up to Ten Million Five Hundred Thousand Dollars ($10,500,000), consisting of a non-contingent payment (the "NON-CONTINGENT PAYMENT") of Five Million Five Hundred Thousand Dollars ($5,500,000), plus installment payments (individually, an "INSTALLMENT PAYMENT" and collectively, the "INSTALLMENT PAYMENTS") in the aggregate amount of Five Million Dollars ($5,000,000), payable as provided in Section 2.6 below. All amounts payable pursuant to this Section 2.4 are collectively referenced hereafter as the "EXCHANGE CONSIDERATION." 4. AMENDMENT AND RESTATEMENT OF SECTION 2.6 OF THE AGREEMENT. Section 2.6 of the Agreement is hereby amended and restated in its entirety to read as follows: 2.6 TERMS OF INSTALLMENT PAYMENTS. Subject to the provisions of this Agreement, Oak shall make Installment Payments to the Security Holders as set forth in this Section 2.6. On January 1, 1998, Oak shall pay to the Security Holders, subject to Oak's right of set-off under Section 7.4 of this Agreement, an Installment Payment in an aggregate amount equal to Three Million Dollars ($3,000,000). On December 31, 1998, Oak shall pay to the Security Holders, subject to Oak's right of set-off under Section 7.4 of this Agreement, an Installment Payment in an aggregate amount equal to Two Million Dollars ($2,000,000). The amounts payable to the Security Holders pursuant to this Section 2.6 shall be allocated among the Security Holders in accordance with the provisions set forth in Section 2.7 below. 5. DEFINITION OF "CONTINGENT PAYMENT". The term "Contingent Payment," wherever used in the Agreement or in the Transaction Documents, shall mean any Installment Payment or the Installment Payments as the context may require. Oak Technology, Inc./Pixel Magic, Inc. Second Amendment to Agreement and Plan of Reorganization for Merger Page 3 6. AMENDMENT OF SECTION 10.13 OF THE AGREEMENT. The first sentence of Section 10.13 of the Agreement is hereby amended and restated in its entirety to read as follows: From and after the Effective Date, Pixel hereby unconditionally guarantees payment by Oak of any and all amounts due under this Agreement and Oak hereby unconditionally guarantees payment by Pixel of any and all amounts due under this Agreement. 7. DELETION OF SECTION 10.14 OF THE AGREEMENT. Section 10.14. of the Agreement is hereby deleted in its entirety. 8. DELIVERY OF AGREEMENTS. The obligations of Oak hereunder shall be conditioned upon execution and delivery by Peter D. Besen and Don H. Shulsinger of agreements terminating their respective Employment Agreements in the forms attached hereto as Exhibits "A-1" and "A-2," and execution and delivery by Peter D. Besen of an amendment to his respective Non-Compete and Technology Transfer Agreement in the form attached hereto as Exhibit "B-1". 9. EFFECT OF THIS AMENDMENT. Except as expressly set forth in this Amendment, all the provisions of the Agreement and the Transaction Documents, and any amendments thereto, remain in full force and effect in accordance with the terms thereof. In this regard, this Amendment supersedes in its entirety the provisions of the First Amendment. 10. GOVERNING LAW. 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 Amendment, the construction of its terms, and the interpretation and enforcement of the rights and duties of the parties hereto. 11. COUNTERPARTS. This Amendment may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Oak Technology, Inc./Pixel Magic, Inc. Second Amendment to Agreement and Plan of Reorganization for Merger Page 4 IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. OAK: PIXEL: OAK TECHNOLOGY, INC., PIXEL MAGIC, INC., a Delaware corporation a Massachusetts corporation By:_______________________________ By:________________________________ Title:____________________________ Title:_____________________________ AGENTS: By:________________________________ Title:_____________________________ __________________________________ Peter D. Besen __________________________________ Don H. Shulsinger EX-10.21 6 EXH. 10.21 FIRST AMENDMENT TO NON-COMPETE AND TECHNOLOGY TRANSFER AGREEMENT THIS FIRST AMENDMENT (the "AMENDMENT") to that certain Non-Compete and Technology Transfer Agreement (the "AGREEMENT") by and among Oak Technology, Inc., a Delaware corporation ("OAK"), Pixel Magic, Inc., a Massachusetts corporation ("PIXEL"), and Peter D. Besen, a resident of Massachusetts ("SELLER"), is entered into as of June ___, 1997 by and among Oak, Pixel and Seller. All capitalized terms used but not defined in this Amendment have the meanings attributed to them in that certain Plan of Reorganization and Agreement of Merger (the "PLAN OF REORGANIZATION"). R E C I T A L S A. Pursuant to the Plan of Reorganization entered into by and among Seller, Oak, Pixel and others, all of Pixel's capital stock held by Seller was converted into cash and a contingent right to receive cash, subject to and in accordance with the Plan of Reorganization. Seller, an employee of Pixel, entered into the Agreement in connection with the transactions consummated pursuant to the Plan of Reorganization. B. Concurrent with the execution and delivery of this Amendment, Oak, Pixel and the Agents of the Shareholders have entered into that certain Second Amendment to Plan of Reorganization and Agreement of Merger, which provides for the elimination of any contingencies affecting the rights of Seller and others to receive additional cash payments pursuant to the provisions of Section 2.6 of the Plan of Reorganization. C. In consideration of the removal of the contingencies limiting the right of Seller to receive additional cash payments, subject to and in accordance with the Plan of Reorganization, Seller has agreed to enter into this Amendment. A G R E E M E N T 1. AMENDMENT OF SECTION 1.6 OF THE AGREEMENT. Section 1.6 of the Agreement is hereby amended and restated in its entirety to read as follows: 1.6. "TERM" means [ * ] from [ * ]. 2. EFFECT OF THIS AMENDMENT. Except as expressly set forth in this Amendment, all the provisions of the Agreement remain in full force and effect in accordance with the terms of the Agreement. 3. GOVERNING LAW. 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 Amendment, the construction of its terms, and the interpretation and enforcement of the rights and duties of the parties hereto. - -------------------- [*] Confidential treatment has been requested for redacted portions which have been filed separately with the Commission. First Amendment to Non-Compete and Technology Transfer Agreement Page 2 4. COUNTERPARTS. This Amendment may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. SELLER: _______________________________ Peter D. Besen PIXEL: PIXEL MAGIC, INC., a Massachusetts corporation By: __________________________ Its: __________________________ OAK: OAK TECHNOLOGY, INC., a Delaware corporation By: __________________________ Its: __________________________ EX-10.22 7 EXH. 10.22 AGREEMENT OF TERMINATION OF EMPLOYMENT AGREEMENT THIS AGREEMENT OF TERMINATION OF EMPLOYMENT AGREEMENT ("TERMINATION AGREEMENT") is entered into as of June ___, 1997 by and between Pixel Magic, Inc., a Massachusetts corporation (the "COMPANY"), and Peter D. Besen (the "EMPLOYEE"). All capitalized terms used but not defined in this Termination Agreement have the meanings attributed to them in that certain Plan of Reorganization and Agreement of Merger (the "PLAN OF REORGANIZATION"). R E C I T A L S A. Pursuant to the Plan of Reorganization entered into by and among Oak Technology, Inc., a Delaware corporation ("OAK"), the Company, the Employee and others, Oak agreed to make certain quarterly payments up to a maximum aggregate amount of Five Million Dollars ($5,000,000), originally defined in the Plan of Reorganization as the "Contingent Payment," to the Security Holders based on Operating Income of the Company for a calendar quarter determined on a calendar year-to-date basis, excluding operating income attributable to any VCEP Products contributed by Oak to the Company. B. In connection with the consummation of the merger transaction pursuant to the Plan of Reorganization, the Company and the Employee entered into that certain Employment Agreement dated as of November 6, 1995 (the "EMPLOYMENT AGREEMENT"), pursuant to the terms of which the Employee was granted the right to control the strategic, tactical and operating decisions of the Company, subject to the limitations described therein, until such time as Oak had satisfied in full its Contingent Payment obligations under the Plan of Reorganization. C. Concurrent with the execution and delivery of this Termination Agreement, Oak, the Company and the Agents of the Shareholders are entering into an amendment to the Plan of Reorganization providing for the elimination of all contingencies affecting payment of the amounts provided for under the original terms of the Contingent Payment. D. In consideration of the elimination of all contingencies affecting payment of the amounts provided for under the original terms of the Contingent Payment, the Company and the Employee have agreed to terminate the Employment Agreement effective as of the date first above written. E. This Termination Agreement is being executed by the Company and the Employee in accordance with the provisions of Section 7.2 of the Employment Agreement, which provides for modification of the Employment Agreement by a writing signed by the parties to be bound thereby. NOW, THEREFORE, in reliance on the foregoing recitals and in consideration of the mutual covenants and agreements contained herein, the parties hereto agree as follows: Pixel Magic, Inc./Peter D. Besen Agreement of Termination of Employment Agreement Page 2 A G R E E M E N T 1. TERMINATION OF EMPLOYMENT. Notwithstanding anything to the contrary contained in the Employment Agreement, including without limitation Section 6 thereof, the Employment Agreement is terminated effective as of the date first above written and shall be of no further force or effect after said date. 2. EMPLOYMENT. Effective as of the date first above written, the Employee shall become an employee at will of the Company, and either the Company or the Employee may terminate the Employee's employment with the Company at any time, with or without cause. 3. GOVERNING LAW. 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 Amendment, the construction of its terms, and the interpretation and enforcement of the rights and duties of the parties hereto. 4. COUNTERPARTS. This Amendment may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Termination Agreement as of the date first above written. EMPLOYEE: COMPANY: PIXEL MAGIC, INC., a Massachusetts corporation ____________________________________ Peter D. Besen By: _________________________________ Its: _________________________________ EX-10.23 8 EXH. 10.23 AGREEMENT OF TERMINATION OF EMPLOYMENT AGREEMENT THIS AGREEMENT OF TERMINATION OF EMPLOYMENT AGREEMENT ("TERMINATION AGREEMENT") is entered into as of June 13, 1997 by and between Pixel Magic, Inc., a Massachusetts corporation (the "COMPANY"), and Don H. Shulsinger (the "EMPLOYEE"). All capitalized terms used but not defined in this Termination Agreement have the meanings attributed to them in that certain Plan of Reorganization and Agreement of Merger (the "PLAN OF REORGANIZATION"). R E C I T A L S A. Pursuant to the Plan of Reorganization entered into by and among Oak Technology, Inc., a Delaware corporation ("OAK"), the Company, the Employee and others, Oak agreed to make certain quarterly payments up to a maximum aggregate amount of Five Million Dollars ($5,000,000), originally defined in the Plan of Reorganization as the "Contingent Payment," to the Security Holders based on Operating Income of the Company for a calendar quarter determined on a calendar year-to-date basis, excluding operating income attributable to any VCEP Products contributed by Oak to the Company. B. In connection with the consummation of the merger transaction pursuant to the Plan of Reorganization, the Company and the Employee entered into that certain Employment Agreement dated as of November 6, 1995 (the "EMPLOYMENT AGREEMENT"), pursuant to the terms of which the Employee was granted the right to control the strategic, tactical and operating decisions of the Company, subject to the limitations described therein, until such time as Oak had satisfied in full its Contingent Payment obligations under the Plan of Reorganization. C. Concurrent with the execution and delivery of this Termination Agreement, Oak, the Company and the Agents of the Shareholders are entering into an amendment to the Plan of Reorganization providing for the elimination of all contingencies affecting payment of the amounts provided for under the original terms of the Contingent Payment. D. In consideration of the elimination of all contingencies affecting payment of the amounts provided for under the original terms of the Contingent Payment, the Company and the Employee have agreed to terminate the Employment Agreement effective as of the date first above written. E. This Termination Agreement is being executed by the Company and the Employee in accordance with the provisions of Section 7.2 of the Employment Agreement, which provides for modification of the Employment Agreement by a writing signed by the parties to be bound thereby. NOW, THEREFORE, in reliance on the foregoing recitals and in consideration of the mutual covenants and agreements contained herein, the parties hereto agree as follows: Pixel Magic, Inc./Don H. Shulsinger Agreement of Termination of Employment Agreement Page 2 A G R E E M E N T 1. TERMINATION OF EMPLOYMENT. Notwithstanding anything to the contrary contained in the Employment Agreement, including without limitation Section 6 thereof, the Employment Agreement is terminated effective as of the date first above written and shall be of no further force or effect after said date. 2. EMPLOYMENT. Effective as of the date first above written, the Employee shall become an employee at will of the Company, and either the Company or the Employee may terminate the Employee's employment with the Company at any time, with or without cause. 3. GOVERNING LAW. 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 Amendment, the construction of its terms, and the interpretation and enforcement of the rights and duties of the parties hereto. 4. COUNTERPARTS. This Amendment may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Termination Agreement as of the date first above written. EMPLOYEE: COMPANY: PIXEL MAGIC, INC., a Massachusetts corporation - ---------------------------------- Don H. Shulsinger By: __________________________________ Its: __________________________________ EX-10.24 9 EXH. 10.24 RELEASE AND SETTLEMENT AGREEMENT This Release and Settlement Agreement ("AGREEMENT") is effective this 31st day of July, 1997, hereinafter the date of this AGREEMENT, between Oak Technology, Inc. ("OAK TECHNOLOGY"), a corporation organized and existing under the laws of the State of Delaware with its principal place of business in Sunnyvale, California, U.S.A., and United Microelectronics Corporation ("UMC"), an entity organized and existing under the laws of the Republic of China (Taiwan) with its headquarters at No. 13 Innovation Road 1, Science-Based Industrial Park, Hsinchu, Taiwan. WHEREAS, OAK TECHNOLOGY owns by assignment the entire right, title, and interest in and to U.S. Patent No. 5,581,715 ("the '715 patent") entitled "IDE/ATA CD Drive Controller Having a Digital Signal Processor Interface, Dynamic Random Access Memory, Data Error Detection and Correction, and a Host Interface" issued December 3, 1996; WHEREAS, OAK TECHNOLOGY requested the United States International Trade Commission to commence an investigation of unlawful activity in violation of OAK TECHNOLOGY'S patent, pursuant to the provisions of section 337 of the Tariff Act 1930 as amended, and named UMC as a proposed respondent to the investigation alleging that UMC has engaged and continues to engage in the unlicensed manufacture, importation, sale for importation, and/or sale within the United States after importation of CD-ROM Controller devices within the scope of one or more of the apparatus claims 1 through 10 of the '715 patent, and products containing same, including, but not necessarily limited to CD-ROM Controller devices UM1101, UM1101A, UM1101AF, Page 1 confidential UM1101B and UM1102; WHEREAS, OAK TECHNOLOGY and UMC desire now to address the question of UMC's alleged use of the invention of the '715 patent; NOW, THEREFORE, in consideration of the recitals, covenants and promises set forth herein, the parties, intending to be bound, hereby agree as follows: 1.0 DEFINITIONS 1.1 "CD-ROM Controller Devices" shall mean semiconductor products, whether integrated or otherwise, that control access to data stored on a CD-ROM mass data storage device and that control communications between the CD-ROM mass data storage device and a host computer. 1.2 "Agreement Product" shall mean CD-ROM Controller Devices manufactured by or on behalf of UMC, or any entity in which UMC directly or indirectly has an ownership interest of twenty-five percent (25%) or more, on which any claim of the '715 patent reads literally or covers through equivalence, except that Agreement Product shall not include any products which are CD-ROM Controller Devices made in a foundry relationship (including a foundry joint venture) for a customer in which UMC does not directly or indirectly have an ownership interest of twenty-five percent (25%) or more so long as (i)[ * ] and/or (ii) [ * ] 1.3 "Limited Basis" shall mean UMC's manufacture and/or sale of Agreement Products in production lots of no more than 50,000 units per lot, for a time period ending six months after the date of this AGREEMENT. Page 2 confidential * Confidential treatment has been requested for redacted portions which have been filed separately with the Commission 2.0 PAYMENT 2.1 [ * ] 2.2 [ * ] 3.0 RELEASE, COVENANT NOT TO SUE, WITHDRAWAL OF COMPLAINT, COVENANT OF NON- INFRINGEMENT, AND WARRANTY OF NO IMPORTATION 3.1 Except for Agreement Products manufactured on a Limited Basis, UMC agrees to cease and desist its manufacture of any Agreement Product as of the date of this AGREEMENT. 3.2 For so long as and to the extent that UMC is in compliance with the terms of this AGREEMENT, OAK TECHNOLOGY covenants and agrees that it shall not assert against UMC, or its officers, directors, employees, or direct and/or downstream customers, any claim that Agreement Products manufactured prior to the date of this AGREEMENT or that Agreement Products manufactured on a Limited Basis infringe the '715 patent. In the event that UMC is in breach of this AGREEMENT, as to Agreement Products not made and sold in compliance with this AGREEMENT, UMC agrees that this covenant not to sue shall terminate and that OAK TECHNOLOGY shall have available to it all remedies under this AGREEMENT and otherwise, at law and equity, including monetary damages and injunctive relief. Page 3 confidential * Confidential treatment has been requested for redacted portions which have been filed separately with the Commission 3.3 Upon [ * ] and provided further that UMC is in compliance with the terms of this AGREEMENT, (a) OAK TECHNOLOGY covenants and agrees that is shall promptly seek withdrawal of its aforementioned complaint against UMC, Lite-On Group, Lite-On Technology Corp., Behavior Tech Computer Corp. and Behavior Tech Computer (USA) Corp. filed with the United States International Trade Commission based upon UMC CD-ROM Controller Devices, and (b) OAK TECHNOLOGY further agrees that UMC and its customers are released from all claims based on manufacture and sale of Agreement Products after the date this AGREEMENT. 3.4 Except as expressly set forth in this AGREEMENT, no license or immunity is granted by OAK TECHNOLOGY to UMC either directly or by implication, estoppel or otherwise under the '715 patent or otherwise. No release of liability for claims of infringement of the '715 patent, other than the above covenant not to sue and withdrawal of the complaint, is granted by OAK TECHNOLOGY to UMC, for its own behalf or for its customers, mediate and immediate, with respect to any items manufactured, used, sold, imported, or otherwise transferred by UMC. 3.5 UMC covenants not to hereafter infringe the '715 patent with unlicensed Agreement Products and warrants that no Agreement Product shall be imported by anyone into the United States after the date of this AGREEMENT and before the expiration of the '715 patent, unless such Agreement Products are manufactured on a Limited Basis; and/or were [ * ] 3.6 In the event UMC infringes the '715 patent with unlicensed Agreement Products, or in the event any Agreement Product not manufactured on a Limited Basis is Page 4 confidential * Confidential treatment has been requested for redacted portions which have been filed separately with the Commission imported into the United States after the date of this AGREEMENT and before the expiration of the '715 patent, UMC agrees [ * ] 4.0 AUDIT PROVISIONS 4.1 UMC shall keep records in sufficient detail [ * ], and, at the request and expense of OAK TECHNOLOGY, except as provided below, will permit an auditor acceptable to UMC and OAK TECHNOLOGY to examine such records and other materials as may be reasonably required by the auditor to verify UMC's compliance with this AGREEMENT. The auditor shall be instructed to report to OAK TECHNOLOGY only the fact of compliance or the extent and nature of non-compliance. 4.2 [ * ] 4.3 The auditor's examination shall occur during ordinary business hours and shall not unreasonably interfere with UMC's business operations. The auditor shall have the right to examine UMC's records and other materials each six months for the first three years after the date of this AGREEMENT, and once in each calendar year thereafter until six years after the date of this AGREEMENT. Page 5 confidential * Confidential treatment has been requested for redacted portions which have been filed separately with the Commission 5.0 OTHER CONDITIONS OF SETTLEMENT AND RELEASE 5.1 Although UMC does not admit infringement, validity or enforceability of the '715 patent, [ * ] 5.2 UMC agrees not to assert any legal claims, known or unknown, arising out of or related to OAK TECHNOLOGY'S above request to commence an investigation by the United States International Trade Commission or arising out of this Settlement Agreement (unless based on a breach thereof). 5.3 Upon the advice of legal counsel, each party waives against the other all rights under California Civil Code section 1542, which provides as follows: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE WHICH, IF KNOWN BY HIM, MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. 5.4 The parties agree that either may issue the press release attached to this AGREEMENT on or about the date of this AGREEMENT. 6.0 ACKNOWLEDGMENTS 6.1 For at least the following reasons, UMC acknowledges [ * ] pursuant to this AGREEMENT [ * ]without regard to whether such Agreement Products were implicated in infringement or Page 6 confidential * Confidential treatment has been requested for redacted portions which have been filed separately with the Commission importation: a. [ * ]; b. It is burdensome to determine the actual destination of Agreement Products; c. To the extent that manufacture of Agreement Products is permitted in the future, flexibility as to where such Agreement Products may be sold is advantageous to UMC; d. Oak hereby waives any claim for attorney fees and claims for enhanced damages for past infringement; and e. [ * ] 7.0 REPRESENTATIONS, DISCLAIMERS AND WARRANTIES 7.1 Each of the parties hereto represents, warrants, and agrees that it has received independent legal advice from its attorneys with respect to the advisability of making this settlement and release provided for herein and with respect to the advisability of executing this AGREEMENT. 7.2 Each of the parties hereto represents, warrants, and agrees that it has not assigned or otherwise transferred to any third party any interest in any claim it may have against another party to this AGREEMENT, and agrees to indemnify and hold other parties hereto harmless from any liability, including but not limited to attorneys' fees, Page 7 confidential * Confidential treatment has been requested for redacted portions which have been filed separately with the Commission costs, and expenses resulting from its having assigned or transferred such an interest to a third party. 7.3 Each of the parties hereto represents, warrants, and agrees that it has the full right and authority to enter into this AGREEMENT, and that the officer executing this AGREEMENT on behalf of it has the full right and authority to commit and bind it to this AGREEMENT. 7.4 This is a compromise of disputed claims and not an admission of anything. 7.5 Except as required by law, the terms of this AGREEMENT are Confidential, provided however that the parties may disclose the attached press release, and the attached form of this AGREEMENT (or such other required form) as may be reasonably necessary for compliance with public filing requirements. 8.0 SUCCESSORS AND ASSIGNS 8.1 This AGREEMENT is binding on OAK TECHNOLOGY and UMC and their successors and assigns under this AGREEMENT. 8.2 Notwithstanding section 8.1, this AGREEMENT and any other rights or obligations arising under this AGREEMENT may not be assigned by UMC unless assigned in connection with the acquisition of a controlling interest in UMC or substantially all the assets of UMC. 9.0 COMPLETE AGREEMENT Page 8 confidential This AGREEMENT constitutes the final written expression and the complete and exclusive statement of all the agreements, conditions, promises, and covenants between the parties with respect to the subject matter hereof. This AGREEMENT supersedes any prior agreement between the parties, oral or written. Any amendment to this AGREEMENT must be in writing specifically referring to this AGREEMENT and signed by the duly authorized representative of each party to be bound by such amendment. 10.0 INTERPRETATION This AGREEMENT will be construed without regard to the party or parties responsible for its preparation, and will be deemed to have been prepared jointly by the parties hereto. In resolving any ambiguity or uncertainty existing herein, the OAK TECHNOLOGY and UMC agree that no consideration or weight shall be given to the identity of the party drafting all or any portion of this AGREEMENT. 11.0. HEADINGS AND SEVERABILITY 11.1 The Article headings herein are for convenience only and shall not be deemed to affect in any way the language of the provisions to which they refer. 11.2 In the event that any of the terms of this AGREEMENT are in conflict with any rule of law or statutory provision or otherwise are unenforceable under the laws or regulations of any government or subdivision thereof, such terms shall be deemed stricken from this AGREEMENT, but such invalidity or unenforceability shall not invalidate any of the other terms of this AGREEMENT, and this AGREEMENT shall Page 9 confidential continue in full force and effect. 12.0 APPLICABLE LAW This AGREEMENT shall be construed, interpreted, and applied in accordance with the laws of the State of California, in the United States of America, as applied to contracts made and performed entirely within the State of California. Both parties agree that if it is necessary to enforce this AGREEMENT by legal action, the prevailing party in any such action will be entitled to any attorney fees and costs required to enforce this AGREEMENT in addition to all other relief to which it may be entitled. 13.0 VENUE AND JURISDICTION The exclusive venue for any action relating to or arising out of this AGREEMENT, including the enforcement thereof, shall be courts in the State of California with preference for the United States District Court for the Northern District of California, San Jose Division, and the parties hereto expressly submit to the jurisdiction of said courts. 14.0 NOTICES All notices under this AGREEMENT shall be deemed to have been fully given when done in writing and deposited in the United States mail, registered or certified, and addressed as follows (with a copy by fax): Page 10 confidential To OAK TECHNOLOGY: Shawn Soderberg, Esq. General Counsel Oak Technology, Inc. 139 Kifer Court Sunnyvale, California 94086 Fax: (408) 737-3838 TO UMC: M.K. Tsai United Microelectronics Corp. No. 13 Innovation Road I Science Based Industrial Park Hsin Chu City Taiwan R.O. C. Fax: 86-03-577-4767 Page 11 confidential Either party may change its designated address for notices provided under this AGREEMENT upon written notice to the other. IN WITNESS WHEREOF, the parties hereto have caused this AGREEMENT to be executed by their duly authorized representatives. OAK TECHNOLOGY, INC. UNITED MICROELECTRONICS CORP. By:_________________________ By:____________________________ Title:______________________ Title: ________________________ Date: ______________________ Date:__________________________ Page 12 confidential EX-11.01 10 EXH. 11.01 EXHIBIT 11.01 OAK TECHNOLOGY, INC. AND SUBSIDIARIES STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS (IN THOUSANDS, EXCEPT PER SHARE DATA)
June 30, --------------------------------------- 1997 1996 1995 --------- --------- --------- 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 --------- --------- --------- --------- --------- ---------
(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. EX-23.01 11 EXH. 23.01 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 EX-27 12 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS AS FOUND ON PAGES 34 AND 35 OF THE COMPANY'S FORM 10K FOR FISCAL YEAR ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR JUN-30-1997 JUL-01-1996 JUN-30-1997 87,609 57,660 25,535 663 12,322 205,935 30,955 10,997 287,595 37,767 2,496 0 0 41 238,656 287,595 167,395 167,395 73,214 73,214 61,333 0 468 38,256 14,537 23,719 0 0 0 23,719 .55 .55
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