-----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, Qc4iyA4lUvg51C8EVYQkCys5XxIrNJJmfjtsxj2f3e2x8cGsusw8K5k/w7REOhZz p52JEodYnUfJWu0pCXNbVg== 0001047469-98-020809.txt : 19980518 0001047469-98-020809.hdr.sgml : 19980518 ACCESSION NUMBER: 0001047469-98-020809 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 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-Q SEC ACT: SEC FILE NUMBER: 000-25298 FILM NUMBER: 98625870 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-Q 1 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from __________ to __________ COMMISSION FILE NO. 0-25298 OAK TECHNOLOGY, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 77-0161486 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 139 KIFER COURT SUNNYVALE, CALIFORNIA 94086 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE) (408) 737-0888 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO . --- --- As of March 31, 1998, there were outstanding 42,192,509 shares of the Registrant's Common Stock, par value $0.001 per share. OAK TECHNOLOGY, INC. AND SUBSIDIARIES INDEX
PAGE ----- PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of March 31, 1998 and June 30, 1997 . . . . . . . . . . . . . . . . . . . . . . 3 Consolidated Statements of Operations for the Three Months and Nine Months ended March 31, 1998 and 1997 . . . . . . . . . . . . . . . . . . . 4 Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 1998 and 1997 . . . . . . . . . . 5 Notes to Consolidated Financial Statements. . . . . . . . . . 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . 13 PART II - OTHER INFORMATION Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 32 Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . 35 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS OAK TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) (Unaudited) ASSETS
March 31, June 30, 1998 1997 ----------- ------------ Current assets: Cash and cash equivalents............................................ $ 71,508 $ 87,609 Short-term investments............................................... 57,754 57,660 Accounts receivable, net of allowance for doubtful accounts of $647 and $663, respectively....................................... 20,624 24,872 Inventories.......................................................... 9,137 12,322 Current portion of foundry deposits.................................. 10,098 15,015 Deferred tax assets.................................................. 4,350 4,350 Prepaid expenses and other current assets............................ 7,708 4,107 ----------- ------------ Total current assets.............................................. 181,179 205,935 Property and equipment, net............................................ 24,342 19,958 Foundry deposits....................................................... 18,231 19,145 Investment in foundry venture.......................................... 51,234 39,618 Other assets........................................................... 2,893 2,939 ----------- ------------ Total assets...................................................... $ 277,879 $ 287,595 ----------- ------------ ----------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and current portion of long-term debt.................. $ 7,766 $ 7,264 Accounts payable..................................................... 6,287 16,144 Accrued expenses..................................................... 8,484 9,882 Income taxes payable................................................. - 3,893 Deferred revenue..................................................... 320 584 ----------- ------------ Total current liabilities......................................... 22,857 37,767 Long-term debt......................................................... 49 2,496 Deferred income taxes.................................................. 4,151 6,344 Other long-term liabilities............................................ 203 2,291 ----------- ------------ Total liabilities................................................. 27,260 48,898 ----------- ------------ Stockholders' equity: Preferred stock, $0.001 par value; 2,000,000 shares authorized; none issued and outstanding as of March 31, 1998 and June 30, 1997...................................................... - - Common stock, $0.001 par value; 60,000,000 shares authorized; 42,192,509 and 41,086,754 shares issued and outstanding as of March 31, 1998 and June 30, 1997, respectively..................... 42 41 Additional paid-in capital........................................... 161,031 159,901 Retained earnings.................................................... 89,546 78,755 ----------- ------------ Total stockholders' equity........................................ 250,619 238,697 ----------- ------------ Total liabilities and stockholders' equity........................ $ 277,879 $ 287,595 ----------- ------------ ----------- ------------
See accompanying notes to consolidated financial statements. 3 OAK TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (Unaudited)
Three Months Ended Nine Months Ended March 31, March 31, ------------------------ ------------------------- 1998 1997 1998 1997 ----------- ---------- ----------- ----------- Net revenues....................................... $ 35,550 $ 50,634 $ 128,196 $ 117,171 Cost of revenues................................... 21,145 22,829 65,133 48,270 ----------- ---------- ----------- ----------- Gross profit.................................. 14,405 27,805 63,063 68,901 Research and development expenses.................. 12,394 8,552 35,400 24,506 Selling, general and administrative expenses....... 8,823 5,720 22,970 15,100 Restructuring charges.............................. 1,766 - 1,766 - ----------- ---------- ----------- ----------- Operating income (loss)....................... (8,578) 13,533 2,927 29,295 Nonoperating income, net........................... 2,342 1,143 12,060 3,127 ----------- ---------- ----------- ----------- Income (loss) before income taxes.............. (6,236) 14,676 14,987 32,422 Income taxes expense (benefit)..................... (3,232) 5,136 4,196 11,347 ----------- ---------- ----------- ----------- Net income (loss).............................. $ (3,004) $ 9,540 $ 10,791 $ 21,075 ----------- ---------- ----------- ----------- ----------- ---------- ----------- ----------- Net income (loss) per share: Basic.......................................... $ (0.07) $ 0.24 $ 0.26 $ 0.52 ----------- ---------- ----------- ----------- ----------- ---------- ----------- ----------- Diluted........................................ $ (0.07) $ 0.22 $ 0.25 0.49 ----------- ---------- ----------- ----------- ----------- ---------- ----------- ----------- Shares used in computing net income (loss) per share: Basic.......................................... 42,000 40,532 41,809 40,469 ----------- ---------- ----------- ----------- ----------- ---------- ----------- ----------- Diluted........................................ 42,000 42,801 42,644 42,630 ----------- ---------- ----------- ----------- ----------- ---------- ----------- -----------
See accompanying notes to consolidated financial statements. 4 OAK TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)
Nine Months Ended March 31, -------------------------- 1998 1997 ---------- ----------- Cash flows from operating activities: Net income............................................................ $ 10,791 $ 21,075 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization...................................... 5,309 4,020 Inventory-related adjustments...................................... 3,630 (20,154) Equity in loss of unconsolidated affiliates........................ - 292 Restructuring charges.............................................. 1,766 Deferred income taxes.............................................. (2,193) 277 Foundry deposits utilized.......................................... 5,831 3,364 Changes in operating assets and liabilities: Accounts receivable............................................. 4,248 (4,086) Inventories..................................................... (445) 19,002 Prepaid expenses and other current assets....................... (1,418) (805) Accounts payable and accrued expenses........................... (13,962) 11,308 Income taxes payable, deferred revenue and other liabilities.... (7,165) 11,704 ---------- ----------- Net cash provided by operating activities.................... 6,392 45,997 ---------- ----------- Cash flows from investing activities: Purchases of short-term investments................................ (57,235) (31,022) Proceeds from matured short-term investments....................... 57,141 41,037 Additions to property and equipment, net........................... (9,450) (4,456) Investment in foundry venture...................................... (11,616) (25,922) Other assets....................................................... (97) 26 ---------- ----------- Net cash used in investing activities........................ (21,257) (20,337) ---------- ----------- Cash flows from financing activities: Issuance of debt...................................................... 12,497 31,976 Repayment of debt..................................................... (14,442) (34,121) Issuance of common stock.............................................. 2,496 1,533 Treasury stock acquisitions........................................... (1,787) - ---------- ----------- Net cash used in financing activities........................... (1,236) (612) ---------- ----------- Net increase (decrease) in cash and cash equivalents.................... (16,101) 25,048 Cash and cash equivalents, beginning of period.......................... 87,609 44,934 Cash and cash equivalents, end of period................................ $ 71,508 $ 69,982 ---------- ----------- ---------- ----------- Supplemental information: Cash paid during the period: Interest........................................................... $ 246 $ 102 ---------- ----------- ---------- ----------- Income taxes....................................................... $ 13,654 $ 1,508 ---------- ----------- ---------- ----------- Noncash investing and financing activities: Benefit related to stock plans........................................ $ 422 $ 1,530 ---------- ----------- ---------- ----------- Adjustment to foundry commitments..................................... $ 5,342 $ (14,400) ---------- ----------- ---------- ----------- Utilization of foundry deposits....................................... $ 489 $ 3,364 ---------- ----------- ---------- -----------
See accompanying notes to consolidated financial statements. 5 OAK TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PREPARATION The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "Commission"). In the opinion of management, the consolidated financial statements reflect all adjustments considered necessary for a fair presentation of the consolidated financial position, operating results and cash flows for those periods presented. The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the full fiscal year or in any future period. This quarterly report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended June 30, 1997, included in the Oak Technology, Inc. (the "Company") 1997 Annual Report on Form 10-K filed with the Commission. 2. NET INCOME (LOSS) PER SHARE Basic and diluted net income (loss) per share have been computed using the weighted average number of shares of common stock and dilutive common equivalent shares from stock options and warrants outstanding in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share." The following table provides a reconciliation of the components of the basic and diluted earnings per share computations:
Three Months Ended Nine Months Ended March 31, March 31, -------------------- -------------------- 1998 1997 1998 1997 --------- -------- --------- -------- Net income (loss)....................... $ (3,004) $ 9,540 $ 10,791 $ 21,075 --------- -------- --------- -------- --------- -------- --------- -------- Weighted average shares used in computing basic net income (loss) per share............................. 42,000 40,532 41,809 40,469 --------- -------- --------- -------- Weighted average number of dilutive common equivalent shares used in computing diluted net income (loss) per share: Options............................ - 2,108 756 2,005 Warrants........................... - 161 79 156 --------- -------- --------- -------- Weighted average shares used in computing diluted net income (loss) per share............................. 42,000 42,801 42,644 42,630 --------- -------- --------- -------- --------- -------- --------- -------- Net income (loss) per share: Basic.............................. $ (0.07) $ 0.24 $ 0.26 $ 0.52 --------- -------- --------- -------- --------- -------- --------- -------- Diluted............................ $ (0.07) $ 0.22 $ 0.25 $ 0.49 --------- -------- --------- -------- --------- -------- --------- --------
6 OAK TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. INVENTORIES Inventories are stated at the lower of cost (first in, first out) or market and consisted of the following (in thousands):
March 31, June 30, 1998 1997 ----------- ---------- Purchased parts and work in process.............. $ 4,243 $ 5,521 Finished goods................................... 4,894 6,801 ----------- ---------- $ 9,137 $ 12,322 ----------- ---------- ----------- ----------
The decrease in inventory is primarily due to a $3.5 million write-off of inventory related to the discontinuation of the graphics and audio/communications businesses during the quarter ended March 31, 1998. 4. CONTINGENCIES The Company and various of its current and former officers and Directors are parties to several lawsuits which purport to be class actions filed on behalf of all persons who purchased or acquired the Company's stock (excluding the defendants and parties related to them) for the period July 27, 1995 through May 22, 1996. The first, a state court proceeding designated IN RE OAK TECHNOLOGY SECURITIES LITIGATION, Master File No. CV758510 pending in Santa Clara County Superior Court in Santa Clara, California, consolidates five putative class actions. This lawsuit also names as defendants several of the Company's venture capital fund investors, two of its investment bankers and two securities analysts. The plaintiffs allege violations of California securities laws and statutory deceit provisions as well as breaches of fiduciary duty and abuse of control. On December 6, 1996, the state court judge sustained the Oak defendants' demurrer to all causes of action alleged in plaintiffs' First Amended Consolidated Complaint, but allowed plaintiffs the opportunity to amend. The plaintiffs' Second Amended Consolidated Complaint was filed on August 1, 1997. On December 3, 1997, the state court judge sustained the Oak defendants' demurrer to plaintiffs' Second Amended Consolidated Complaint without leave to amend to the causes of action for breach of fiduciary duty and abuse of control, and to the California Corporations Code Sections 25400/25500 claims with respect to the Company, a number of the individual officers and directors, and the venture capital investors. The judge also sustained the demurrer with leave to amend to the California Civil Code Sections 1709/1710 claims, however plaintiffs elected not to amend this claim. Accordingly, the only remaining claim in the state court, IN RE OAK TECHNOLOGY SECURITIES LITIGATION, is the California Corporations Code Sections 25400/25500 cause of action against four officers of the Company and the Company's investment bankers. 7 OAK TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 4. CONTINGENCIES (CONTINUED) The Company and various of its current and former officers and Directors are also parties to four putative class action lawsuits pending in the U.S. District Court for the Northern District of California. These actions have been consolidated as IN RE OAK TECHNOLOGY, INC. SECURITIES LITIGATION, Case No. C-96-20552-SW(PVT). This action alleges certain violations of federal securities laws and is brought on behalf of purchasers of the Company's stock for the period July 27, 1995 through May 22, 1996. This action also names as a defendant one of the Company's investment bankers. On July 29, 1997, the federal court judge granted the Oak defendants' Motion to Dismiss the plaintiffs' First Amended Consolidated Complaint, but granted plaintiffs leave to amend most claims. The plaintiffs' Second Amended Consolidated Complaint was filed on September 4, 1997. Defendants Motion to Dismiss was heard on December 17, 1997. The federal court judge took the matter under submission and has not yet issued a ruling. Additionally, various of the Company's current and former officers and Directors are defendants in three consolidated derivative actions pending in Santa Clara County Superior Court in Santa Clara, California, entitled IN RE OAK TECHNOLOGY DERIVATIVE ACTION. This lawsuit, which asserts a claim for breach of fiduciary duty and a claim under California securities law based upon the officers' and Directors' trading in securities of the Company, has been stayed pending resolution of the class actions. In all of the putative state and federal class actions, the plaintiffs are seeking monetary damages and equitable relief. In the derivative action, the plaintiffs are also seeking an accounting for the defendants' sales of Company stock and the payment of monetary damages to the Company. All of these actions are in the early stages of proceedings. Based on its current information, the Company believes the suits to be without merit and will defend its position vigorously. Although it is reasonably possible the Company may incur a loss upon conclusion of these claims, an estimate of any loss or range of loss cannot be made. No provision for any liability that may result upon adjudication has been made in the Company's Consolidated Financial Statements. In connection with these legal proceedings, the Company has incurred, and expects to continue to incur, substantial legal and other expenses. Shareholder suits of this kind are highly complex and can extend for a protracted period of time, which can substantially increase the cost of such litigation and divert the attention of the Company's management. 8 OAK TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 5. FOUNDRY AGREEMENTS In June and November 1995, the Company entered into agreements with Taiwan Semiconductor Manufacturing Company ("TSMC") and Chartered Semiconductor Manufacturing Pte. Ltd. ("Chartered") to obtain certain additional wafer capacity through the year 2001. The agreements call for the Company to commit to certain future wafer purchases and to deposit funds with the suppliers as either a portion of the price of the additional wafers in advance of their delivery or as a non-interest bearing deposit to secure the availability of additional wafers. The price of such wafers will be determined in the future periods in which specific orders are actually placed. If the Company is not able to use, assign, or sell the additional wafer quantities, all or a portion of the deposits may be forfeited. In October 1996, the Company amended its previous agreement with TSMC resulting in a reduction of the Company's future wafer purchases required under the original agreement and the elimination of required future cash prepayments of approximately $73 million. Under the amended agreement, no additional prepayment is required; however the Company must utilize the entire amount of the prepayment paid as of October 1996 through a certain committed amount of wafer purchases in calendar years 1997, 1998, and 1999 or a portion of the prepayment will be forfeited. In March 1998, the Company further amended its agreement with TSMC allowing the Company to utilize excess wafer purchases in 1997 and 1998 to reduce the Company's committed wafer purchases in the following years. This amendment resulted in the Company utilizing calendar 1998 committed wafer purchases beginning in calendar 1997 after the committed wafer purchases for calendar 1997 were met. As a result of this amendment, the Company recorded a credit to foundry deposits of approximately $5.3 million which was used to offset payables to TSMC in the quarter ended March 31, 1998. In addition, the Company received an additional credit of $7.1 million which will be used to offset future payments to TSMC. The Company currently believes the terms and conditions of the agreement, as amended, will be met although no assurance can be given in this regard. In September 1996, April 1997 and September 1997, the Company amended its agreement with Chartered. The amendments resulted in a reduction of the Company's future wafer purchase commitments and the elimination of required future cash deposits under the original agreement of approximately $36 million. Under the amended agreement, the required future cash deposits of approximately $36 million could be reinstated if certain conditions are not met. The Company currently believes the terms and conditions of the agreement, as amended, will be met and that these commitments will not be reinstated although no assurance can be given in this regard. The deposits and prepayments under the amended foundry agreements described above are recorded at cost and total approximately $28.3 million as of March 31, 1998. The Company currently anticipates being able to utilize and fully recover the value of all foundry prepayments and deposits under the terms of the amended agreements although no assurance can be given in this regard. 9 OAK TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 6. INVESTMENT IN FOUNDRY VENTURES In October 1995, the Company entered into a series of agreements with United Microelectronics Corporation ("UMC") to form, along with other investors, a separate Taiwanese company, United Integrated Circuits Corporation ("UICC"), for the purpose of building and managing a semiconductor manufacturing facility in the Science Based Industrial Park in Hsin Chu City, Taiwan, Republic of China. As an investor in this venture, the Company has rights to a portion of the total wafer capacity for the manufacture of its proprietary products. The Company paid approximately $51.2 million for approximately 9.3% of the total outstanding shares of the foundry venture. The investment in UICC has been accounted for under the cost method of accounting. In October 1997, a fire damaged the UICC facility. UICC management has advised the Company that a majority of the equipment, majority of the inventory and a significant portion of the building were completely destroyed at an estimated loss of approximately $331 million (based on current exchange rates). UICC management has also advised the Company that approximately 10% of the loss to the facility will not be covered by insurance and that there is a deductible amount that UICC must pay with respect to the insured portion. Despite any unreimburseable loss, UICC management has represented to the Company that it is rebuilding the facility and expects the facility to be fully rebuilt and operational by April of 1999. Given the fire, the Company has evaluated its investment in the UICC facility and the potential impact of the Company's portion of the unreimburseable loss to determine whether there has been an impairment and as the Company believes that estimated future cash inflows expected to be generated by the facility and/or disposition of the investment are in excess of the carrying amount of the investment, no impaired loss has been recognized as of March 31, 1998. Representations have been made by UICC management that the facility's foundry capacity that has been guaranteed to the Company will be available through substitute capacity arrangements. To date, the Company has not requested that UICC make such substitute capacity available to the Company. Therefore, there can be no assurance that such substitute foundry capacity will be available to the Company should the Company require it. Additionally, there can be no assurance that a market will develop for the shares representing the Company's equity investment at any time in the future. 7. SETTLEMENT AWARDS In September 1997, October 1997 and February 1998, the Company received $2.6 million, $4.8 million and $0.7 million, respectively, pursuant to a Settlement Agreement entered into on July 31, 1997 between the Company and United Microelectronics Corporation ("UMC") in connection with a complaint the Company had filed with the International Trade Commission on July 21, 1997 based on the Company's belief that certain UMC CD-ROM controllers infringed one of the Company's patents. Proceeds from this settlement were recorded as miscellaneous income and are included in nonoperating income for the periods ended September 30, 1997, December 31, 1997 and March 31, 1998, respectively. 10 OAK TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 8. BUSINESS REORGANIZATION In January 1998, the Company announced its intention to discontinue its graphics and audio/communications businesses and focus on three core markets: optical storage, consumer electronics and digital office equipment. Unable to locate a buyer for either its graphics or its audio/communications businesses, the Company discontinued all product development, marketing, selling and other efforts related to these businesses during the quarter ended March 31, 1998. As a result of the discontinuation of these businesses, the Company laid-off 30 employees and recorded a restructuring charge to operations related to this reorganization of $1.8 million and an inventory-related charge of $3.5 million to cost of revenues during the quarter ending March 31, 1998. The following represents the Company's restructuring activities for the quarter ended March 31, 1998:
Prepaid Royalties Severance Other Total ----------- ---------- ---------- ------------ Restructuring charges................. $ 948,322 $ 611,549 $ 206,496 $ 1,766,367 Noncash items......................... (948,322) - (111,496) (1,059,818) ----------- ---------- ---------- ------------ Balance at March 31, 1998............... $ - $ 611,549 $ 95,000 $ 706,549 ----------- ---------- ---------- ------------ ----------- ---------- ---------- ------------
The remaining restructuring accrual of $0.7 million is included in accrued expenses as of March 31, 1998. Of the remaining restructuring accrual of $0.7 million, the Company made $0.6 million in cash payments in April 1998 and the remaining balance of $0.1 million is anticipated to be paid in the first quarter of fiscal year 1999. 9. BUSINESS ACQUISITIONS On January 29, 1998, the Company and its wholly-owned subsidiary Pixel Magic, Inc. signed a Plan of Reorganization and Agreement of Merger ("The Merger Agreement") with Xerographic Laser Images Corporation ("XLI"), a developer of resolution enhancement technology. Pursuant to the Merger Agreement, XLI will become a wholly-owned subsidiary of Pixel Magic. The Merger Agreement provides for a cash payment of approximately $3.7 million to XLI shareholders on the effective date of the merger and the right to receive additional payments up to a maximum of approximately $11.3 million subject to the achievement of certain milestones by XLI over a three year period ending on December 31, 2000. The merger is subject to the approval of XLI shareholders. The transaction will be accounted for as a purchase transaction. The Company currently anticipates that it will expense a significant portion of the purchase price in the period during which the acquisition is closed. 11 OAK TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 9. BUSINESS ACQUISITIONS (CONTINUED) On March 20, 1998, the Company entered into an asset purchase agreement with Odeum Microsystems, Inc. ("Odeum") and Hyundai Electronics America ("HEA") pursuant to which the Company agreed to acquire certain assets of Odeum for approximately $4.0 million. With this acquisition, the Company acquired two products currently in production, an integrated MPEG-2 audio/video decoder and transport demultiplexer and a DVD-5 compliant QPSK demodulator. Both products are used predominantly in "free to air" satellite and cable set-top boxes for MPEG-2 encoded digital television broadcasting. The transaction was consummated on April 2, 1998. This transaction will be accounted for as a purchase transaction. The Company anticipates that it will expense a significant portion of the purchase price for this acquisition in the period ended June 30, 1998. 10. STOCK REPURCHASE PLAN On January 22, 1998, the Company announced that its Board of Directors had authorized the repurchase of up to 2.0 million shares of its common stock, either in the open market or in private transactions. The repurchase program is authorized for one year, unless further extended by the Company's Board of Directors. As of March 31, 1998, the Company has purchased 287,500 shares for approximately $1.8 million. 11. SUBSEQUENT EVENTS On April 30, 1998, the Company entered into several agreements with Omni Peripherals Pte. Ltd., a private Singaporean company ("Omni") and two other investors pursuant to which the Company acquired a preferred equity interest in Omni. Omni was incorporated in Singapore on January 2, 1996, and is in the business of designing, developing and marketing mechatronics modules for optical storage drives. The Company paid $802,124, for its interest, representing approximately 20% of the issued stock of Omni. As a group, the three preferred investors own 51% of the issued stock of Omni. There can be no assurance that a market will develop for the shares representing the Company's equity investment at any time in the future nor can there be any assurance that Omni will successfully develop its products or that if developed, its products will be competitive and achieve market acceptance. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EXCEPT FOR THE HISTORICAL FINANCIAL INFORMATION CONTAINED HEREIN, THE MATTERS DISCUSSED IN THIS QUARTERLY REPORT ON FORM 10-Q MAY BE CONSIDERED "FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES ACT OF 1934, AS AMENDED. SUCH STATEMENTS INCLUDE DECLARATIONS REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF THE COMPANY AND ITS MANAGEMENT AS OF THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY REVISION TO THESE FORWARD-LOOKING STATEMENTS WHICH MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS. AMONG THE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS ARE: (i) THAT THE INFORMATION IS OF A PRELIMINARY NATURE AND MAY BE SUBJECT TO FURTHER ADJUSTMENT, (ii) VARIABILITY IN THE COMPANY'S QUARTERLY OPERATING RESULTS, (iii) GENERAL CONDITIONS IN THE SEMICONDUCTOR INDUSTRY, (iv) RISKS RELATED TO PENDING LEGAL PROCEEDINGS, (v) DEVELOPMENT BY COMPETITORS OF NEW OR SUPERIOR PRODUCTS OR THE ENTRY OF NEW COMPETITORS INTO THE COMPANY'S MARKETS, (vi) THE COMPANY'S ABILITY TO DIVERSIFY ITS PRODUCT AND MARKET BASE BY DEVELOPING AND INTRODUCING NEW PRODUCTS WITHIN DESIGNATED MARKET WINDOWS AT COMPETITIVE PRICE AND PERFORMANCE LEVELS, (vii) WILLINGNESS OF PROSPECTIVE CUSTOMERS TO DESIGN THE COMPANY'S PRODUCTS INTO THEIR PRODUCTS, (viii) AVAILABILITY OF ADEQUATE FOUNDRY CAPACITY AND ACCESS TO PROCESS TECHNOLOGIES, (ix) THE COMPANY'S ABILITY TO PROTECT ITS PROPRIETARY INFORMATION AND OBTAIN ADEQUATE LICENSES OF THIRD PARTY TECHNOLOGY ON ACCEPTABLE TERMS, (x) RISKS RELATED TO USE OF INDEPENDENT MANUFACTURERS AND THIRD PARTY ASSEMBLY AND TEST VENDORS, (xi) DEPENDENCE ON KEY PERSONNEL, (xii) RELIANCE ON A LIMITED NUMBER OF LARGE CUSTOMERS, (xiii) THE COMPANY'S CURRENT DEPENDENCE ON SALES OF CD-ROM CONTROLLER PRODUCTS AND THE PC MARKET, (xiv) RISKS RELATED TO INTERNATIONAL BUSINESS OPERATIONS AND THE COMPANY'S CURRENT DEPENDENCE ON SALES TO THE ASIAN MARKETS, (xv) ABILITY OF THE COMPANY TO MAINTAIN ADEQUATE PRICE LEVELS AND MARGINS WITH RESPECT TO ITS PRODUCTS, (xvi) MANAGEMENT OF CHANGING OPERATIONS RELATED TO THE COMPANY'S RESTRUCTURING AND MANAGEMENT CHANGES ANNOUNCED ON JANUARY 22, 1998, (xvii) RISKS RELATED TO ACQUISITIONS (xviii) THE ABILITY TO ATTRACT AND RETAIN QUALIFIED MANAGEMENT AND TECHNICAL PERSONNEL AND OTHER RISKS IDENTIFIED FROM TIME TO TIME IN THE COMPANY'S REPORTS AND REGISTRATION STATEMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING THE ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JUNE 30, 1997. The Company designs, develops and markets high performance integrated semiconductors and related software to original equipment manufacturers worldwide that serve the optical storage, consumer electronics and digital office equipment markets. The Company's products typically consist of hardware, firmware and software to provide a complete solution for customers. The Company contracts with independent foundries to manufacture all of its hardware products, enabling the Company to focus on its design strengths, minimize fixed costs and capital expenditures and gain access to advanced manufacturing facilities. Except pursuant to its agreements with TSMC, Chartered and UICC, the Company's foundries generally are not 13 obligated to supply products to the Company for any specific period, in any specific quantity or at a specific price. During the quarter ending March 31, 1998, the Company implemented a strategy of concentrating its efforts on the markets for optical storage, consumer electronics and digital office equipment. As part of this strategy, the Company sought to discontinue its graphics and audio/communications businesses and restructure its business to leverage its three core technologies: optical storage, MPEG imaging and digital imaging. Unable to locate a buyer for either its graphics or its audio/communications businesses, the Company discontinued all product development, marketing, selling and other efforts related to these businesses during the quarter ended March 31, 1998. As a result of the discontinuation of these businesses, the Company laid-off 30 employees and recorded a restructuring charge of $1.8 million to operations and a $3.5 million inventory-related charge to cost of revenues related to this restructuring during the quarter ended March 31, 1998. The $1.8 million charge consisted of $1.0 million charges related to a write-off of prepaid royalties, approximately $0.6 million for severance pay and $0.2 in miscellaneous charges. On April 22, 1998, the Company announced that it expects to incur a loss from operations in the quarter ending June 30, 1998 due to a number of factors currently affecting its optical storage business, including, but not limited to, new competitors entering the market, a maturation of the CD-ROM controller market, pressure from the sub-$1000 PC segment for low-cost components, uncertain demand for personal computers and delays in new product releases. Through the restructuring efforts described above, the Company intends to direct and focus Company resources and management time on the optical storage, consumer electronics and digital office equipment markets with primary emphasis on the optical storage market. However, there can be no assurance that these actions will enable the Company to diminish the pressures currently affecting its optical storage business and/or enable the Company to successfully transition the business to the emerging CD-R/W and DVD markets. On January 29, 1998, the Company and its wholly-owned subsidiary Pixel Magic, Inc. signed a Plan of Reorganization and Agreement of Merger ("The Merger Agreement") with Xerographic Laser Images Corporation ("XLI"), a developer of resolution enhancement technology. Pursuant to the Merger Agreement, XLI will become a wholly-owned subsidiary of Pixel Magic. The Merger Agreement provides for a cash payment of approximately $3.7 million to XLI shareholders on the effective date of the merger and the right to receive additional payments up to a maximum of approximately $11.3 million subject to the achievement of certain milestones by XLI over a three year period ending on December 31, 2000. The merger is subject to the approval of XLI shareholders. The transaction will be accounted for as a purchase transaction. The Company currently anticipates that it will expense a significant portion of the purchase price in the period during which the acquisition is closed. On March 20, 1998, the Company entered into an asset purchase agreement with Odeum Microsystems, Inc. ("Odeum") and Hyundai Electronics America ("HEA") pursuant to which the Company agreed to acquire certain assets of Odeum for approximately $4.0 million. With this acquisition, the Company acquired two products currently in production, an integrated MPEG-2 audio/video decoder and transport demultiplexer and a DVD-5 compliant QPSK demodulator. Both products are used predominantly in "free to air" satellite and cable set-top boxes for MPEG-2 encoded digital television broadcasting. The transaction was consummated 14 on April 2, 1998. This transaction will be accounted for as a purchase transaction. The Company anticipates that it will expense a significant portion of the purchase price for this acquisition in the period ended June 30, 1998. On April 30, 1998, the Company entered into several agreements with Omni Peripherals Pte. Ltd., a private Singaporean company ("Omni") and two other investors pursuant to which the Company acquired a preferred equity interest in Omni. Omni was incorporated in Singapore on January 2, 1996, and is in the business of designing, developing and marketing mechatronics modules for optical storage drives. The Company paid $802,124, for its interest, representing approximately 20% of the issued stock of Omni. As a group, the three preferred investors own 51% of the issued stock of Omni. There can be no assurance that a market will develop for the shares representing the Company's equity investment at any time in the future nor can there be any assurance that Omni will successfully develop its products or that if developed, its products will be competitive and achieve market acceptance. On February 27, 1998, the Company incorporated a wholly-owned subsidiary, Oak Technology, Ltd. in Bristol, England. The subsidiary will employ primarily technical personnel who will develop products for the Company's consumer products business. THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997 NET REVENUES. The Company's net revenues in the comparison periods were primarily derived from sales of its CD-ROM controller products which comprised 77% and 86% of the Company's net revenues in the three months ended March 31, 1998 and 1997 respectively. Net revenues decreased 29.8% to $35.6 million in the three months ended March 31, 1998 from $50.6 million in the comparable period of fiscal 1997. This decrease was primarily attributable to a decrease in unit sales and overall average selling price ("ASP") of CD-ROM controllers, in relatively equal proportion, partially offset by an increase in sales of digital office equipment controllers. In the three months ended March 31, 1998 and 1997, sales to the Company's top ten customers accounted for approximately 76% and 78%, respectively, of the Company's net revenues. International sales, principally to Japan, Taiwan, Korea and Belgium accounted for approximately 87% and 98% of the Company's net revenues in the three months ended March 31, 1998 and 1997, respectively. This decrease in international sales, as a percentage of total sales, is primarily attributable to a decrease in international revenues as well as an increase in domestic revenues in the comparison quarters. Sales of products related to the graphics and audio/communications businesses which the Company discontinued in the quarter ended March 31, 1998 accounted for less than 3% and 1% of the Company's net revenues in each of the three months ended March 31, 1998 and 1997, respectively. Although the Company is attempting to diversify its revenue product base in the three core markets of optical storage, consumer electronics and digital office equipment, it anticipates that CD-ROM controller sales will continue to account for a substantial majority of its revenue in the foreseeable future. As the Company has been experiencing continued pressure on CD-ROM controller ASPs, increased competition, a maturation of the CD-ROM controller market and development delays in the Company's next generation CD-ROM product, the Company does not anticipate year over year growth in CD-ROM controller unit sales and revenue to continue at the same rate, if at all, in the foreseeable future. See "Factors That May Affect Future Results" below. GROSS MARGIN. Cost of revenues includes the cost of wafer fabrication, assembly and testing performed by third-party vendors and direct and indirect costs associated with the procurement, scheduling and quality assurance functions performed by the Company. The 15 Company's gross margin decreased to 40.5% in the three month period ended March 31, 1998 as compared to 54.9% during the comparable period in the prior year. Gross margin in the three month period ended March 31, 1998 includes the impact of a $3.5 million inventory-related charge to cost of revenues related to the discontinuation of the graphics and audio/communications businesses. Excluding the impact of the discontinuation of these businesses, gross margin in the three months ended March 31, 1998 would have been 50.5%. Gross margin in the three month period ended March 31, 1997 included the impact of favorable adjustments of approximately $5.2 million to cost of revenues associated with the sale of products which had been fully reserved in a prior period. Excluding the effect of this adjustment, gross margin in the three month period ended March 31, 1997 would have been 44.7%. The increase in gross margin during the comparison periods, excluding the impact of the adjustments recorded during the three months ended March 31, 1998 and March 31, 1997, is primarily the result of a product mix shift to higher margin CD-ROM controllers and the CD-R/W controller. Gross margins related to the graphics and audio/communications businesses which the Company discontinued in the quarter ended March 31, 1998 accounted for approximately 2% and less than 1% of the Company's total gross margin contribution in each of the three months ended March 31, 1998 and 1997, respectively. The Company's overall gross margin is subject to change due to various factors, including, among others, competitive product pricing, yields, wafer costs, assembly and test costs, product design changes and product mix. The Company expects that ASPs for its existing products will continue to decline over time and that ASPs for each new product will decline significantly over the life of the product. The Company is currently experiencing severe price pressure on its CD-ROM controller and MPEG products and expects such price erosion to continue. A decline in ASPs that is not offset by cost reductions through product design changes, manufacturing process changes, yield improvement, savings negotiated with its manufacturing subcontractors or by sales of new products with higher gross margins would decrease the Company's overall gross margin and could materially adversely affect the Company's operating results. The Company does not believe that it can achieve cost reductions or sales of new products with higher gross margins which fully offset the expected price declines of its CD-ROM and MPEG products and therefore, it expects gross margin percentages to decline for such products. In addition, the Company believes that gross margins for new products in its optical storage and consumer markets will be lower than historical levels and that, as a result, gross margins in general will decline in the future. RESEARCH AND DEVELOPMENT EXPENSES. Research and development costs are expensed as incurred. Research and development expenses increased 44.9% to $12.4 million in the three months ended March 31, 1998 from $8.6 million in the comparable period in the prior year. Additionally, research and development expenses increased as a percentage of net revenues to 34.9% during the three months ended March 31, 1998 from 16.9% in the comparable period in the prior year. The increased spending related to research and development activities was principally the result of the hiring of additional technical personnel and associated expenses during the comparison periods. The Company will continue to invest substantial resources in research and development, including hiring additional technical personnel, in an effort to maintain its technological leadership in the optical storage market and diversify its product development in its other core markets: consumer electronics and digital office equipment. Although the Company expects research and development expenses to decrease as a result of the discontinuation of its graphics and audio/communications businesses, the increase in the investment in the remaining core businesses may partially, if not fully, offset this decrease. As a result, no assurance can be given that absolute research and development expenses for the remainder of fiscal 1998 will decrease. 16 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses include costs related to salaries, commissions, legal fees, consulting and other costs related to the sales, marketing and administrative functions of the Company. Selling, general and administrative expenses increased 54.2% to $8.8 million in the three months ended March 31, 1998 from $5.7 million in the comparable period in the prior year. Additionally, selling, general and administrative expenses increased as a percentage of net revenues to 24.8% in the three months ended March 31, 1998 from 11.3% during the comparable period in fiscal 1997. This increase was principally the result of the hiring of additional management and administrative personnel and associated expenses, an increase in legal expenses as well as a decrease in the Company revenues in the comparison periods. The increase in legal expenses relates primarily to a complaint the Company filed with the International Trade Commission on July 21, 1997 ("ITC Complaint") and additional litigation related to a settlement agreement with one of the parties in the ITC Complaint. See "Legal Proceedings". Although the Company may experience a decrease in selling, general and administrative expenses as a result of the discontinuation of its graphics and audio/communications businesses, any such decrease is expected to be offset by the continuing efforts to develop the Company's support infrastructure and hire additional senior management personnel. As a result, the Company expects to incur higher absolute selling, general and administrative expenses in the remainder of fiscal 1998. RESTRUCTURING CHARGES. During the three months ended March 31, 1998, the Company discontinued its graphics and audio/communications businesses and incurred a charge to operations of $1.8 million related to these discontinued businesses. The $1.8 million charge consisted of $1.0 million related to a write-off of prepaid royalties, approximately $0.6 million for severance pay and $0.2 for miscellaneous charges. NONOPERATING INCOME. During the three months ended March 31, 1998, nonoperating income increased to $2.3 million from $1.1 million during the comparable three months of fiscal 1997. This increase was primarily the result of the receipt of approximately $0.7 million related to the settlement agreement between the Company and United Microelectronics Corporation in connection with a complaint the Company filed with the International Trade Commission on July 21, 1997. See "Legal Proceedings". INCOME TAXES. The overall effective tax rate for the three months ended March 31, 1998 was 52% and 35% for the period ended March 31, 1997. The change in the tax rate was the result of the loss recorded in the quarter ended March 31, 1998 and the resultant impact on total anticipated fiscal 1998 net income. NINE MONTHS ENDED MARCH 31, 1998 COMPARED TO NINE MONTHS ENDED MARCH 31, 1997 NET REVENUES. The Company's net revenues in the comparison periods were primarily derived from sales of its CD-ROM controller products which comprised 81% and 86% of the Company's net revenues in the nine months ended March 31, 1998 and 1997 respectively. Net revenues increased 9.4% to $128.2 million in the nine months ended March 31, 1998 from $117.2 million in the comparable period of fiscal 1997. This increase was primarily attributable to an increase in unit sales of CD-ROM controllers from the comparable period of fiscal 1997 partially offset by a decline in the average selling price ("ASP") of the CD-ROM controllers. The increase in unit sales of the CD-ROM controllers is primarily the result of the relatively low unit sales in the comparable period of fiscal 1997 resulting from customer decisions to reduce inventory, an overall slowdown in the PC market and a shift in the CD-ROM industry from 4x 17 speed drives to 6x and 8x speed drives. In the nine months ended March 31, 1998 and 1997, sales to the Company's top ten customers accounted for approximately 80% and 77%, respectively, of the Company's net revenues. International sales, principally to Japan, Taiwan, Korea and Belgium accounted for approximately 93% and 98% of the Company's net revenues in the nine months ended March 31, 1998 and 1997, respectively. Sales of products related to the graphics and audio/communications businesses that the Company discontinued accounted for approximately 3% of the Company's net revenues in the nine months ended March 31, 1998 and approximately 2% in the nine months ended March 31, 1997. GROSS MARGIN. Cost of revenues includes the cost of wafer fabrication, assembly and testing performed by third-party vendors and direct and indirect costs associated with the procurement, scheduling and quality assurance functions performed by the Company. The Company's gross margin decreased to 49.2% in the nine month period ended March 31, 1998 as compared to 58.8% during the comparable period in the prior year. Gross margin in the nine month period ended March 31, 1998 includes the impact of a $3.5 million inventory-related charge to cost of revenues related to the discontinuation of the graphics and audio/communications businesses. Excluding the impact of these discontinued businesses, gross margin in the nine month period ended March 31, 1998 would have been 52.0%. Margins for the nine month period ended March 31, 1997 were favorably affected by adjustments of approximately $18.7 million to cost of revenues associated with the sale of products which had been fully reserved in a prior period as well as manufacturing cost adjustments of $3.0 million related to foundry agreements. Excluding the impact of these adjustments, gross margin for the nine month period ended March 31, 1997 would have been 40.0%. The increase in gross margin during the comparison periods, excluding the impact of the adjustments recorded during the nine months ended March 31, 1998 and the nine months ended March 31, 1997, is primarily the result of a product mix shift to higher margin CD-ROM controllers and the CD-R/W controller. Gross margins related to the graphics and audio/communications businesses that the Company discontinued accounted for approximately 2% and (4%) of the Company's total gross margin contribution in the nine months ended March 31, 1998 and 1997, respectively. RESEARCH AND DEVELOPMENT EXPENSES. Research and development costs are expensed as incurred. Research and development expenses increased 44.4% to $35.4 million in the nine months ended March 31, 1998 from $24.5 million in the comparable period in the prior year. This increase was principally the result of the hiring of additional personnel and associated expenses. Research and development expenses increased as a percentage of net revenues to 27.6% during the nine months ended March 31, 1998 from 20.9% in the comparable period in the prior year. This increase was principally the result of the hiring of additional technical personnel and associated expenses during the comparison periods. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses include costs related to salaries, commissions, legal fees, consulting and other costs related to the sales, marketing and administrative functions of the Company. Selling, general and administrative expenses increased 52.1% to $23.0 million in the nine months ended March 31, 1998 from $15.1 million in the comparable nine months in fiscal 1997. Additionally, selling, general and administrative expenses increased as a percentage of net revenues to 17.9% in the nine months ended March 31, 1998 from 12.9% during the comparable period in fiscal 1997. This increase was principally the result of the hiring of additional management and administrative personnel and associated expenses as well as increases in legal expenses. The increase in legal expenses relates primarily to a complaint the Company filed with the 18 International Trade Commission on July 21, 1997 ("ITC Complaint") and additional litigation related to a settlement agreement with one of the parties in the ITC Complaint. See "Legal Proceedings." NONOPERATING INCOME. During the nine months ended March 31, 1998, nonoperating income increased to $12.1 million from $3.1 million during the comparable nine months in fiscal 1997. This increase was primarily the result of the receipt of approximately $8.1 million related to the settlement agreement between the Company and United Microelectronics Corporation in connection with a complaint the Company had filed with the International Trade Commission on July 21, 1997. See "Legal Proceedings". INCOME TAXES. The overall effective tax rate for the nine months ended March 31, 1998 was 28% and 35% for the nine months ended March 31, 1997. The change in the tax rate was the result of the loss recorded in the quarter ended March 31, 1998 and the resultant impact on total anticipated fiscal 1998 net income. FACTORS THAT MAY AFFECT FUTURE RESULTS The following factors should be carefully considered in evaluating the Company and its business. The Company's operating results are subject to quarterly and other fluctuations due to a variety of factors, including the gain or loss of significant customers, increased competitive pressures, the timing of new product introductions by the Company or its competitors and market acceptance of new or enhanced versions of the Company's and its customers' products. Other factors include the availability of foundry capacity, fluctuations in manufacturing yields, availability and cost of raw materials, the cyclical nature of both the semiconductor industry, the market for PCs and the other markets addressed by the Company's products, seasonal customer demand, the Company's ability to diversify its product offerings, the competitiveness of the Company's customers, the timing of significant orders and order cancellations or rescheduling, significant increases in expenses associated with the expansion of operations and development of the Company's support infrastructure, and changes in pricing policies by the Company, its competitors or its suppliers, including decreases in ASPs of the Company's products. In addition, the Company's quarterly operating results could be materially adversely affected by legal expenses incurred in connection with, or any adverse judgment in, the Company's ongoing shareholder legal proceedings. The Company's operating results could also be adversely affected by economic conditions generally in various geographic areas where the Company or its customers do business. These factors are difficult to forecast, and these or other factors could materially affect the Company's quarterly or annual operating results. The Company's operating results in the remainder of fiscal 1998 are likely to be affected by these factors as well as others. Accordingly, there can be no assurance as to the level of sales or earnings that may be attained by the Company in any given period in the future. The Company currently places noncancelable orders to purchase its products from independent foundries on an approximately three month rolling basis and is currently committed with two of its foundries for certain minimum amounts of capacity through the end of calendar 1999, while its customers generally place purchase orders with the Company less than four weeks prior to delivery that may be rescheduled or under certain circumstances may be canceled without significant penalty. Consequently, if anticipated sales and shipments in any quarter are 19 rescheduled, canceled, or do not occur as quickly as expected, expense and inventory levels could be disproportionately high and the Company's business, financial condition and results of operations for that quarter or for the fiscal year would be materially adversely affected. The semiconductor industry has historically been characterized by rapid technological change, cyclical market patterns, significant price erosion, periods of over-capacity and production shortages, variations in manufacturing costs and yields and significant expenditures for capital equipment and product development. In addition, the industry has experienced significant economic downturns at various times, characterized by diminished product demand and accelerated erosion of product prices. The Company may experience substantial period-to-period fluctuations in operating results due to conditions affecting the Company's specific markets or to general semiconductor industry conditions. The Company's success is highly dependent upon its ability to develop new, technically advanced products, to introduce them to the marketplace ahead of the competition, and to have them selected for design into products of leading OEM manufacturers. Both revenues and margins may be affected quickly if new product introductions are delayed or if the Company's products are not designed into successive generations of products of the Company's customers. These factors have become increasingly important to the Company's results of operations because the rate of change in the markets served by the Company continues to accelerate. In an effort to attempt to increase its competitiveness in the Company's core markets, the Company recently implemented a strategy to concentrate its efforts on the markets for optical storage, consumer electronics and digital office equipment. As part of this strategy, the Company discontinued its graphics and audio/communications businesses and is restructuring its business to leverage its three core technologies: optical storage, MPEG imaging and digital imaging. As a result of the decision to discontinue its graphics and audio/communications businesses the Company recorded a charge to operations related to this restructuring during the quarter ended March 31, 1998 of $1.8 million and an inventory-related charge to cost of revenues of $3.5 million. See "Notes to Consolidated Financial Statements". The Company and various of its current and former officers and Directors are parties to certain legal proceedings. See "Legal Proceedings". All of these actions are in the early stages of proceedings. Based on its current information, the Company believes the suits to be without merit and will defend its position vigorously. No provision for any liability that may result has been made in the Company's Consolidated Financial Statements. In connection with these legal proceedings, the Company has incurred, and expects to continue to incur, substantial legal and other expenses. Shareholder suits of this kind are highly complex and can extend for a protracted period of time, which can substantially increase the cost of such litigation and divert the attention of the Company's management. The markets in which the Company competes are intensely competitive and are characterized by rapid technological change, declining unit ASPs and rapid product obsolescence. The Company expects competition to increase in the future from existing competitors and from other companies that may enter the Company's existing or future markets with solutions that may be less costly or provide higher performance or additional features. Competition typically occurs at the design stage, where the customer evaluates alternative design approaches that require integrated circuits such as those offered by the Company. Because of shortened product life cycles and even shorter design-in cycles, particularly in the CD-ROM controller market, the Company's competitors have increasingly frequent opportunities to 20 achieve design wins in next generation systems or, in the CD-ROM controller market, in the next generation drive. In the event that competitors succeed in supplanting the Company's products, the Company's market share may not be sustainable and revenue, gross margin and earnings would be adversely affected. The Company's existing and potential competitors include many large domestic and international companies that have substantially greater financial, manufacturing, technical, marketing, distribution and other resources, broader product lines and longer standing relationships with customers than the Company. The Company's competitors also include a number of emerging companies as well as some of the Company's own customers and suppliers. Certain of the Company's principal competitors maintain their own semiconductor foundries and may therefore benefit from certain capacity, cost and technological advantages. The Company believes that its ability to compete successfully depends on a number of factors, both within and outside of its control, including the price, quality and performance of the Company's and its customers' products, the timing and success of new product introductions by the Company, its customers and its competitors, the emergence of new PC and other market standards, the development of technical innovations, the ability to obtain adequate foundry capacity and sources of raw materials, the efficiency of production, the rate at which the Company's customers design the Company's products into their products, the market acceptance of the Company's customer's products, the number and nature of the Company's competitors in a given market, the assertion of intellectual property rights and general market and economic conditions. There can be no assurance that the Company will be able to compete successfully in the future. The willingness of prospective customers to design the Company's products into their products depends, to a significant extent, upon the ability of the Company to have product available at the appropriate market window and to price its products at a level that is cost effective for such customers. The markets for most of the applications for the Company's products, particularly the optical storage market and the consumer electronics market, are characterized by intense price competition. As the markets for the Company's products mature and competition increases, the Company anticipates that ASPs on its products will decline. If the Company is unable to reduce its costs sufficiently to offset declines in ASPs or is unable to successfully introduce new higher performance products with higher ASPs, the Company's operating results will be materially adversely affected. In addition, if the Company experiences yield or other production problems or shortages of supply that increase its manufacturing costs, or fails to reduce its manufacturing costs, the result would be a material adverse effect on the Company's business, financial condition and operating results. The markets for the Company's products are characterized by evolving industry standards, rapid technological change and product obsolescence. The Company's performance is highly dependent upon the successful development and timely introduction of new products at competitive price and performance levels. Currently, the Company's financial performance is dependent upon the Company's level of success in the CD-ROM controller market. The Company has recently experienced some product development delays in this area. In an effort to diversify its product and market base, the Company has invested substantial resources in optical storage as well as in its other core technologies for the consumer and digital office equipment markets. There can be no assurance that products currently under development in these core technologies or any other new products will be successfully developed or will achieve market acceptance, thereby affecting the Company's ability to achieve diversification of its products and markets, and thereby revenue diversification. The failure of the Company to introduce new products successfully or the failure of new products to achieve market acceptance would have a 21 material adverse effect on the Company's business, financial condition and results of operations. The success of new product introductions is dependent on several factors, including recognition of market requirements, product cost, timely completion and introduction of new product designs, securing sufficient foundry capacity for volume manufacturing of wafers, quality of new products and achievement of acceptable manufacturing yields from the Company's contract manufacturers. Due to the design complexity of its products, the Company has experienced delays in completing development and introduction of new products, and there can be no assurance that the Company will not encounter such delays in the development and introduction of future products. There can be no assurance that the Company will successfully identify new product opportunities and develop and bring new products to market in a timely manner, that the Company's products will be selected for design into the products of its targeted customers or that products or technologies developed by others or changing industry standards will not render the Company's products or technologies obsolete or noncompetitive. The failure of the Company's new product development efforts or the failure of the Company to achieve market acceptance of its new products would have a material adverse effect on the Company's business, financial condition and operating results. The Company has begun to pursue, and will continue to pursue, opportunities to acquire key technology to augment its technical capabilities or to achieve faster time to market as alternatives to internally developing such technology. Acquisitions involve numerous risks, including difficulties in integration of the operations, technologies, and products of the acquired companies; the risk of diverting management's attention from normal daily operations of the business; risks of entering markets in which the Company has no or limited direct prior experience and where competitors in such markets have stronger market positions; the coordination of sales, marketing and research and development; and the potential loss of key employees of the acquired company. The Company must also maintain its ability to manage any such growth effectively. Failure to manage growth effectively and successfully integrate acquisitions made by the Company could adversely affect the Company's business and operating results. In addition, with such acquisitions, there is the risk that future operating performance may be unfavorably impacted due to acquisition related costs such as, but not limited to, in-process research and development charges, additional development expenses, lower gross margins generated by the sales of acquired products and restructuring costs associated with duplicate facilities. The Company's ability to compete is affected by its ability to protect its proprietary information. The Company considers its technology to be proprietary and relies on a combination of patents, trademarks, copyrights, trade secret laws, confidentiality procedures and licensing arrangements to protect its intellectual property rights. The Company currently has six patents granted, thirty patents pending, thirty-two patents in preparation in the United States, and fifteen international patents pending. The Company intends to seek additional international patents and additional United States patents on its technology. There can be no assurance that additional patents will issue from any of the Company's pending applications or applications in preparation, or be issued in all countries where the Company's products can be manufactured or sold, or that any claims allowed from pending applications or applications in preparation will be of sufficient scope or strength to provide meaningful protection or any commercial advantage to the Company. Additionally, competitors of the Company may be able to design around the Company's patents. The laws of certain foreign countries in which the Company's products are or may be manufactured or sold, including various countries in Asia, may not protect the Company's products or intellectual property rights to the same extent as do the laws of the United 22 States and thus make the possibility of piracy of the Company's technology and products more likely. On April 7, 1998, the Company filed a complaint with the International Trade Commission ("ITC") against certain Asian manufacturers of optical storage controller devices based on the Company's belief that such devices infringed one or more of the Company's patents. The complaint seeks a ban on the importation into the United States of any infringing CD-ROM controller or products containing such infringing CD-ROM controllers. See "Legal Proceedings". The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights, which has resulted in significant, often protracted and expensive litigation. The Company and certain of its customers and foundries have, from time to time, been notified that they may be infringing patents or other intellectual property rights owned by third parties. In addition, customers have been named in suits alleging infringement of patents or other intellectual property rights by customer products. Certain components of these products have been purchased from the Company and may be subject to indemnification provisions made by the Company to its customers. If it is necessary or desirable, the Company may seek licenses under such patents or other intellectual property rights. However, there can be no assurance that licenses will be offered or that the terms of any offered licenses will be acceptable to the Company. The failure to obtain a license from a third party for technology used by the Company could cause the Company to incur substantial liabilities and to suspend the manufacture of products or the use by the Company's foundries of processes requiring the technology. As the Company's products become more integrated and offer increased functionality, there is a likelihood that more of these claims will occur. The Company cannot accurately predict the eventual outcome of any suit or other alleged infringement of intellectual property. Furthermore, the Company may initiate claims or litigation against third parties for infringement of the Company's proprietary rights or to establish the validity of the Company's proprietary rights. The Company recently initiated such litigation by filing a complaint with the International Trade Commission. See "Legal Proceedings". Litigation by or against the Company could result in significant expense to the Company and divert the efforts of the Company's technical and management personnel, whether or not such litigation results in a favorable determination for the Company. In the event of an adverse result in any such litigation, the Company could be required to pay substantial damages, cease the manufacture, use and sale of infringing products, expend significant resources to develop non-infringing technology, discontinue the use of certain processes or obtain licenses to the infringing technology. There can be no assurance that the Company would be successful in such development or that such licenses would be available on reasonable terms, or at all, and any such development or license could require expenditures by the Company of substantial time and other resources. Patent disputes in the semiconductor industry have often been settled through cross-licensing arrangements. Because the Company has a limited portfolio of patents, the Company may not be able to settle an alleged patent infringement claim through a cross-licensing arrangement. If a successful claim is made against the Company, or its customers, and a license is not made available to the Company on commercially reasonable terms, or if the Company is required to pay substantial damages or awards, the Company's business, financial condition and operating results would be materially adversely affected. The Company generally enters into confidentiality agreements with its employees and confidentiality and license agreements with its customers and potential customers, and limits access to and distribution of the source and object code of its software and other proprietary information. Under some circumstances, the Company grants licenses that give its customers 23 limited access to the source code of the Company's software which increases the likelihood of misappropriation or misuse of the Company's technology. Accordingly, despite precautions taken by the Company, it may be possible for unauthorized third parties to copy certain portions of the Company's technology or to obtain and use information that the Company regards as proprietary. There can be no assurance that the steps taken by the Company will be adequate to prevent misappropriation of its technology or to provide an adequate remedy in the event of a breach or misappropriation by others. Certain technology used in the Company's products is licensed from third parties. Some of the Company's products, particularly those targeted for the DVD market, require certain types of copy protection software that the Company must license from third parties. In addition, if the Company is to successfully design and develop technologically advanced products, it must license a variety of software design and development tools from third parties. There can be no assurance that such licenses, or licenses of other third party technology, will be available or can be renewed on terms acceptable to the Company, if at all. The inability of the Company to obtain or renew such license arrangements on acceptable terms could have a material adverse effect on the Company's business, financial condition and results of operations. The Company contracts with independent foundries to manufacture all of its hardware products, enabling the Company to focus on its design strengths, minimize fixed costs and capital expenditures and gain access to advanced manufacturing facilities. Certain of the Company's foundry agreements require up-front, nonrefundable prepayments or deposits and these fixed costs could affect the Company's operating margins if the Company is unable to utilize the minimum number of wafers required under the agreements. The Company is dependent on its foundries to allocate to the Company a portion of their foundry capacity sufficient to meet the Company's needs to produce products of acceptable quality and with acceptable manufacturing yields and to deliver products to the Company in a timely manner. These foundries fabricate products for other companies and some manufacture products of their own design. While the Company believes there is adequate foundry capacity available to meet its current requirements, there can be no assurance that the Company will continue to have access to sufficient capacity to meet its needs in the future. If there is a decrease in available foundry capacity it is likely that the lead time required to manufacture the Company's products will increase. In addition, the Company had anticipated that it would be able to satisfy a small portion of its manufacturing requirements from UICC; however due to the October 1997 fire at UICC the Company will not be able to utilize this foundry in the foreseeable future. UICC management has indicated that capacity will be available through substitute capacity arrangements, however no assurance can be given as to the availability of such capacity. The loss of any of these foundries as a supplier, the inability of the Company in a period of increased demand for its products to expand the foundry capacity of its current suppliers or qualify other wafer manufacturers for additional foundry capacity, any inability to obtain timely and adequate deliveries from the Company's current or future suppliers or any other circumstances that would require the Company to seek alternative sources of supply could delay shipments of the Company's products, which could damage relationships with its current and prospective customers, provide an advantage to the Company's competitors and have a material adverse effect on the Company's business, financial condition and operating results. In October 1997, a fire damaged the UICC facility. UICC management has advised the Company that a majority of the equipment, majority of the inventory and a significant portion of the building were completely destroyed at an estimated loss of approximately $331 million (based on 24 current exchange rates). UICC management has also advised the Company that approximately 10% of the loss to the facility will not be covered by insurance and that there is a deductible amount that UICC must pay with respect to the insured portion. Despite any unreimburseable loss, UICC management has represented to the Company that it is rebuilding the facility and expects the facility to be fully rebuilt and operational by April of 1999. Given the fire, the Company has evaluated its investment in the UICC facility and the potential impact of the Company's portion of the unreimburseable loss to determine whether there has been an impairment and as the Company believes that estimated future cash inflows expected to be generated by the facility and/or disposition of the investment are in excess of the carrying amount of the investment, no impaired loss has been recognized as of March 31, 1998. Representations have been made by UICC management that the facility's foundry capacity that has been guaranteed to the Company will be available through substitute capacity arrangements. To date, the Company has not requested that UICC made such substitute capacity available to the Company. Therefore, there can be no assurance that such substitute foundry capacity will be available to the Company should the Company require it. Additionally, there can be no assurance that a market will develop for the shares representing the Company's equity investment at any time in the future. The Company's reliance on independent manufacturers and third party assembly and testing vendors involves a number of additional risks, including the unavailability of, or interruption in access to, certain process technologies and reduced control over delivery schedules, quality assurance and costs. In addition, as a result of the Company's dependence on foreign subcontractors, the Company is subject to the risks of conducting business internationally, including foreign government regulation and general political risks, such as political and economic instability, potential hostilities, changes in diplomatic and trade relationships, currency fluctuations, unexpected changes in, or imposition of, regulatory requirements, tariffs, import and export restrictions, and other barriers and restrictions, potentially adverse tax consequences, the burdens of complying with a variety of foreign laws and other factors beyond the Company's control. The manufacture of semiconductors is a highly complex and precise process. Minute levels of contaminants in the manufacturing environment, defects in the masks used to print circuits on a wafer, difficulties in the fabrication process or other factors can cause a substantial percentage of wafers to be rejected or a significant number of die on each wafer to be nonfunctional. Many of these problems are difficult to diagnose and time consuming or expensive to remedy. The Company's products are particularly complex and difficult to manufacture. There can be no assurance that the Company's foundries will not experience irregularities or adverse yield fluctuations in their manufacturing processes. Any yield or other production problems or shortages of supply experienced by the Company or its foundries could have a material adverse effect on the Company's business, financial condition and results of operations. Sales of the Company's CD-ROM controller products comprised 77% and 86% of the Company's net revenues in the three months ended March 31, 1998 and 1997, respectively. Sales of CD-ROM controller products are expected to continue to account for a substantial portion of the Company's total revenues for the foreseeable future. The market for CD-ROM controller products continues to mature and therefore, it is expected that sales of such products will not necessarily continue to grow at historical rates and will be influenced by the traditional seasonality and volatility associated with the PC market. It is further anticipated that the proliferation of DVD-ROM drives will impact the demand for CD-ROM controller products. Due to the backward 25 compatibility of DVD-ROM drives, it is critical that the Company maintain its CD-ROM customer base throughout this transition to DVD-ROM. As the CD-ROM market has begun to mature and transition toward the emerging CD-R/W and DVD-ROM market, there have been a number of new competitors entering the market. This increased competition combined with pressure from the sub-$1000 PC segment for lower cost components have caused tremendous price erosion on CD-ROM controller prices. In addition, as a majority of the new competitors are located in Asia, together with a majority of the Company's customers, the Company currently is hampered in its ability to effectively compete given the effects of the strong dollar versus Asian currencies. Furthermore, there is currently a trend toward integrating increased functionality on the CD-ROM controller. Therefore, the Company's revenues and its gross margins from its CD-ROM controller products will be dependent on the Company's ability to introduce such integrated products in a commercially competitive manner. The Company has not previously offered an integrated CD-ROM controller product that provides functions that had traditionally been supplied by separate, single function chips. The Company is currently experiencing development delays with its first integrated CD-ROM controller product. To provide integrated CD-ROM controller products, the Company has been and will continue to be required to expand the scope of its research and development efforts to provide these new functions, which will require the hiring of engineers skilled in the respective areas and additional management coordination among the Company engineering and marketing groups. Alternatively, the Company may find it necessary or desirable to license or acquire technology to enable the Company to provide these functions, and there can be no assurance that any such technology will be available for license or purchase on acceptable terms to the Company. In addition, with new functions being added to the CD-ROM controller product, companies that historically provided chips with these functions are now entering the CD-ROM controller market with integrated products containing these functions as well as the controller function. Accordingly, given the above-stated factors, there can be no assurance that the Company will be able to sustain the current level of such product sales or current operating margins. In addition, there can be no assurance that the market for CD-ROM controller products in general, or the Company's CD-ROM controller products in particular, will support the Company's planned operations in the future. Any decrease in the overall level of sales of, or the prices for, the Company's CD-ROM controller products, due to introductions of products by present or future competitors, a decline in demand for CD-ROM controller products, product obsolescence or any other reason would have a material adverse effect on the Company's business, financial condition and results of operations. International sales, principally to Japan, Taiwan, Korea and Belgium accounted for approximately 87% and 98% of the Company's net revenues in the three months ended March 31, 1998 and 1997, respectively. A substantial portion of the Company's international revenues in the comparison periods were derived from Taiwanese, Japanese, Korean and Belgian manufacturers of CD-ROM drives. Most of the Company's foreign sales are negotiated in U.S. dollars; however, invoicing is often done in local currency. Assets and liabilities which are denominated in non-functional currencies are translated to the functional currency on a monthly basis and the resulting gain or loss is recorded within nonoperating income in the statement of operations. Many of the Company's non-functional currency receivables and payables are hedged through managing net asset positions, product pricing and other means. The Company's strategy is to minimize its non-functional currency net assets or net liabilities in its foreign subsidiaries. The Company's policy is not to speculate in financial instruments for profit on the exchange rate price fluctuations, trade in currencies for which there are not underlying exposures, or enter into trades for any currency to intentionally increase the underlying exposure. The Company uses financial instruments, including local currency debt arrangements, to offset the gains or losses of the 26 financial instruments against gains or losses on the underlying operations cash flows or investments. The Company expects that there could be hedges of anticipated transactions or investments in foreign subsidiaries in the future. The Company is also subject to the additional risks of conducting business outside of the United States. These risks include unexpected changes in, or impositions of, legislative or regulatory requirements, delays resulting from difficulty in obtaining export licenses for certain technology, tariffs, quotas and other trade barriers and restrictions, longer payment cycles, greater difficulty in accounts receivable collection, potentially adverse tax rates, the burdens of complying with a variety of foreign laws and other factors beyond the Company's control. With the current economic problems in Asia and the strengthening of the dollar, the Company has recently experienced a more conservative buying pattern from its customers and increased price pressure on its products. The Company is also subject to general geopolitical risks in connection with its international operations, such as political, social and economic instability, potential hostilities and changes in diplomatic and trade relationships. There can be no assurance that such factors will not adversely affect the Company's operations in the future or require the Company to modify its current business practices. In addition, the laws of certain foreign countries in which the Company's products are or may be developed, manufactured or sold, including various countries in Asia, may not protect the Company's products or intellectual property rights to the same extent as do the laws of the United States and thus make the possibility of piracy of the Company's technology and products more likely. As a result, the Company may be subject to the risks of currency fluctuations. There can be no assurance that one or more of the foregoing factors will not have a material adverse effect on the Company's business, financial condition or results of operations or require the Company to modify its current business practices. A limited number of customers historically have accounted for a substantial portion of the Company's net revenues. In the three months ended March 31, 1998 and 1997, sales to the Company's top ten customers accounted for approximately 76% and 78%, respectively, of the Company's net revenues. The Company expects that sales to a limited number of customers will continue to account for a substantial portion of its net revenues for the foreseeable future. The Company has experienced significant changes from year to year in the composition of its major customer base and believes this pattern will continue. The Company does not have long-term purchase agreements with any of its customers. Customers generally purchase the Company's products pursuant to cancelable short-term purchase orders. The loss of, or significant reduction in purchases by, current major customers would have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurances that the Company's current customers will continue to place orders or that existing orders will not be canceled. If sales to current customers cease or are reduced, there can be no assurance that the Company will be able to continue to obtain the orders from new customers necessary to offset any such losses or reductions. The Company's future performance depends, to a significant degree, on the continued retention and contribution of members of the Company's senior management as well as other key personnel. The Company is in the process of recruiting additional senior managers and technical personnel. Competition for these persons is intense and there can be no assurance that the Company will be able to attract and retain qualified managers and other personnel. The loss of the services of one or more of these key personnel could adversely affect the Company. Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. These date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, in less than two years, 27 computer systems and/or software used by many companies may need to be upgraded to comply with such "Year 2000" requirements. The Company is currently installing various new internal information systems in connection with operating its business. These systems are believed to be Year 2000 compliant. The Company is currently evaluating the impact of the Year 2000 on its products, suppliers and customers, but has not yet completed the process. As a result, the Company has no reasonable basis to conclude that the Year 2000 will not materially affect the Company's operations. Since its inception, the Company has experienced significant growth in the number of its employees and in the scope of its operating and financial systems. To manage growth effectively, the Company will need to continue to improve its operational, financial and marketing information systems, procedures and controls, and expand, train, and manage its employee base. The Company is in the final stages of implementing a new management information system. Any problems encountered with the new system could materially adversely affect the Company's operations. LIQUIDITY AND CAPITAL RESOURCES Since its inception, the Company has financed its cash requirements from cash generated from operations, the sale of equity securities, bank lines of credit and long-term and short-term debt. The Company's principal sources of liquidity as of March 31, 1998 consisted of approximately $129.3 million in cash, cash equivalents and short-term investments, approximately $25.0 million in lines of credit with two Japanese financial institutions, of which $17.8 million was available as of March 31, 1998 and approximately $12.5 million in lines of credit with Taiwanese financial institutions of which approximately $12.1 million was available as of March 31, 1998. During the nine months ended March 31, 1998, operating activities provided net cash of approximately $6.4 million. This cash resulted primarily from net income of $10.8 million, non-cash adjustments to net income of $6.7 million, utilization of foundry deposits of $5.8 million and restructuring related charges of $1.8 million, partially offset by net changes in accounts payable of $14.0 million and other operating assets and liabilities of $4.7 million. Net income includes the impact of the receipt of approximately $8.1 million recorded during the nine months ended March 31, 1998 related to the settlement agreement between the Company and United Microelectronics Corporation in connection with a complaint the Company had filed with the International Trade Commission on July 21, 1997. See "Legal Proceedings". Investing and financing activities utilized cash of approximately $22.5 million consisting primarily of an investment in the UICC foundry venture of $11.6 million, purchases of property and equipment of $9.5 million and net repayment of debt of $1.9 million and treasury stock acquisitions of $1.8 million, partially offset by proceeds from issuance of common stock of $2.5 million. The Company believes that its existing cash, cash equivalents, short-term investments and credit facilities will be sufficient to provide adequate working capital and to fund necessary purchases of property and equipment through at least the next twelve months. Capital expenditures for the remainder of fiscal 1998 are anticipated to be approximately $3.2 million. The Company may also utilize cash to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. From time to time, in the ordinary course of business, the Company evaluates potential acquisitions of such businesses, products or technologies. 28 In November 1995, the Company acquired Pixel Magic, a privately-held company based in Andover, Massachusetts for $10.5 million in cash, of which $5.0 million was contingent upon the achievement of certain performance criteria over a three-year period. Approximately $4.8 million of the initial cash payment was allocated to in-process research and development and was charged to operations in fiscal 1996. In June 1997, the Company waived certain of the performance criteria and agreed to pay the contingent amount of $5.0 million in two installments during calendar 1998. The $5.0 million amount was expensed by the Company in the quarter ended June 30, 1997. The first payment of $3.0 million was paid in January 1998 and the second payment of $2.0 million is due in December 1998. On January 29, 1998, the Company and its wholly-owned subsidiary Pixel Magic, Inc. signed a Plan of Reorganization and Agreement of Merger ("The Merger Agreement") with Xerographic Laser Images Corporation ("XLI"), a developer of resolution enhancement technology. Pursuant to the Merger Agreement, XLI will become a wholly-owned subsidiary of Pixel Magic. The Merger Agreement provides for a cash payment of approximately $3.7 million to XLI shareholders on the effective date of the merger and the right to receive additional payments up to a maximum of approximately $11.3 million subject to the achievement of certain milestones by XLI over a three year period ending on December 31, 2000. The merger is subject to the approval of XLI shareholders. The transaction will be accounted for as a purchase transaction. The Company currently anticipates that it will expense a significant portion of the purchase price in the period during which the acquisition is closed. On March 20, 1998, the Company entered into an asset purchase agreement with Odeum Microsystems, Inc. ("Odeum") and Hyundai Electronics America ("HEA") pursuant to which the Company agreed to acquire certain assets of Odeum for $4.0 million. With this acquisition, the Company acquired two products currently in production, an integrated MPEG-2 audio/video decoder and transport demultiplexer and a DVD-5 compliant QPSK demodulator. Both products are used predominantly in "free to air" satellite and cable set-top boxes for MPEG-2 encoded digital television broadcasting. The transaction was consummated on April 2, 1998. This transaction will be accounted for as a purchase transaction. The Company anticipates that it will expense a significant portion of the purchase price for this acquisition in the period ended June 30, 1998. On January 22, 1998, the Company announced that its Board of Directors had authorized the repurchase of up to 2.0 million shares of its common stock, either in the open market or in private transactions. Accordingly, the Company may utilize cash to repurchase its common stock. The repurchase program is authorized for one year, unless further extended by the Company's Board of Directors. As of March 31, 1998, the Company has purchased 287,500 shares for approximately $1.8 million. In June and November 1995, the Company entered into agreements with TSMC and Chartered to obtain certain additional wafer capacity through the year 2001. The agreements call for the Company to commit to certain future wafer purchases and to deposit funds with the suppliers as either a portion of the price of the additional wafers in advance of their delivery or as a non-interest bearing deposit to secure the availability of additional wafers. The price of such wafers will be determined in the future periods in which specific orders are actually placed. If the Company is not able to use, assign, or sell the additional wafer quantities, all or a portion of the deposits may be forfeited. 29 In October 1996, the Company amended its previous agreement with TSMC resulting in a reduction of the Company's future wafer purchases required under the original agreement and the elimination of required future cash prepayments of approximately $73 million. Under the amended agreement, no additional prepayment is required; however, the Company must utilize the entire amount of the prepayment paid as of October 1996 through a certain committed amount of wafer purchases in calendar years 1997, 1998, and 1999 or a portion of the prepayment will be forfeited. In March 1998, the Company further amended its agreement with TSMC allowing the Company to utilize excess wafer purchases in 1997 and 1998 to reduce the Company's committed wafer purchases in the following years. This amendment resulted in the Company utilizing calendar 1998 committed wafer purchases beginning in calendar 1997 after the committed wafer purchases for calendar 1997 were met. As a result of this amendment the Company recorded a credit to foundry deposits of approximately $5.3 million which was used to offset payables to TSMC in the quarter ended March 31, 1998. In addition, the Company received an additional credit of $7.1 million which will be used to offset future payments to TSMC. The Company currently believes the terms and conditions of the agreement, as amended, will be met although no assurance can be given in this regard. In September 1996, April 1997 and September 1997, the Company amended its agreement with Chartered. The amendments resulted in a reduction of the Company's future wafer purchase commitments and the elimination of required future cash deposits under the original agreement of approximately $36 million. Under the amended agreement, the required future cash deposits of approximately $36 million could be reinstated if certain conditions are not met. The Company currently believes the terms and conditions of the agreement as amended will be met and that these commitments will not be reinstated although no assurance can be given in this regard. The deposits and prepayments under the amended foundry agreements described above are recorded at cost and total approximately $28.3 million as of March 31, 1998. The Company currently anticipates being able to utilize and fully recover the value of all foundry prepayments and deposits under the terms of the amended agreements although no assurance can be given in this regard. In October 1995, the Company entered into a series of agreements with United Microelectronics Corporation ("UMC") to form, along with other investors, a separate Taiwanese company, United Integrated Circuits Corporation ("UICC"), for the purpose of building and managing a semiconductor manufacturing facility in the Science Based Industrial Park in Hsin Chu City, Taiwan, Republic of China. As an investor in this venture, the Company has rights to a portion of the total wafer capacity for the manufacture of its proprietary products. The Company paid for its investment in the foundry venture in three installments: $13.7 million in January 1996, $25.9 in January 1997 and $11.6 in December 1997. This final payment was made by the Company after receiving representations from UICC management that the losses from the October fire (discussed below) would be covered by insurance and that the facility would be rebuilt to its fully operational state. Investment in the foundry venture as of March 31, 1998 was approximately $51.2 million which represents an investment of approximately 9.3% of the total outstanding shares of the foundry venture. In October 1997, a fire damaged the UICC facility. UICC management has advised the Company that a majority of the equipment, majority of the inventory and a significant portion of the building were completely destroyed at an estimated loss of approximately $331 million (based on 30 current exchange rates). UICC management has also advised the Company that approximately 10% of the loss to the facility will not be covered by insurance and that there is a deductible amount that UICC must pay with respect to the insured portion. Despite any unreimburseable loss, UICC management has represented to the Company that it is rebuilding the facility and expects the facility to be fully rebuilt and operational by April of 1999. Given the fire, the Company has evaluated its investment and the potential impact of the Company's portion of the unreimburseable loss in the UICC facility to determine whether there has been an impairment and as the Company believes that estimated future cash inflows expected to be generated by the facility and/or disposition of the investment are in excess of the carrying amount of the investment, no impaired loss has been recognized as of March 31, 1998. Representations have been made by UICC management that the facility's foundry capacity that has been guaranteed to the Company will be available through substitute capacity arrangements. To date, the Company has not requested that UICC make such substitute capacity available to the Company. Therefore, there can be no assurance that such substitute foundry capacity will be available to the Company should the Company require it. Additionally, there can be no assurance that a market will develop for the shares representing the Company's equity investment at any time in the future. 31 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company and various of its current and former officers and Directors are parties to several lawsuits which purport to be class actions filed on behalf of all persons who purchased or acquired the Company's stock (excluding the defendants and parties related to them) for the period July 27, 1995 through May 22, 1996. The first, a state court proceeding designated IN RE OAK TECHNOLOGY SECURITIES LITIGATION, Master File No. CV758510 pending in Santa Clara County Superior Court in Santa Clara, California, consolidates five putative class actions. This lawsuit also names as defendants several of the Company's venture capital fund investors, two of its investment bankers and two securities analysts. The plaintiffs allege violations of California securities laws and statutory deceit provisions as well as breaches of fiduciary duty and abuse of control. On December 6, 1996, the state court judge sustained the Oak defendants' demurrer to all causes of action alleged in plaintiffs' First Amended Consolidated Complaint, but allowed plaintiffs the opportunity to amend. The plaintiffs' Second Amended Consolidated Complaint was filed on August 1, 1997. On December 3, 1997, the state court judge sustained the Oak defendants' demurrer to plaintiffs' Second Amended Consolidated Complaint without leave to amend to the causes of action for breach of fiduciary duty and abuse of control, and to the California Corporations Code Sections 25400/25500 claims with respect to the Company, a number of the individual officers and directors, and the venture capital investors. The judge also sustained the demurrer with leave to amend to the California Civil Code Sections 1709/1710 claims, however plaintiffs elected not to amend this claim. Accordingly, the only remaining claim in state court, IN RE OAK TECHNOLOGY SECURITIES LITIGATION, is the California Corporations Code Sections 25400/25500 cause of action against four officers of the Company and the Company's investment bankers. The Company and various of its current and former officers and Directors are also parties to four putative class action lawsuits pending in the U.S. District Court for the Northern District of California. These actions have been consolidated as IN RE OAK TECHNOLOGY, INC. SECURITIES LITIGATION, Case No. C-96-20552-SW(PVT). This action alleges certain violations of federal securities laws and is brought on behalf of purchasers of the Company's stock for the period July 27, 1995 through May 22, 1996. This action also names as a defendant one of the Company's investment bankers. On July 29, 1997, the federal court judge granted the Oak defendants' Motion to Dismiss the plaintiff's First Amended Consolidated Complaint, but granted plaintiffs leave to amend most claims. The plaintiffs' Second Amended Consolidated Complaint was filed on September 4, 1997. Defendants' Motion to Dismiss was heard on December 17, 1997. The federal court judge took the matter under submission and has not yet issued a ruling. Additionally, various of the Company's current and former officers and Directors are defendants in three consolidated derivative actions pending in Santa Clara County Superior Court in Santa Clara, California, entitled IN RE OAK TECHNOLOGY DERIVATIVE ACTION. This lawsuit, which asserts a claim for breach of fiduciary duty and a claim under California securities law based upon the officers' and Directors' trading in securities of the Company, has been stayed pending resolution of the class actions. In all of the putative state and federal class actions, the plaintiffs are seeking monetary damages and equitable relief. In the derivative action, the plaintiffs are also seeking an accounting for the defendants' sales of Company stock and the payment of monetary damages to the Company. 32 All of these actions are in the early stages of proceedings. Based on its current information, the Company believes the suits to be without merit and will defend its position vigorously. Although it is reasonably possible the Company may incur a loss upon conclusion of these claims, an estimate of any loss or range of loss cannot be made. No provision for any liability that may result upon adjudication has been made in the Company's Consolidated Financial Statements. In connection with these legal proceedings, the Company has incurred, and expects to continue to incur, substantial legal and other expenses. Shareholder suits of this kind are highly complex and can extend for a protracted period of time, which can substantially increase the cost of such litigation and divert the attention of the Company's management. On July 21, 1997, the Company filed a complaint with the International Trade Commission ("ITC") based on the Company's belief that certain CD-ROM controllers infringed one or more of the Company's patents. The complaint seeks a ban on the importation into the United States of any infringing CD-ROM controller or product containing such infringing CD-ROM controller. A formal investigative proceeding was instituted by the ITC (Investigation No. 337-TA-401) on August 19, 1997, naming as respondents: Winbond Electronics Corporation ("Winbond"); Winbond Electronics North America Corporation; Wearnes Technology (Private) Ltd.; Wearnes Electronics Malaysia Sendirian Berhad; and Wearnes Peripheal International (Pte.). On March 16, 1998, the Company and Winbond entered into a settlement agreement pursuant to which Winbond obtained a nonexclusive, royalty-bearing license to the Company's U.S. patents No.'s 5,535,327 and 5,581,715 and the Company obtained a nonexclusive, royalty-free license to several Winbond patents. The settlement agreement provided that the parties would jointly seek termination and dismissal of investigation No. 337-TA-401 as to Winbond and its four affiliated companies: Winbond Electronics North America Corporation; Wearnes Technology (Private) Ltd.; Wearnes Electronics Malaysia Sendirian Berhad; and Wearnes Peripheal International (Pte.). On April 15, 1998, Investigation No. 337-TA-401 was ordered terminated as to all parties. As originally filed with the ITC, the Company's complaint also identified as proposed respondents: United Microelectronics Corporation ("UMC"); Lite-On Group; Lite-On Technology Corp.; Behavior Tech Computer Corp. and Behavior Tech Computer (USA) Corp. Prior to the ITC's institution of the formal investigation proceeding, the Company and UMC entered into a settlement agreement, effective July 31, 1997, pursuant to which UMC agreed to cease and desist the manufacture of its specified CD-ROM controllers, except under certain limited conditions which expired on January 31, 1998. The settlement agreement additionally provided for the withdrawal of the Company's ITC complaint against UMC and the above-named Lite-On and Behavior Tech companies. In September 1997, October 1997 and February 1998, the Company received $2.6 million, $4.8 million and $0.7 million, respectively pursuant to this settlement. Proceeds from the settlement were recorded as miscellaneous income and included in nonoperating income for the periods ended September 30, 1997, December 31, 1997 and March 31, 1998, respectively. On October 27, 1997, the Company filed a complaint in the United States District Court, Northern District of California against UMC for breach of contract, breach of the covenant of good faith and fair dealing and fraud based on UMC's breach of the settlement agreement arising out of the ITC action. Together with the filing of the complaint, the Company filed a motion for a preliminary injunction against UMC, seeking to enjoin UMC from selling the CD-ROM 33 controllers, that were the subject of the ITC action and related settlement agreement, through or to a UMC affiliated, Taiwanese entity called MediaTek. On February 23, 1998, the federal court judge denied the Company's request for a preliminary injunction based on the court's findings that there was no evidence that UMC was presently engaged in the manufacture of CD-ROM controllers or other products covered by the settlement agreement. On December 24, 1997, UMC answered the Company's complaint and counterclaimed asserting causes of action for recission, restitution, fraudulent concealment, mistake, lack of mutuality, interference and declaratory judgment of non-infringement, invalidity and unenforceability of the Oak patent that was the subject of the original ITC action filed against UMC. The Company believes these counterclaims to be without merit and will vigorously defend its patent. Both the Company and UMC seek compensatory and punitive damages. In addition, the Company seeks permanent injunctive relief. On April 14, 1998, the Company filed a Motion to Bifurcate UMC's patent counterclaims from the contract-related claim's and counterclaims. The Motion to Bifurcate is scheduled to be heard on May 22, 1998. If an order is granted bifurcating the UMC patent counterclaims, a trial on the contract-related issues is scheduled for December of 1998. If the Company's Motion to Bifurcate is not granted, it is expected that a trial on all claims and counterclaims will occur in the second calendar quarter of 1999. In a related action to the lawsuit that was commenced by the Company against UMC (described above), on December 19, 1997, MediaTek, a UMC affiliated, Taiwanese entity, filed a complaint in the United States District Court, Northern District of California, against the Company for declaratory judgment of non-infringement, invalidity and unenforceability of the Oak patent that was the subject of the original ITC action against UMC, and intentional interference with prospective economic advantage. MediaTek seeks compensatory damages of not less than $10 million and punitive damages. The Company filed its answer on January 8, 1998 denying all the allegations. The Company believes the suit to be without merit and will vigorously defend its patent. On April 7, 1998, the Company filed a new complaint with the International Trade Commission ("ITC") alleging that five Asian companies, are violating U.S. trade laws by importing or selling CD-ROM drive controllers that infringe a United States patent owned by the Company. The Company's complaint is asserted against United Microelectronics Corp.; MediaTek, Inc.; Lite-On Group; Lite-On Technology Corp and AOpen, Inc. In its complaint, the Company requests the ITC to investigate the five above-named companies and to enter an order barring imports into the United States of their allegedly infringing products and products containing them, including CD-ROM drives and personal computers. A formal investigative proceeding was instituted by the ITC (Investigation No. 337-TA-409) on May 8, 1998 naming as respondents United Microelectronics Corp. MediaTek, Inc., Lite-On Technology Corp. and AOpen, Inc. In most cases, the ITC decides within 12 to 15 months after the filing of a complaint whether or not to issue an order excluding foreign products that allegedly infringe U.S. patents. In connection with this legal proceeding, the Company will incur substantial legal and other expenses. If any of the above pending actions are decided adversely to the Company, it would likely have a material adverse affect on the Company's financial condition and results of operations. 34 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed herewith or incorporated by reference herein.
Exhibit Number Exhibit Title ------ ------------- 3.01 The Company's Restated Certificate of Incorporation, as amended (1) 3.02 The Company's Restated Bylaws (2) 3.03 Certificate of Correction to the Restated Certificate of Incorporation of the Company (16) 4.01 Form of Specimen Certificate for the Company's Common Stock (3) 4.02 Amended and Restated Registration Rights Agreement dated as of October 15, 1993 among the Company and various investors (3) 4.03 The Company's Restated Certificate of Incorporation, as amended (See Exhibit 3.01) 4.04 The Company's Restated Bylaws (See Exhibit 3.02) 4.05 Form of Certificate of Designation of Series A Junior Participating Preferred Stock of the Company dated August 18, 1997 (16) 4.06 Rights Agreement between the Company and BankBoston, N.A. dated August 19, 1997 (16) 10.01 1988 Stock Option Plan, as amended and related documents (3)* 10.02 1994 Stock Option Plan and related documents (3) and amendment thereto dated February 1, 1996 (4)* 10.03 1994 Outside Directors' Stock Option Plan and related documents (3)* 10.04 1994 Employee Stock Purchase Plan (3)* 10.05 401(k) Plan and related documents (3) and Amendment Number One and Supplemental Participation Agreement thereto (5)* 10.06 Lease Agreement dated August 3, 1988 between John Arrillaga, Trustee, or his Successor Trustee, UTA dated 7/20/77 (John Arrillaga Separate Property Trust) as amended and Richard T. Peery, Trustee, or his Successor Trustee, UTA dated 7/20/77 (Richard T. Peery Separate Property Trust) as amended, and Justin Jacobs, Jr., dba Siri-Kifer Investments, a joint venture, and the Company, as amended June 1, 1990, and Consent to Alterations dated March 26, 1991 (lease agreement for 139 Kifer Court, Sunnyvale, California) (3), and amendments thereto dated June 15, 1995 and July 19, 1995 (5) 35 10.07 Lease Agreement dated August 22, 1994 between John Arrillaga, Trustee, or his Successor Trustee, UTA dated 7/20/77 (John Arrillaga Separate Property Trust) as amended and Richard T. Peery, Trustee, or his Successor Trustee, UTA dated 7/20/77 (Richard T. Peery Separate Property Trust) as amended, and Justin Jacobs, Jr., dba Siri-Kifer Investments, a joint venture, and the Company (lease agreement for 140 Kifer Court, Sunnyvale, California) (3), and amendment thereto dated June 15, 1995 (5) 10.08 Form of Indemnification Agreement, between the Company and each of its Directors and executive officers (14) 10.09 VCEP Agreement dated July 30, 1990 between the Company and Advanced Micro Devices, Inc. (3) 10.10 Product License Agreement dated April 13, 1993 between the Company and Media Chips, Inc., as amended September 16, 1993 (3) 10.11 Resolutions of the Board of Directors of the Company dated July 27, 1994 setting forth the provisions of the Executive Bonus Plan (3) (12)* 10.12 Employee Incentive Plan effective January 1, 1995 (3)* 10.13 Option Agreement between Oak Technology, Inc., and Taiwan Semiconductor Manufacturing Co., Ltd. dated as of August 8, 1996 (14)** 10.14 Foundry Venture Agreement between the Company and United Microelectronics Corporation dated as of October 2, 1995 (6) (12) 10.15 Fab Ven Foundry Capacity Agreement among the Company, Fab Ven and United Microelectronics Corporation dated as of October 2, 1995 (7) (12) 10.16 Written Assurances Re: Foundry Venture Agreement among the Company, United Microelectronics Corporation and Fab Ven dated as of October 2, 1995 (8) (12) 10.17 Lease Agreement dated June 15, 1995 between John Arrillaga, Trustee, or his Successor Trustee, UTA dated 7/20/77 (John Arrillaga Separate Property Trust) as amended and Richard T. Peery, Trustee, or his Successor Trustee, UTA dated 7/20/77 (Richard T.Peery Separate Property Trust) as amended, and the Company (lease agreement for 130 Kifer Court, Sunnyvale, California) (9), and amendments thereto dated June 15, 1995 and August 18, 1995 (10) 10.18 Deposit Agreement dated November 8, 1995 between Chartered Semiconductor Manufacturing Ltd. and the Company (11), and Amendment Agreement (No. 1) thereto dated September 25, 1996 (13)** 10.19 Amendment Agreement (No. 2) dated April 7, 1997 to Deposit Agreement dated November 8, 1995 between Chartered Semiconductor Manufacturing Ltd. and the Company(15) and addendum thereto dated September 26, 1997(17)** 36 10.20 First Amendment to Plan of Reorganization and Agreement of Merger dated October 27, 1995 among the Company, Oak Acquisition Corporation, Pixel Magic, Inc. and the then shareholders of Pixel dated June 25, 1996 and Second Amendment thereto dated June 13, 1997 (16) 10.21 First Amendment to Non-Compete and Technology Transfer Agreement by and among the Company, Pixel Magic, Inc. and Peter D. Besen dated June 13, 1997 (16)** 10.22 Agreement of Termination of Employment Agreement between Pixel Magic, Inc. and Peter D. Besen dated June 13, 1997 (16) 10.23 Agreement of Termination of Employment Agreement between Pixel Magic, Inc. and Don Schulsinger dated June 13, 1997 (16) 10.24 Release and Settlement Agreement between the Company and United Microelectronics Corporation dated July 31, 1997 (16)** 10.25 Sublease Agreement dated December 1, 1997 between Global Village Communication, Inc. and the Company (lease agreement for 1150 East Arques Avenue, Sunnyvale, California) and accompanying lease and amendment thereto (18) 10.26 Amendment to Option Agreement by and between Taiwan Semiconductor Manufacturing Co., Ltd, and the Company. ** 10.27 Settlement Agreement between Winbond Electronics Corporation and the Company. ** 11.01 Statement regarding computation of net income per share 27.01 Financial Data Schedule
- ------------------- (1) Incorporated herein by reference to exhibit 3.01 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996. (2) Incorporated herein by reference to exhibit 3.05 filed with the Company's Registration Statement on Form S-1 (File No. 33-87518) declared effective by the Securities and Exchange Commission on February 13, 1995 (the "February 1995 Form S-1"). (3) Incorporated herein by reference to the exhibit with the same number filed with the February 1995 Form S-1. (4) Incorporated herein by reference to Exhibit 10.1 filed with the Company's Registration Statement on Form S-8 (File No. 333-4334) on May 2, 1996. (5) Incorporated herein by reference to the exhibit with the same number filed with the Company's Annual Report on Form 10-K for the year ended June 30, 1996. (6) Incorporated herein by reference to Exhibit 2.1 filed with the Company's Form 8-K dated October 2, 1995 (the "October 1995 form 8-K"). (7) Incorporated herein by reference to Exhibit 2.2 filed with the October 1995 Form 8-K. (8) Incorporated herein by reference to Exhibit 2.3 filed with the October 1995 Form 8-K. (9) Incorporated herein by reference to Exhibit 10.08 filed with the Company's Annual Report on Form 10-K for the year ended June 30, 1995. (10) Incorporated herein by reference to Exhibit 10.08 filed with the Company's Annual Report on Form 10-K for the year ended June 30, 1996. (11) Incorporated herein by reference to Exhibit 10.04 filed with the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995. 37 (12) Confidential treatment has been granted with respect to portions of this exhibit. (13) Incorporated herein by reference to Exhibit 10.17 filed with the Company's Annual Report on Form 10-K for the year ended June 30, 1996. (14) Incorporated herein by reference to the exhibit with the same number filed with the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996. (15) Incorporated herein by reference to the exhibit with the same number filed with the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997. (16) Incorporated herein by reference to the exhibit with the same number filed with the Company's Annual Report on Form 10-K for the year ended June 30, 1997. (17) Incorporated herein by reference to the exhibit with the same number filed with the Company's Quarterly report on Form 10-Q for the quarter ended September 30, 1997. (18) Incorporated herein by reference to the exhibit with the same number filed with the Company's Quarterly report on Form 10-Q for the quarter ended December 31, 1997. - ------------------- * Indicates Management incentive plan. ** Confidential treatment granted and/or requested as to portions of the exhibit. (b) Reports on Form 8-K A report on Form 8-K was filed on January 28, 1998 reporting the business restructuring that was announced with the release of the Company's second fiscal quarter results. Pursuant to the restructuring plan, the Company would discontinue its graphics and audio/communications businesses and focus on three core markets: optical storage, consumer electronics and digital office equipment. The Company also appointed Mr. Richard Black, a Director of the Company since 1987, to the executive management team as president and added Mr. Young Sohn, president of Quantum Corporation's Enterprise and Personal Storage Group, to its Board of Directors. The form 8-K also reported that its Board of Directors approved a stock repurchase plan. 38 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. OAK TECHNOLOGY, INC. (Registrant) Date: May 14, 1998 /S/ SIDNEY S. FAULKNER ----------------------------- Sidney S. Faulkner Vice President, Finance Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Officer) 39 EXHIBIT INDEX
Exhibit Number Exhibit Title ------ ------------- 10.26 Amendment to Option Agreement by and between Taiwan Semiconductor Manufacturing Co., Ltd, and the Company.** 10.27 Settlement Agreement between Winbond Electronics Corporation and the Company. ** 11.01 Statement regarding computation of net income per share 27.01 Financial Data Schedule
------------------- ** Confidential treatment requested as to portions of the exhibit 40 EX-10.26 2 EX 10.26 EXHIBIT 10.26 FIRST AMENDMENT TO THE OPTION AGREEMENT THIS FIRST AMENDMENT TO THE OPTION AGREEMENT (the "Amendment") is made and becomes effective as of March 1, 1998 (the "Effective Date") by and between Taiwan Semiconductor Manufacturing Co., Ltd., and company duly incorporated under the laws of the Republic of China ("ROC"), having its principal place of business at No. 121, Park Avenue 3, Science Based Industrial Park, Hsin-Chu, Taiwan, ROC ("TSMC"), and Oak Technology, Inc., a company duly incorporated under the laws of ROC, having its principal place of business at Rm. B, No. 370, Sec. 1, Fu-Hsing S. Rd. Taipei, Taiwan ("Oak"). In consideration of mutual covenants and conditions, the parties, hereto agree to amend the Option Agreement entered into on August 8, 1996 (the "Option Agreement") as follows: 1. Capitalized terms not defined herein shall have the same meanings given them in the Option Agreement. 2. Owing to the fact that the actual number of wafers purchased by OAK in 1996 exceeded the 1996 Customer Committed Capacity by [ * ] wafers, the parties agree to apply such exceeding number of wafers to the 1997 Base Capacity thereby reducing the 1997 Base Capacity from [ * ] wafers to [ * ] wafers, and the 1997 Customer Committed Capacity from [ * ] wafers to [ * ] wafers. The parties further agree that the 1997 TSMC Committed Capacity shall remain at [ * ] wafers. 3. In the event that OAK's purchase of wafers exceeds the TSMC Committed Capacity of year(s) 1997 and/or 1998, the parties agree that the exceeding number of wafers would be applied first to the Base Capacity and then to the Option Capacity of the following calendar year, and the Base Capacity, Option Capacity and Customer Committed Capacity of the following calendar year will therefore be reduced as appropriate by the excess amount. However, the TSMC Committed Capacity would not be affected by the occurrence of the above-stated conditions. 4. Subject to the foregoing amendments, the Option Agreement shall continue in full force and effect. IN WITNESS WHEREOF, the parties have executed this First Amendment to the Option Agreement as of the date first stated above. Taiwan Semiconductor Oak Technology, Inc. Manufacturing Co., Ltd. By: /s/ C.C. Tsai By: /s/ Sidney S. Faulkner ---------------------------- ---------------------------- Name: C.C. Tsai Name: Sidney S. Faulkner Title: Senior Director Title: Vice President Asia Marketing & Technical Service & Chief Financial Officer * CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR REDACTED PORTIONS WHICH HAVE BEEN FILED SEPARATELY WITH THE COMMISSION. EX-10.27 3 EX 10.27 EXHIBIT 10.27 SETTLEMENT AGREEMENT WINBOND ELECTRONICS CORPORATION (hereinafter "Winbond") and OAK TECHNOLOGY, INC. (hereinafter "Oak") hereby agree to settlement of ITC Investigation No. 337-TA-401 on the following terms and conditions: 1. DEFINITIONS. a. The "Effective Date" of the settlement is March 16, 1998. b. The "Licensed Patents" are Oak's U.S. Patent No. 5,535,327 and U.S. Patent No. 5,581,715, and any continuation, division, continuation-in-part, reissue, reexamination, renewal and extension thereof, including U.S. and foreign counterparts. c. The "Licensed Products" are [ * ] It is agreed that the Winbond 88111F, 88111AF, 88112F, 88113F, 88113AF, 88222, and 88223 chips are Licensed Products that are, were or will be individually sold by or for Winbond. It is also agreed that all other Winbond controllers implementing substantially the same structures and/or methods insofar as the claims of the Licensed Patents are concerned, are also Licensed Products. d. As used in this Agreement [ * ] e. As used in this Agreement [ * ] 2. RIGHTS UNDER THE LICENSED PATENTS. a. Winbond has the right [ * ] 3. RIGHTS UNDER WINBOND PATENTS. [ * ] 4. DISMISSAL OF ITC ACTION. Based on this Settlement Agreement, Oak and Winbond agree to jointly seek termination and dismissal of Investigation No. 337-TA-401 as to all parties. * CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR REDACTED PORTIONS WHICH HAVE BEEN FILED SEPARATELY WITH THE COMMISSION. 5. CONFIDENTIALITY. Terms of this settlement shall be kept confidential, except as required by law or statute or as otherwise agreed to by the parties. [ * ] 9. MODIFICATION. This Agreement shall not be modified, except by a writing duly executed by both parties. 10. The parties agree that, except as required by law, public comment will be limited to the following: Oak and Winbond have resolved their dispute regarding CD- ROM controller chips. As part of the resolution, Winbond has obtained a license under the Oak patents. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized officers. OAK TECHNOLOGY, INC. Date: March 17, 1998 By: /s/ SHAWN M. SODERBERG ------------------------------- Title: GENERAL COUNSEL ---------------------------- Date: March 18, 1998 By: /s/ ARCHIE YEH ------------------------------- Title: VP WINBOND ELECTRONICS CORP. ---------------------------- * CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR REDACTED PORTIONS WHICH HAVE BEEN FILED SEPARATELY WITH THE COMMISSION. Page 2 of 2 EX-11.01 4 EXHIBIT 11.01 EXHIBIT 11.01 OAK TECHNOLOGY, INC. AND SUBSIDIARIES STATEMENT REGARDING COMPUTATION OF NET INCOME PER SHARE (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
Three Months Ended Nine Months Ended March 31, March 31, ---------------------------- --------------------------- 1998 1997 1998 1997 ------------ ----------- ------------ ----------- Net income (loss)............................................. $ (3,004) $ 9,540 $ 10,791 $ 21,075 ------------ ----------- ------------ ----------- ------------ ----------- ------------ ----------- Weighted average shares used in computing basic net income (loss) per share.................................. 42,000 40,532 41,809 40,469 ------------ ----------- ------------ ----------- Weighted average number of dilutive common equivalent shares used in computing diluted net income (loss) per share: Options.................................................... - 2,108 756 2,005 Warrants................................................... - 161 79 156 ------------ ----------- ------------ ----------- Weighted average shares used in computing diluted net income (loss) per share.......................... 42,000 42,801 42,644 42,630 ------------ ----------- ------------ ----------- ------------ ----------- ------------ ----------- Net income (loss) per share: Basic...................................................... $ (0.07) $ 0.24 $ 0.26 $ 0.52 ------------ ----------- ------------ ----------- ------------ ----------- ------------ ----------- Diluted.................................................... $ (0.07) $ 0.22 $ 0.25 $ 0.49 ------------ ----------- ------------ ----------- ------------ ----------- ------------ -----------
EX-27.01 5 EXHIBIT 27.01
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS AS FOUND ON PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE YEAR TO DATE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000824225 OAK TECHNOLOGY, INC. 1,000 9-MOS JUN-30-1998 JAN-01-1998 MAR-31-1998 71,508 57,754 21,271 647 9,137 181,179 40,383 16,041 277,879 22,857 0 0 0 42 250,577 277,879 35,550 35,550 21,145 21,145 22,983 0 68 (6,236) (3,232) (3,004) 0 0 0 (3,004) (.07) (.07)
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