-----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, FWxa1Zjf3WVCqzi55EqIrVRF0tBLWih6SqnNO5iWID2yhiS82sRxjkVceR2THiqF 0U5e7V4+lWr6d6sgVmq4DA== 0001056359-01-000004.txt : 20010223 0001056359-01-000004.hdr.sgml : 20010223 ACCESSION NUMBER: 0001056359-01-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010214 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: 1545238 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 0001.txt FILING ON FORM 10-Q =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the Quarterly Period Ended December 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND 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 (I.R.S. Employer of incorporation or organization) Identification Number) 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 February 8, 2001, there were outstanding 55,330,767 shares of the Registrant's Common Stock, par value $0.001 per share. =============================================================================== OAK TECHNOLOGY, INC. AND SUBSIDIARIES FORM 10-Q INDEX For the Quarter Ended December 31, 2000
Page No. ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited): Condensed Consolidated Balance Sheets as of December 31, 2000 and June 30, 2000................................................ 3 Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended December 31, 2000 and 1999........... 4 Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2000 and 1999................................. 5 Notes to Condensed Consolidated Financial Statements............... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................ 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 26 PART II. OTHER INFORMATION Item 1. Legal Proceedings.................................................. 28 Item 6. Exhibits and Reports on Form 8-K................................... 30 Signatures................................................................. 31 Exhibit Index.............................................................. 32
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
OAK TECHNOLOGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) (Unaudited) ASSETS December 31, June 30, 2000 2000 ---- ---- Current assets: Cash and cash equivalents $ 25,386 $ 19,100 Short-term investments 99,228 101,704 Accounts receivable, net of allowance for doubtful accounts of $1,038 and $671, respectively 30,558 18,294 Inventories 22,361 20,137 Prepaid expenses and other current assets 4,280 11,658 -------- -------- Total current assets 181,813 170,893 Property and equipment, net 20,864 19,738 Intangible assets, net 36,695 44,053 Other assets 1,575 1,716 -------- -------- Total assets $240,947 $236,400 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and current portion of long-term debt $ -- $ 7 Accounts payable 18,508 20,062 Accrued expenses 15,416 11,357 Deferred revenue 1,299 2,857 -------- -------- Total current liabilities 35,223 34,283 Deferred income taxes 984 697 Other long-term liabilities 148 110 -------- -------- Total liabilities 36,355 35,090 -------- -------- Stockholders' equity: Preferred stock, $0.001 par value; 2,000,000 shares authorized; None issued and outstanding as of December 31, 2000 and June 30, 2000 -- -- Common stock, $0.001 par value; 130,000,000 shares authorized; 57,492,530 shares issued and 55,110,050 shares outstanding as of December 31, 2000 and 55,059,984 shares issued and 52,677,504 outstanding as of June 30, 2000 57 55 Additional paid-in capital 225,398 217,357 Treasury stock (11,257) (11,257) Retained earnings 5,280 1,171 Accumulated other comprehensive loss (14,886) (6,016) -------- -------- Total stockholders' equity 204,592 201,310 -------- -------- Total liabilities and stockholders' equity $240,947 $236,400 ======== ========
See accompanying notes to condensed consolidated financial statements. 3
OAK TECHNOLOGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (Unaudited) Three Months Ended Six Months Ended December 31, December 31, ------------------ ------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Revenues: Product revenues $ 51,727 $ 10,195 $ 91,911 $ 18,999 Software and other revenues 8,906 834 19,710 2,172 -------- -------- -------- -------- Total revenues 60,633 11,029 111,621 21,171 -------- -------- -------- -------- Cost of revenues: Cost of product revenues 30,706 6,173 53,200 10,724 Cost of software and other revenues 1,635 438 4,166 958 -------- -------- -------- -------- Total cost of revenues 32,341 6,611 57,366 11,682 Gross profit 28,292 4,418 54,255 9,489 Research and development expenses 13,931 12,123 27,472 23,303 Selling, general and administrative expenses 9,482 8,050 19,165 15,513 Acquired in-process technology -- 225 -- 225 Restructuring charge -- 2,015 -- 2,015 Amortization of intangibles 3,679 2,079 7,358 3,038 -------- -------- -------- -------- Operating income (loss) 1,200 (20,074) 260 (34,605) Non-operating income, net 2,163 1,782 4,632 4,127 -------- -------- -------- -------- Income (loss) before income taxes 3,363 (18,292) 4,892 (30,478) Income taxes 538 -- 783 -- -------- -------- -------- -------- Net income (loss) $ 2,825 $(18,292) $ 4,109 $(30,478) ======== ======== ======== ======== Net income (loss) per basic share: $ 0.05 $ (0.45) $ 0.08 $ (0.74) ======== ======== ======== ======== Net income (loss) per diluted share: $ 0.05 $ (0.45) $ 0.07 $ (0.74) ======== ======== ======== ======== Shares used in computing basic net income (loss) per share: 54,726 40,925 54,099 41,008 ======== ======== ======== ======== Shares used in computing diluted net income (loss) per share: 62,014 40,925 62,622 41,008 ======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements. 4
OAK TECHNOLOGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) Six Months Ended December 31, ---------------------- 2000 1999 ---- ---- Cash flows from operating activities: Net income (loss) $ 4,109 $(30,478) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 11,161 5,725 Write-off of previously acquired in-process technology -- 1,200 Newly acquired in-process technology -- 225 Loss on disposal of property and equipment -- 1,278 Changes in operating assets and liabilities: Accounts receivable (12,264) 1,844 Inventories (2,224) (818) Foundry deposits -- 9,061 Prepaid expenses and other current assets 7,378 (1,522) Other assets 141 1,087 Accounts payable and accrued expenses 2,505 3,934 Deferred income taxes, deferred revenue and other liabilities (1,233) -- -------- -------- Net cash provided by (used in) operating activities 9,573 (8,464) Cash flows from investing activities: Purchases of short-term investments, net (79,758) (43,732) Proceeds from matured short-term investments 73,364 50,191 Additions to property and equipment, net (4,929) (2,791) Other -- (1,019) -------- -------- Net cash provided by (used in) investing activities (11,323) 2,649 -------- -------- Cash flows from financing activities: Repayment of debt (7) (6) Issuance of common stock, net 8,043 1,575 Treasury stock acquisitions -- (1,817) -------- -------- Net cash provided by (used in) financing activities 8,036 (248) -------- -------- Net increase (decrease) in cash and cash equivalents 6,286 (6,063) Cash and cash equivalents, beginning of period 19,100 19,500 -------- -------- Cash and cash equivalents, end of period $ 25,386 $ 13,437 ======== ======== Supplemental information: Cash paid (refunded) during the period: Interest $ 58 $ 3 ======== ======== Income taxes refunded, net $ (3,534) $ (13) ======== ======== Net unrealized losses on available-for-sale securities $ (8,870) $ (558) ======== ========
See accompanying notes to condensed consolidated financial statements. 5 OAK TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Preparation The accompanying unaudited condensed consolidated financial statements of Oak Technology, Inc. and subsidiaries ("Oak" or the "Company") have been prepared in conformity with generally accepted accounting principles. However, certain information or footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the "Commission"). In the opinion of management, the condensed consolidated financial statements reflect all adjustments considered necessary for a fair presentation of the consolidated financial position, operating results and cash flows for the periods presented. The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the full fiscal year or in any future period. This quarterly report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended June 30, 2000, included in the Oak Technology, Inc. 2000 Annual Report on Form 10-K filed with the Commission. Reclassifications - ----------------- Certain prior year amounts have been reclassified to conform to the current year presentation. Derivative Instruments and Hedging Activities - --------------------------------------------- The Company periodically enters into economic hedges by purchasing foreign exchange contracts as a hedge against foreign currency denominated accounts receivables or fixed sales commitments. As of December 31, 2000, the Company had short-term foreign currency exchange contracts with face values of approximately $1.1 million and $2.1 million for accounts receivables in foreign currencies and fixed purchase commitments, respectively. The impact of recording the fair values of the forward contracts and unrealized gains or losses in the accounts receivable was not material for the periods presented. 2. Inventories Inventories are stated at the lower of cost (first in, first out) or market and consisted of the following (in thousands):
December 31, June 30, 2000 2000 ---- ---- Purchased parts and work in process $ 16,490 $ 16,193 Finished goods 5,871 3,944 -------- -------- $ 22,361 $ 20,137 ======== ========
6 3. Net Income (Loss) Per Share Basic and diluted net income (loss) per share have been computed using the weighted average number of shares of common stock and dilutive common equivalent shares from stock options and warrants outstanding in accordance with Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." The following table provides a reconciliation of the components of the basic and diluted income (loss) per share computations:
Three Months Ended Six Months Ended December 31, December 31, ------------------ ------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Net earnings (loss) from continuing operations $ 2,825 $(18,292) $ 4,109 $(30,478) ======== ======== ======= ======== Basic common shares 54,726 40,925 54,099 41,008 Effect of dilutive securities: Common stock options 7,288 -- 8,523 -- -------- -------- ------- -------- Dilutive weighted average shares 62,014 40,925 62,622 41,008 ======== ======== ======= ======== Net earnings (loss) per share from continuing operations: Basic $ 0.05 $ (0.45) $ 0.08 $ (0.74) ======== ======== ======= ======== Diluted $ 0.05 $ (0.45) $ 0.07 $ (0.74) ======== ======== ======= ========
For the three and six month periods ended December 31, 2000, there were approximately 571,000 and 276,000 weighted average options to purchase shares, respectively, which were excluded from the calculation of diluted weighted average shares outstanding as inclusion of these shares would have had an anti- dilutive effect. Similarly, for the three and six month periods ended December 31, 1999, approximately 763,000 and 744,000 weighted average options to purchase shares, respectively, were not included in the calculation of diluted loss per share. 4. Contingencies The Company and various of its current and former officers and directors are parties to a consolidated class action lawsuit filed in Santa Clara County Superior Court in Santa Clara, California on behalf of all persons who purchased or acquired the Company's common stock for the period from July 27, 1995 to May 22, 1996. The plaintiffs allege the Company has violated state securities laws, statutory provisions, deceit provisions as well as breaches of fiduciary duty and abuse of control. On August 5, 2000 the court granted the Company's motion for summary judgment and entered judgment in favor of the Company. The plaintiffs have filed a notice of their intent to appeal the court's decision. 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 which allege a breach of fiduciary duty and a claim under California securities laws. Based on its current information, the Company believes the class action and derivative suits to be without merit and will defend its position vigorously. Although it is reasonably possible the Company may incur losses upon resolution of these claims, an estimate of loss or range of loss cannot be made. As such, a provision has not been recorded on the Company's financial statements as of June 30, 2000 nor December 31, 2000 with regard to these suits. The Company is also a party to various other legal proceedings, including a number of patent-related matters, and counterclaims filed by the named defendants in the pending patent suits. In connection with these 7 OAK TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (Unaudited) lawsuits, management time has been, and will continue to be, expended and the Company has incurred, and expects to continue to incur, substantial legal and other expenses. See "Legal Proceedings" in Part II - Item I. 5. Segment Information SFAS No. 131 establishes standards for the reporting by public business enterprises of information about operating segments, products and services, geographic areas, and major customers. The method for determining what information to report is based on the way that management organizes the operating segments within the Company for making operational decisions and assessments of financial performance. The Company's chief operating decision- maker is considered to be the chief executive officer (CEO). For fiscal year 2001, Oak Technology has two reportable segments which offer different product lines to each of its target markets: Optical Storage Group and Imaging Group. The Consumer Group product line did not exist during the three and six months ended December 31, 2000 as it was divested during the third quarter of fiscal year 2000. The Company evaluates operating segment performance based on net revenues and direct operating expenses of the segment. The accounting policies of the operating segments are the same as those described in the summary of accounting policies. Fiscal year 2001 results for the Imaging Group includes the operations of the Xionics business which was not acquired nor included in the operations of the Company until January 11, 2000. No segments have been aggregated. The Company does not allocate assets to its individual operating segments. Information about reported segment income or loss is as follows for the three and six months ended December 31, 2000 and 1999 (in thousands):
Three Months Ended Six Months Ended December 31, December 31, ------------------ ------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Net Revenues: Optical Storage $43,392 $ 2,017 $ 77,205 $ 3,641 Imaging 17,241 6,412 34,416 13,266 Consumer -- 2,600 -- 4,264 ------- ------- -------- -------- $60,633 $11,029 $111,621 $ 21,171 ======= ======= ======== ======== Cost of Goods Sold and Direct Operating Expenses: Optical Storage $36,051 $ 6,676 $ 63,602 $ 12,506 Imaging 11,380 5,595 23,271 10,751 Consumer -- 5,343 -- 10,065 ------- ------- -------- -------- $47,431 $17,614 $ 86,873 $ 33,322 ======= ======= ======== ======== Contribution Margin: Optical Storage $ 7,341 $(4,659) $ 13,603 $ (8,865) Imaging 5,861 817 11,145 2,515 Consumer -- (2,743) -- (5,801) ------- ------- -------- -------- $13,202 $(6,585) $ 24,748 $(12,151) ======= ======= ======== ========
8 OAK TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (Unaudited) A reconciliation of the totals reported for the operating segments to the applicable line items in the condensed consolidated financial statements for the three and six months ended December 31, 2000 and 1999, is as follows (in thousands):
Three Months Ended Six Months Ended December 31, December 31, ------------------ ------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Contribution margin from operating Segments $13,202 $ (6,585) $ 24,748 $(12,151) Indirect operating expenses 8,323 9,170 17,130 17,176 Acquired in-process technology -- 225 -- 225 Restructuring charge -- 2,015 -- 2,015 Amortization of intangibles 3,679 2,079 7,358 3,038 ------- -------- -------- -------- Total operating income (loss) 1,200 (20,074) 260 (34,605) Non-operating income, net 2,163 1,782 4,632 4,127 ------- -------- -------- -------- Income (loss) before income taxes $ 3,363 $(18,292) $ 4,892 $(30,478) ======= ======== ======== ========
Indirect operating expenses include all costs and expenses not specifically charged to the operating segments in the financial information reviewed by the Company's chief executive officer. These include various overhead and indirect sales expenses as well as corporate marketing and general and administrative expenses. The Company maintains significant operations in the United States, United Kingdom, Taiwan and Japan. Activities in the United States consist of corporate administration, product development, logistics and worldwide sales management. Foreign operations consist of regional sales and limited board- level manufacturing and engineering support services. The distribution of net revenues for the three and six months ended December 31, 2000 and 1999 are as follows (in thousands):
Three Months Ended Six Months Ended December 31, December 31, ------------------ ------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Revenue from unaffiliated customers originating from: North America $10,281 $ 2,119 $ 18,207 $ 4,994 Japan 21,344 4,601 39,772 8,893 Korea 20,007 2,178 42,635 3,536 Taiwan 8,464 -- 9,230 308 Other Asia 100 1,593 647 2,367 Europe 437 538 1,130 1,073 ------- ------- -------- ------- $60,633 $11,029 $111,621 $21,171 ======= ======= ======== =======
For the six months ended December 31, 2000, two customers accounted for 31% and 10% of total revenues, respectively and as of December 31, 2000, three customers accounted for 24%, 15% and 13% of total accounts receivable, respectively. For the six months ended December 31, 1999, one customer accounted for 18% of total revenues. As of June 30, 2000, three customers accounted for 20%, 13% and 10% of total accounts receivable. 9 OAK TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (Unaudited) 6. Comprehensive Loss The following table presents the calculation of comprehensive loss as required by SFAS 130. The components of comprehensive loss, net of tax, are as follows (in thousands):
Three Months Ended Six Months Ended December 31, December 31, ------------------ ------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Net income (loss) $ 2,825 $(18,292) $ 4,109 $(30,478) Other comprehensive income (loss): Change in unrealized loss on investments, net (7,265) (168) (8,870) (558) ------- -------- ------ -------- Total comprehensive loss $(4,440) $(18,460) $(4,761) $(31,036) ======= ======== ======= ========
7. Income Taxes For the three and six months ended December 31, 2000, the Company recorded a tax expense of 16% of net income. The amount was computed based on projected fiscal year 2000 operating results as well as estimated AMT and NOL limitations. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Except for the historical information contained herein, the matters discussed in this Report on Form 10-Q may be considered "forward-looking" statements within the meaning of Section 27a of the Securities Act of 1933, as amended, and Section 21e of the Securities Act of 1934, as amended. Such statements include declarations regarding the intent, belief or current expectations of the Company and its management. Such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties. Actual results could differ materially from those indicated by such forward-looking statements as a result of certain factors, including those set forth in this Item 2, those described elsewhere in this Quarterly Report and those described in the Company's Annual Report on Form 10-K for the year ended June 30, 2000, other Quarterly Reports on Form 10-Q and other reports filed under the Exchange Act. The Company undertakes no obligation to publicly release the results of any revision to these forward-looking statements which may be made to reflect events or circumstances after the dates hereof or to reflect the occurrence of unanticipated events. Among the important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are: (i) that the information is of a preliminary nature and may be subject to further adjustment, (ii) variability in the Company's quarterly operating results, (iii) general conditions in the semiconductor industry, (iv) risks related to pending legal proceedings, (v) development by competitors of new or superior products or the entry of new competitors into the Company's markets, (vi) the Company's ability to diversify its product and market base by developing and introducing new products within designated market windows at competitive price and performance levels, (vii) willingness of prospective customers to design the Company's products into their products, (viii) availability of adequate foundry capacity and access to process technologies, (ix) the Company's ability to protect its proprietary information and obtain adequate access to third party technology on acceptable terms, (x) risks related to use of independent manufacturers and third party assembly and test vendors, (xi) dependence on key personnel, (xii) reliance on a limited number of large customers, (xiii) dependence on sales of CD-ROM and CD-RW controller products and the PC market, (xv) risks related to international business operations, (xvi) ability of the Company to maintain adequate price levels and margins with respect to its products, (xvii) risks related to acquisitions, (xviii) the ability to attract and retain qualified management and technical personnel and (xix) other risks identified from time to time in the Company's reports and registration statements filed with the Securities and Exchange Commission. General - ------- The Company designs, develops and markets high performance embedded software and integrated semiconductor solutions to original equipment manufacturers worldwide that serve the optical storage and imaging markets. The Company's products consist primarily of embedded software, integrated circuits and supporting software and firmware to provide a complete solution for customers, thereby enabling them to deliver cost effective, powerful systems to end users for home and business use. The Company's mission is to be a leading solutions provider for the storage and distribution of digital content. For the results of operations for the three and six months ended December 31, 2000, the Company reported net income of $2.8 million and $4.1 million, respectively. The increase in net income is a result of the growth in revenues, primarily due to increased customer acceptance of the Company's optical product line. Oak continues to develop its next generation CD-RW product with five of the top ten CD-RW manufacturers. However, the Company cannot predict the future level of customer acceptance of the product and the product's impact on operating results. The Company's quarterly and annual operating results have been, and will continue to be, affected by a wide variety of factors that could have a material adverse effect on revenues and profitability during any particular period, including competitive pressures on selling prices, availability and cost of foundry capacity and raw materials, fluctuations in yield, loss of any strategic relationships, the Company's ability to introduce new products in accordance with OEM design requirements and design cycles, new product introductions by the Company's competitors and market acceptance of product sold by both the Company and its customers. To date, Oak has not experienced any material delays in its wafer deliveries from its primary manufacturers. However, there can be no assurance that delays will not occur in the future. In addition, the Company's operating results are subject to fluctuations in the markets for its customers' products, particularly the consumer electronics and personal computer markets, which have been extremely volatile in 11 the past. The Company has devoted a substantial portion of its research and development efforts in recent quarters to developing chips used in DVD systems, CD-RW, printer drivers and inkjet multi-function peripherals. The Company's DVD, CD-RW, and digital imaging products are subject to the new product risks described in the preceding paragraph, including, in particular the Company's ability to timely introduce these products and the market's acceptance of them, which could have a materially adverse effect on its operating results. Results of Operations - --------------------- Net Revenues. Net revenues increased 450% to $60.6 million for the three ------------ months ended December 31, 2000 from $11.0 million in the comparable period of fiscal 2000. For the six months ended December 31, 2000, net revenues increased 427% to $111.6 million from $21.2 million in the same period of the prior year. The year over year increase in revenues is affected by the inclusion of Xionics' results of operations in Oak's FY 2001 results which were not part of Oak's operations in the comparable three and six months of fiscal 2000. Net revenues in the Optical Storage business segment were $43.4 million for the second quarter of fiscal 2001, representing a 2,051% increase from the segment's net revenues of $2.0 million reported in the same period of fiscal 2000. Net revenues in the Optical Storage business segment increased 2,020% to $77.2 million for the six months ended December 31, 2000 compared to $3.6 million recorded in the same period of the prior year. This increase is primarily the result of the Company's continued success with its CD-RW product line. The Company continued shipping the 8X 9790 product and began to ship the 16X 9795 product in volume. The Company was also able to bring five additional large OEM's into mass production during the first six months of fiscal 2001. The continued ramp into production plus this quarter's initial shipments of products to one additional OEM customer contributed to the large sequential increase in revenues in the Optical Storage segment. Net revenues for the Imaging business segment were $17.2 million for the three months ended December 31, 2000, representing a 169% increase over the $6.4 million reported in the same quarter of fiscal 2000. Net revenues for the Imaging business segment increased to $34.4 million, or 159% for the six months ended December 31, 2000 compared to $13.3 million recorded during the same period of the prior year. The year over year increase in imaging revenues is affected by the inclusion of Xionics' imaging revenues in Oak's FY 2001 results which were not part of Oak's Imaging operations in the comparable three and six months of fiscal 2000. Subsequent to the inclusion of Xionics effective January 11, 2000, revenues for the Imaging business segment remained consistent at $17.2 million for the three months ended December 31, 2000 compared to the three months ended September 30, 2000. For the six months ended December 30, 2000, the Company recorded imaging revenues of $34.4 million compared to $32.9 million recorded during the approximate six-month period ended June 30, 2000. Going forward, imaging revenues will be impacted due to a change in the Imaging business model for the Company's software products. Over the past year the Company has been shifting its business model to share more completely in the profit opportunities with our customers. In the past, the Company has licensed its technology to some customers and has received a fixed fee from them over the life of the contract, at the end of which the customer would have a paid up license to the technology. The Company's recent practice has been to negotiate a royalty arrangement instead of a license fee, which allows it to have an equity position in its customers' success and which it believes offers better upside potential. The Company expects to see a period of transition over the next few quarters as fixed contract license fees decline and royalty revenue begins to ramp as its customers are deploying the software into their product lines. There were no net revenues for the Consumer business segment during fiscal 2001 compared to $2.6 million and $4.3 million recorded during the three and six months ended December 31, 1999, respectively. The decrease is a result of the divestiture of the business during fiscal year 2000. Gross Margin. Cost of revenues include 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 total gross margin increased to 47% for the three-month period 12 ended December 31, 2000, as compared to 40% during the comparable period in the prior year. For the six months ended December 31, 2000, the Company's total gross margin increased to 49% compared to 45% in the same period of the prior year. Gross margin for the Optical Storage business segment was 35% for the second quarter of fiscal 2001 compared to 46% for the comparable quarter of the prior year and 37% for the six months ended December 31, 2000 compared to 49% for the comparable period of the prior year. The decrease is primarily due to a decrease in higher margin royalty income combined with an increase in lower margin product revenues during fiscal 2001. During the second quarter of fiscal 2001, there was also an increase in the inventory reserve of approximately $2.0 million which also contributed to the decrease in the gross margin for the Optical Storage business segment. Gross margin for the Imaging business segment was 76% for the second quarter of fiscal year 2001, representing a 15% increase from the 66% reported in the second quarter of fiscal 2000. Gross margin for the Imaging business for the six months ended December 31, 2000 was 74% compared to 67% for the same period in the prior year. This increase was primarily due to the acquisition and integration of the Xionics business during the third quarter of the prior year which resulted in the inclusion of Xionics software with higher gross margins for fiscal 2001. Gross margin for the Consumer business segment was 24% for the second quarter of fiscal year 2000, and 26% for the six months ended December 31, 2000, a segment which no longer exists as it was divested during the third quarter of fiscal 2000. The Company's overall gross margin is subject to change due to various factors, including, among others, competitive product pricing, yields, wafer costs, assembly and test costs and product mix. The Company expects that average selling prices for its existing products will continue to decline over time and that the average selling prices for each new product will decline significantly over the life of the product. Given the extremely competitive nature of the optical storage and consumer market, the Company believes that gross margins for new products in its optical storage market and consumer market will be lower than historical levels and, as a result, gross margins in general will decline in the future. Research and Development Expenses. Research and development costs are --------------------------------- expensed as incurred. Research and development expenses of $13.9 million for the quarter ended December 31, 2000 increased $1.8 million, or 15%, from $12.1 million in the comparable period of the previous fiscal year. Research and development expenses for the six months ended December 31, 2000 increased 18% to $27.5 million from the $23.3 million recorded in the same period of the prior year. The year over year increase in research and development expenses is due to the net effect of the inclusion of Xionics expenses from the third quarter of the prior year offset by the divestiture of the broadband business. Research and development expenses decreased significantly as a percentage of net revenues for the current fiscal period over the comparable period in the prior year due primarily to the significant increase in the Company's net revenues in the current period compared to the comparable period of fiscal 2000. The Company will continue to invest substantial resources in research and development of new products in the Company's target markets: optical storage and digital imaging. In the second quarter press release and conference call, management also announced a restructuring of the Imaging business in order to de-emphasize imaging hardware. The restructuring will include a reduction in workforce and result in a charge to the third quarter results of less than $3.0 million. The Company expects this action to generate ongoing savings of approximately $750,000 per quarter. Selling, General and Administrative Expenses. Selling, general and -------------------------------------------- administrative (SG&A) expenses increased by 18% to $9.5 million for the three months ended December 31, 2000 from $8.1 million in the comparable period of the prior year. SG&A expenses increased 24% to $19.2 million for the six months ended December 31, 2000 compared to $15.5 million in the same period of the prior year. The year over year increase in SG&A expenses is due to the net effect of the inclusion of Xionics expenses from the third quarter of the prior year offset by the divestiture of the broadband business. SG&A expenses decreased significantly as a percentage of net revenues for the current fiscal period over the comparable period in the prior year due primarily to a significant increase in the Company's net revenues in the current year. Amortization of Intangibles. Amortization of intangible assets was $3.7 --------------------------- million for the three months ended December 31, 2000, an increase of $1.6 million or 77% from the $2.1 million recorded in the same period of the prior fiscal year. For the six months ended December 31, 2000, amortization of intangible assets increased 142% to $7.4 million from the $3.0 million recorded in the same period of the prior year. The increase is a result of the additions to intangible assets as a result of the acquisition of Xionics in the third quarter of fiscal 2000. 13 Non-operating Income. During the second quarter of fiscal 2001, non- -------------------- operating income increased to $2.2 million from $1.8 million recorded during the same quarter of fiscal 2000. Non-operating income increased 12% to $4.6 million for the six months ended December 31, 2000 from $4.1 million in the same period of the prior year. This increase is primarily due to interest received in conjunction with an income tax refund offset by a decrease in foreign currency translation gains recognized during the quarter. Income Taxes. For the second quarter of fiscal 2001 and the six months ------------ ended December 31, 2000, a tax expense of 16% of net income was recorded based on estimated fiscal 2001 results. Management does not yet believe it is more likely than not that sufficient future taxable income will be generated to realize all of the Company's deferred tax assets. Accordingly, during fiscal 1999 a full valuation allowance against deferred tax assets was established. Given this, no income tax benefit was recognized with respect to operating losses incurred in the second quarter of fiscal 2000. Outlook - ------- The statements contained in this outlook section and within certain sections of management's discussion and analysis are forward-looking based on current expectations and management's estimates. Actual results may differ materially from those set forth in these forward-looking statements. In addition to the risk factors discussed in the "Factors That May Affect Future Results" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the Company's 2000 Annual Report on Form 10-K for the fiscal year ended June 30, 2000 filed with the Securities and Exchange Commission, the following factors may also affect the Company's operating results for fiscal 2001: Due to a number of factors including a recent slowdown in the PC industry, global economic conditions and regular seasonality in the business, the Company expects total net revenues for the third fiscal quarter of 2001 will increase by approximately 30% compared with the same quarter of fiscal 2000. This implies that revenues will be down sequentially perhaps as much as 40% compared to the quarter just ended, a quarter in which the Company had recognized a sequential increase of 19% compared to the previous quarter. The Company further expects the year-over-year growth rate of net revenues to accelerate in the fourth fiscal quarter and anticipates in excess of a 50% year over year growth rate for that quarter. This will imply a quarter to quarter sequential growth rate in fiscal 2001 in excess of 40% from the third to the fourth fiscal quarters. The Company expects revenue growth in the second half of the calendar year to accelerate and anticipates exiting calendar 2001 at an annual revenue run rate of $300 million. Gross margin is expected to be in the range of 45% to 48% for the remainder of the fiscal year as optical storage revenues become a greater percentage of the revenue mix. The Company intends to realign its imaging business to de-emphasize imaging hardware and increase emphasis on imaging software. The Company intends to restructure the imaging business including a reduction in workforce which will result in a charge in the third fiscal quarter of less than $3 million related to this strategic initiative. The Company expects these actions to generate ongoing cost savings in excess of $750,000 per quarter as a result of these actions. The Company expects pro forma net income, excluding reorganization and other charges or write-offs and amortization of intangible assets, to remain breakeven to positive in the third fiscal quarter of 2001, with a substantial sequential increase in the fourth fiscal quarter. Oak Technology's procedure for publishing and updating this outlook is as follows. Following the publication of the outlook in its quarterly earnings release and this Quarterly Report on Form 10-Q, Oak will continue its current practice of having corporate representatives meet during the quarter with investors, the media, investment 14 analysts and others to discuss the published outlook and publicly disclosed material related to the outlook. This outlook will not be updated during the quarter unless Oak Technology publishes a notice stating otherwise. 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 December 31, 2000 consisted of approximately $124.6 million in cash, cash equivalents and short-term investments. The Company also has approximately $8.2 million in lines of letters of credit with Taiwanese financial institutions, all of which were available at December 31, 2000. During the six months ended December 31, 2000, operating activities generated cash of approximately $9.6 million. The Company's net income of approximately $4.1 million was offset by increases in accounts receivable and inventories totaling $14.5 million as a result of increased product revenues and an associated ramp in inventory. Increases in accounts payable and accrued expenses of $2.5 million, primarily attributable to the timing of payments of liabilities, and decreases in prepaid expenses and other current assets of $7.4 million resulting from the receipt of tax refunds, litigation settlements, and other receivable helped increase cash generated from operating activities. The non-cash effect of depreciation and amortization totaling $11.2 million also helped increase the cash effect of the net income for the period. Investing activities utilized cash of approximately $11.3 million primarily due to additions to property, plant and equipment of $4.9 million and net purchases of investments of $6.4 million. Financing activities generated cash proceeds of $8.0 million as a result of exercises of stock options. The Company believes that its existing cash, cash equivalents, short-term investments and credit facilities will be sufficient to provide adequate working capital and to fund necessary purchases of property and equipment and any other investments it may make through at least the next twelve months. If, however, during the next twelve to eighteen month period the Company fails to continue its increase in revenue or is unable to maintain expenses below its revenues, then the Company may be in a position where it will need to seek additional financing. However, there can be no assurance that the Company will not be required to seek other financing sooner or that such financing, if required, will be available on terms satisfactory to the Company. The Company may also utilize cash to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. From time to time, in the ordinary course of business, the Company evaluates potential acquisitions of such businesses, products or technologies. Factors That May Affect Future Results - -------------------------------------- The following factors should be carefully considered in evaluating the Company and its business. Expected Benefits of the Merger with Xionics May Not be Achieved - ---------------------------------------------------------------- As a result of its merger with Xionics, the Company will have to continue to maintain effective integration of the combined operations including areas of technical research and development, sales and marketing, business development efforts and also continue to retain key personnel in this process. The execution of these events involve considerable risk and may not be successful. If the Company is not successful in maintaining a successful integration, the objectives of the merger, including improved operating results will not be realized. A key benefit of the merger was perceived to be the Company's opportunity to transition from being an integrated circuits provider to a complete solutions provider for the growing digital office market, and thereby, gain a larger share of the products outsourced by the Company's original equipment manufacturer, or OEM, customers. The Company believes that it has the resources and technology necessary to be a leading supplier to the digital office market and will offer one of this industry's most integrated and flexible platforms. However, if a successful integration is not maintained or is more expensive than contemplated, the Company will not realize these benefits to the fullest extent possible. The Company Has Experienced and Expects to Continue to Experience ----------------------------------------------------------------- Significant Period-to-Period Fluctuations in its Revenues and Operating - ----------------------------------------------------------------------- Results, Which May Result in Volatility in the Price of the Company's Stock - --------------------------------------------------------------------------- 15 The Company's quarterly revenues and operating results have varied significantly in the past and are likely to vary substantially from quarter to quarter in the future. Accordingly, you should not rely on period-to-period comparisons as an indication of future performance. In addition, these variations may cause the Company's stock price to fluctuate. If quarterly results fail to meet public expectations, the price of the Company's stock may decline. The Company's revenues and operating results are affected by a wide variety of factors, including factors that generally affect everyone in its industry and factors that are more specific to its business and product lines. The principal risk the Company faces in its business and one which has had, and is expected to continue to have, a significant effect on its revenues and operating results, is its dependence on the optical storage market. Other factors specific to its business and product lines include the following: o The Company's ability to diversify its product offerings and the markets for its products; o The current market for its products; o The loss or gain of important customers; o The timing of significant orders and order cancellations or rescheduling; o Pricing policy changes by the Company and its competitors and suppliers; o The potential for significant inventory obsolescence exposure; o The timing of the development and introduction of new products or enhanced versions of existing products; o Market acceptance of new products and continued demand for PC and other devices which utilize optical storage technology; o Increased competition in product lines; o Barriers to entry into new product lines; o The competitiveness of the Company's customers; and o The inability to obtain foundry capacity and fluctuations in inventory and overall demand. The Company is in the process of diversifying its business so that its product offerings include not only integrated circuits, but also embedded software and platform solutions. However, a significant portion of the Company's revenue will continue to come from its semiconductor product offerings. The semiconductor industry historically has been characterized by rapid technological change and product obsolescence, cyclical market patterns and seasonal customer demand, significant price erosion, periods of over- capacity and under-capacity, periods of production shortages, variations in manufacturing costs, including raw materials, and yields, and significant expenditures for capital equipment and product development. In addition, the industry has experienced significant economic downturns at various times, characterized by diminished product demand and accelerated erosion of product prices. Any downturns in the industry such as those which occurred in January 2001 may cause the Company's business, financial condition and results of operations to suffer. The Company has experienced in the past and may in the future experience substantial period-to-period fluctuations in operating results due to these general semiconductor industry conditions. The downturns in the industry often occur in connection with, or in anticipation of, maturing product cycles (of both the semiconductor companies and their customers) and declines in general economic conditions. These downturns have been characterized by abrupt fluctuations in product demand, production over-capacity and subsequent accelerated erosion of average selling prices, and in some cases have lasted for more than a year. Even if customers' aggregate demand 16 were not to decline, the availability of additional capacity can adversely impact pricing levels, which can also depress revenue levels. In addition, the Company's quarterly operating results could be materially adversely affected by legal expenses incurred in connection with or any judgment or settlement in the Company's ongoing stockholder legal proceedings. See "The Company Is A Defendant in Several Lawsuits." The Company Has a Recent History of Operating Losses and May Not Remain - ----------------------------------------------------------------------- Profitable - ---------- Although the Company experienced periods of profitability in recent quarters and was initially profitable following its reincorporation in Delaware in October 1994 in connection with its initial public offering (the Company was first incorporated in California in 1987), the Company has at times sustained significant losses and may not continue to be profitable in the future. The Company's operating losses generally have been due to its dependence on its optical storage business, which historically has accounted for approximately 80% of its business. In fiscal 1998, the Company failed to timely and/or adequately develop its integrated CD-ROM controller product and second generation CD-RW product. Consequently, for fiscal 1999, the Company was dependent on mature CD-ROM products and its first generation CD-RW product for its revenue. These mature products continued to decline in both unit sales volume and average sales price in each successive quarter. In the third quarter of fiscal 2000, the Company achieved volume production with its next generation CD-RW product. However, given certain evolving dynamics in the CD- RW market, including the rate of adoption of this technology, competition and selling prices, the Company cannot accurately predict the product's impact on operating results nor can any assurance be given that revenue from this product will enable the Company to maintain profitability. The Company expects that the average sales prices for its optical storage products will continue to decline over time and that average sales prices for each new optical storage product will decline significantly over the life of the product. In addition, given the extremely competitive nature of the optical storage market, the Company believes that gross margins for new products in its optical storage market will be lower than historical levels. However, the Company believes that with the additional planned software and solution product offerings from the Company's Optical Storage and Imaging Groups, gross margins in general will continue to increase in the future. If the Company incurs losses or fails to continue profitability in the future, this will significantly harm its business and may affect the trading price of its common stock. The Company's Financial Performance is Highly Dependent on the Timely and - ------------------------------------------------------------------------- Successful Introduction of New Products - --------------------------------------- The markets for the Company's products are characterized by evolving industry standards, rapid technological change and product obsolescence. The Company's financial performance is highly dependent upon timely and successful execution of next generation and new products, including those from acquired businesses. The failure to timely and successfully introduce next generation and new products that achieve market acceptance in the future could seriously damage the Company's business, financial condition and results of operations. Specifically, the Company's performance is highly dependent upon the successful development and timely introduction of its next generation CD-RW controller, combination DVD and CD-RW controller, MPEG-2 decoder for the DVD player market, and embedded imaging processing solutions for the digital office market, in particular, embedded digital color copier technology and image processing chips for multifunction peripherals. In the optical storage market, particularly DVD, a variety of standards and formats are being proposed, making it difficult to develop product to market requirements, and making it even more difficult for the market to develop. Product delay's in the Company's Optical Storage Group have resulted primarily from difficulties in allocating engineering personnel among competing projects, engineering resource limitations, and unanticipated engineering complexity. Although the Company timely introduced its next generation CD-RW product and refocused its Optical Storage Group on a defined product roadmap, there can be no assurance that these or other factors will not contribute to future delays. In the digital office market in which the Company's acquired business competed with software products and the Company with integrated circuits, the Company will need to address a variety of other factors related to that market with respect to new product development. Product delays in the past in both the Company's Imaging Group and its acquired business have resulted from numerous factors such as changing OEM 17 customer product specifications, difficulties in allocating engineering personnel among competing projects, other resource limitations, difficulties with independent contractors, changing market or competitive requirements and unanticipated engineering complexity. There can be no assurance that these or other factors will not contribute to future delays; that OEM customers will tolerate those delays; or that delayed office devices, once introduced, will meet with market acceptance or success. Among other technological changes, embedded PDF and color capability are rapidly emerging as market requirements for printers and other imaging devices. Some of the Company's competitors have the capacity to supply these solutions, and some of their solutions are well- received in the marketplace. The Company faces the challenges of developing products that will require greater color and image complexity capability including web-based documents, and to work with higher performing devices in networked environments. Any significant inability to meet these challenges with the development of products that can effectively compete in the OEM software and solutions market could cause future results of operations to differ materially from current expectations. Due to the design complexity of the Company's products, especially with the increased levels of integration that are required, the Company has previously experienced delays in completing development and introduction of new products for the optical storage and the digital office markets. In addition, in light of the short product life cycles associated in the markets related to acquired businesses, any delay or unanticipated difficulty associated with new product development or introduction could result in a material adverse effect on the Company's business, results of operations and financial condition. No assurance can be given that the Company will successfully identify new product opportunities and develop and bring new products to market, such as its new SimpliCD software in a timely manner or that its products will be selected for design into the products of its targeted customers. Also, there can be no assurance that the products of the Company's customers will be successfully introduced into the market. If the Company fails in its new product development efforts or its products fail to achieve market acceptance, its revenues will decline and its business, financial condition and results of operations will be severely damaged. The Company's Future Revenues Are Highly Dependent On Sales of Its CD-RW - ------------------------------------------------------------------------ Controller Product - ------------------ The Company's future revenue generation is highly dependent on its current and next generation CD-RW product as well as its combination DVD and CD-RW product. The Company is no longer developing any CD-ROM controllers, but since the early part of fiscal 1999 has been instead focusing its development efforts on controllers for CD-RW and DVD drives. If the Company's CD-RW products fail to achieve market acceptance, it will need other sources of revenue to offset the previous discontinuation of sales of its CD-ROM controllers. In fiscal 2000, revenue generated from the Company's optical storage CD-ROM business declined 94% primarily due to the lack of a next-generation integrated CD-ROM device and revenue generated from the Company's optical storage CD-RW business increased by 90%, compared to the previous year, primarily due to the introduction of a new CD-RW product. In fiscal 1999, revenue generated from the Company's optical storage CD-ROM and CD-R/RW businesses declined 73% and 36%, respectively, compared to the previous year, primarily due to delays in the development of the next-generation integrated CD-ROM device and CD-RW product. Although the Company was a leading supplier of CD-ROM controllers, due to product delays in its next generation CD-ROM product, the Company lost its leadership in this market. While the Company is currently in production with its next generation CD-RW product with a few customers, no assurance can be given this product or its successor will be competitive in the marketplace or carried into production by targeted customers. In addition, even if this product proves to be competitive and is accepted by targeted customers, there is no assurance that the Company's customers will be successful. The Company also faces increased competition in the emerging CD-RW and DVD markets in both the PC and consumer segments. In addition, the current trend toward integrating increased functionality on the CD-RW or DVD controller potentially adds to the development and manufacturing costs of producing the controller. The Company's revenues and gross margins from its optical storage controller products will be dependent on the Company's ability to introduce integrated products for the CD-RW and DVD markets in a commercially competitive manner. 18 The decrease in the overall level of sales of, and prices for, the Company's CD-ROM and older generation CD-RW controller product due to introductions of newer products by competitors, the decline in demand for CD- ROM controller products generally, product obsolescence and delays in the Company's integrated CD-ROM controller product and its next generation CD-RW product, have had a material adverse effect on the Company's business, financial condition and results of operations, and will continue to have that effect if the Company fails to successfully introduce new and next generation products to the optical storage market. The Company also anticipates that the royalty streams derived from OEMs' shipments of office equipment containing the Company's imaging products, and the sale of related products and services to manufacturers of office equipment will account for a significant portion of its revenue for the foreseeable future, although not as significant as CD-RW for the remainder of fiscal 2001 and possibly fiscal 2002. In order to assure that the Company will derive future royalty streams from the shipment of OEM devices, the Company and its OEMs are required to develop and release in a regular and timely manner new office products with increased speed, enhanced output resolutions, reduced memory requirements, multiple functions, and network connectivity. The Company's OEMs are under tremendous pressure to continually shorten the development cycles of these products, leading to increased complexity and cost of development to the Company and its OEMs. The Company's success will depend on, among other things: the rate at which OEMS serving the digital office market outsource their technology needs, market acceptance of the Company's technology and products and the office devices of the Company's OEMs; the ability of the Company and its OEMs to meet industry changes and market demands in a timely manner; achievement of new design wins by the Company; successful implementation of the Company's technology and products in new office devices being developed by its OEMs; and successful marketing of those devices by the OEMs. Revenues from the office equipment market will depend heavily on the Company's ability to integrate its acquired business, Xionics Document Technologies, successfully in order to develop complete product solutions and compete more effectively and successfully against other suppliers and outsourcers as well as its own OEM customers and other manufacturers. The Company's Markets Are Intensely Competitive and Experience Rapid - -------------------------------------------------------------------- Technological Change - -------------------- The markets in which the Company competes are intensely competitive and are characterized by rapid technological change, declining average unit sales prices and rapid product obsolescence. If the Company cannot successfully respond to the technological advances of others or if its new products or product enhancements do not achieve market acceptance, the Company's business, operating results and financial condition could be seriously harmed. The Company expects competition to increase in the future from existing competitors and from other companies that may enter the Company's existing or future markets with solutions that may be less costly or provide higher performance or additional features. The Company's principal competitors in the optical storage market are MediaTek, Toshiba and Ricoh; its principal competitors in the digital office market are Adobe Systems, Inc., Peerless Systems Corporation, Electronics for Imaging, Inc., and in-house, captive suppliers, and the Company expects increased competition from the merchant market in the future. Many of these existing competitors as well as those customers expected to compete in the future have substantially greater financial, manufacturing, technical, marketing, distribution and other resources, broader product lines and longer standing relationships with customers than the Company. In addition, much of the Companies success is dependent on the success of its OEM customers. The Company's OEM customers in both the optical storage, and digital office markets compete fiercely with one another for market share in a market characterized by rapid development cycles, short product life cycles and ever-increasing consumer demand for greater performance and functionality at reduced prices. The markets for most of the applications for the Company's products, especially in the optical storage market, are characterized by intense price competition. As the markets for these products mature and competition increases, as has been the trend for the optical storage, the Company anticipates that average sales prices on products will decline. If the Company is unable to reduce costs sufficiently to offset declines in average sales prices or is unable to successfully introduce new higher performance products with higher average sales prices, operating results will be materially adversely affected. The future growth of the digital office market is highly dependent on OEMs' continuing to outsource an increasing portion of their product development work. While the trend toward outsourcing on the part of the Company's OEM customers has accelerated in recent years, any reversal of this trend could have a material adverse effect on the Company's business, financial condition, and results of operations. Similarly, significant market trends 19 leading to changes in the way the Company's competitors do business may enable them to compete more effectively against the Company than they have in the past. These changes, if they enable competitors to compete more effectively for business from the Company's customers, could have a material adverse effect on the Company's business, financial condition and results of operations. Additionally, changes in strategy by the Company's competitors, for example price reductions, new product introductions or new marketing/distribution methods, could make it more difficult for the Company to compete effectively, cause reduced market demand for the Company's products and/or render the Company's products obsolete. There can be no assurance that the Company or its OEM customers will be able to compete successfully against current or future competitors, or that competitive pressures faced by it and its customers will not result in reduced revenues and profit margins and otherwise seriously harm its business, financial condition and results of operations. The Company May Be Unable To Protect Its Intellectual Property and Proprietary - ------------------------------------------------------------------------------ Rights, Which May Affect Its Ability to Compete - ----------------------------------------------- The Company's ability to compete is affected by its ability to protect its proprietary information. The Company considers its technology to be proprietary and relies on a combination of patents, trademarks, copyrights, trade secret laws, confidentiality procedures and licensing arrangements to protect its intellectual property rights. However, these measures afford only limited protection. The Company's competitors may be able to effectively design around the Company's patents or independently develop competing software. There can be no assurance that any of the Company's patents will not be challenged, invalidated or circumvented, or that the rights granted under those patents will provide competitive advantages to the Company. Moreover, while the Company holds or has applied for patents relating to the design of its products, some of its products are based in part on standards, for which it does not hold patents or other intellectual property rights or under terms dictated by the Standards Body and may be forced to grant licenses under its patents. In addition, the laws of certain foreign countries in which the Company's products are or may be manufactured or sold, including various countries in Asia, may not protect the Company's products or intellectual property rights to the same extent as do the laws of the United States and thus make the possibility of piracy of the Company's technology and products more likely. There can be no assurance that the steps taken by the Company to protect its proprietary information will be adequate to prevent misappropriation of its technology or that the Company's competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technology. Moreover, the Company intends to seek additional international and United States patents on its technology. There can be no assurance that additional patents will issue from any of the Company's pending applications or applications in preparation, or be issued in those countries selected by the Company where the Company's products can be sold, or that any claims allowed from pending applications or applications in preparation will be of sufficient scope or strength to provide meaningful protection or any commercial advantage to the Company. The Company also generally enters into confidentiality agreements with its employees and consultants and confidentiality and license agreements with its customers and potential customers, and limits access to and distribution of the source and object code of its software and other proprietary information. With respect to its page description language software and drivers for the digital office market and in limited circumstances with respect to firmware and drivers for its optical storage products, the Company grants licenses that give its customers access to and restricted use of the source code of the Company's software which increases the likelihood of misappropriation or misuse of the Company's technology. Accordingly, despite the Company's precautions, it may be possible for unauthorized third parties to copy certain portions of the Company's technology or to obtain and use information that the Company regards as proprietary. There can be no assurance that the steps the Company takes will be adequate to prevent misappropriation of its technology or to provide an adequate remedy in the event of a breach or misappropriation by others. Furthermore, the Company may initiate claims or litigation against third parties, in addition to those referenced herein (see Item 1, Note 4 "Contingencies"), for infringement of the Company's proprietary rights or to establish the validity of its proprietary rights and in the past has incurred significant legal expenses in connection with claims of this type it has initiated. Any litigation by or against the Company could result in significant expense to the Company and divert the efforts of its technical and management personnel, whether or not that litigation results in a 20 favorable determination for the Company. In the event of an adverse result in any litigation, the Company could be required to pay substantial damages, cease the manufacture, use and sale of infringing products, expend significant resources to develop non-infringing technology, discontinue the use of certain processes or obtain licenses to the infringing technology. There can be no assurance that the Company would be successful in developing new technology or that those licenses would be available on reasonable terms, or at all, and any development or license could require the Company's expenditures of substantial time and other resources. The Company May Be Unable to Obtain Third Party Intellectual Property Rights - ---------------------------------------------------------------------------- and/or May Be Liable For Significant Damages - -------------------------------------------- Certain technology used in the Company's products is licensed from third parties, and in connection with these licenses, the Company is required to fulfill confidentiality obligations and, in some cases, pay royalties. Some of the Company's products require various types of copy protection software that the Company must license from third parties. Should the Company lose its rights to, or be unable to obtain the necessary copy protection software, the Company would be unable to sell and market certain of its products. The Company's agreements with third parties often have no specified term and may be terminated by either party in the event of breach by the other. The Company's business could be adversely affected by the loss for any reason of these third- party agreements. Given the trend to include increasing levels of functionality on a chip, in the future it may be necessary or desirable for the Company to seek additional licenses to intellectual property rights held by third parties or purchase products manufactured and/or sold by third parties with respect to some or all of its product offerings. There can be no assurance that those licenses or purchases will be available on terms acceptable to the Company, if at all. The inability of the Company to enter into those license arrangements on acceptable terms or to maintain its current licenses on acceptable terms could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights, which has resulted in significant, often protracted and expensive litigation. The Company or its foundries may, from time to time, be notified of claims that the Company may be infringing patents or other intellectual property rights owned by third parties. If it is necessary or desirable, the Company may seek licenses under those patents or other intellectual property rights. However, there can be no assurance that licenses will be offered or that the terms of any offered licenses will be acceptable to the Company. The failure to obtain a license from a third party for technology used by the Company could cause the Company to incur substantial liabilities and suspend the manufacture of products or the use by the Company's foundries of processes requiring the technology. The Company has historically indemnified its customers for certain costs and damages of patent infringement in circumstances where the Company's product is the factor creating the customer's infringement exposure. This practice generally excludes coverage in circumstances where infringement arises out of the combination of the Company's products with products of others or where infringement arises based on modifications made by the customer to the Company's products. This indemnification practice, however, could have a material adverse effect on the results of operations. Although patent disputes in the semiconductor industry have often been settled through cross-licensing arrangements, the Company may not be able in any or every instance, to settle an alleged patent infringement claim through a cross-licensing arrangement. The Company, while having expanded its patent portfolio over the years, still has a more limited patent portfolio than many of its competitors. If a successful claim is made against the Company or its customers and a license is not made available to the Company on commercially reasonable terms or the Company is required to pay substantial damages or awards, the Company's business, financial condition and results of operations would be materially adversely affected. The Company Depends on Third Party Foundries and Vendors to Manufacture - ----------------------------------------------------------------------- Products - -------- The Company contracts with independent foundries to manufacture a majority of its products and with independent vendors to assemble and test these products. The Company's failure to adequately manage its relationships with these foundries and vendors could negatively impact its ability to manufacture and sell its products and its results of operations. 21 The Company relies on its foundries to allocate to the Company a portion of their foundry capacity sufficient to meet its needs to produce products of acceptable quality and with acceptable manufacturing yield and to deliver products to the Company in a timely manner. These foundries fabricate products for other companies and some manufacture products of their own design. If these foundries fail or are unable to satisfy the Company's product, quality and other requirements, the Company's business, financial condition and results of operation could suffer. The Company also relies on third-party subcontractors to assemble and test its products. The failure of any of these subcontractors to meet the Company's production requirements could cause the Company's business, financial condition and operating results to suffer. The Company's reliance on independent manufacturers and third party assembly and testing vendors involves a number of additional risks, including: o The loss of any foundry as a supplier; o Inability to expand foundry capacity in a period of increased demand for the Company's products; o Inability to obtain timely and adequate deliveries from current or future suppliers; o Delays in shipments of the Company's products; o Disruption of operations at any of the Company's manufacturing facilities; o Product defects and the difficulty of detecting and remedying product defects; o The unavailability of, or interruption in access to, certain process technologies; and o Reduced control over delivery schedules, quality assurance and costs. As the Company generally does not use multiple services of supply for its products, the consequences of these factors occurring is magnified. The Company's Failure to Accurately Forecast Demand for Its Products Could - -------------------------------------------------------------------------- Negatively Impact Its Results of Operations - ------------------------------------------- Under its foundry agreements, the Company is required to place non- cancelable orders and purchase its products on an approximately three-month rolling basis. The Company's customers, on the other hand, generally place purchase orders with the Company less than four weeks prior to delivery that may be rescheduled or under certain circumstances may be cancelled, without significant penalty. This limits the Company's ability to react to fluctuations in demand for its products. If the Company overestimates the product necessary to fill orders, or fails to foresee a technology change that could render a product obsolete, it will build excess inventories which could harm its gross margins and operating results. If the Company underestimates the product necessary to fill orders, it may not be able to obtain an adequate supply of products which could harm its revenues. The Company has experienced inventory write-offs of its optical storage products in the past primarily due to unforeseen and rapid changes in its customers' demand, in particular speed changes, and consequently experienced rapid product obsolescence. Product supply and demand fluctuations common to the semiconductor industry are historically characterized by periods of manufacturing capacity shortages immediately followed by periods of overcapacity, which are caused by the addition of manufacturing capacity in large increments. No assurance can be given that the Company can or will achieve timely, cost-effective access to that capacity when needed. 22 The Company Derives A Large Portion of Its Revenues from International Sales, - ----------------------------------------------------------------------------- Depends on Foreign Subcontractors and Is Subject to the Risks of Doing Business - ------------------------------------------------------------------------------- in Foreign Countries - -------------------- A large portion of the Company's revenues are derived from international sales. International sales, principally to Korea, Japan, Singapore and Europe, accounted for approximately 75%, 86% and 92%, of the Company's net revenues for fiscal 2000, 1999 and 1998, respectively. The Company also depends on foreign subcontractors for the manufacture of its products. Most of the Company's foreign sales and purchases are negotiated in US dollars, although invoicing is often done in local currency. As a result, the Company may be subject to the risks of currency fluctuations in the foreign countries in which it does business. The Company also is subject to other risks of conducting business outside of the United States. These risks include: o Unexpected changes in, or impositions of, foreign legislative or regulatory requirements; o Delays resulting from difficulty in obtaining export licenses for certain technology; o Tariffs, quotas and other trade barriers and restrictions; o Longer payment cycles; o Greater difficulty in collecting accounts receivable; o Potentially adverse taxes and adverse tax consequences; o The burdens of complying with a variety of foreign laws; o Political, social and economic instability; o Potential hostilities; o Changes in diplomatic and trade relationships; and o Fluctuations in foreign currencies. The Company's significant investment in foundry capacity in Taiwan is a prime example of its exposure to these types of risks. Due to this investment, the Company is subject to the risk of political instability in Taiwan, including the potential for conflict between Taiwan and the People's Republic of China. In addition, the fact that China is the primary market for the Company's consumer DVD products is another example. Any political or economic instability in China could significantly reduce the demand for these products. In addition, the Company has several significant OEM customers in Japan, South Korea, and other parts of Asia. The Company faces uncertainty in these customers' continued willingness or ability to do business with the Company in the future or their success in developing and launching in particular office devices containing the Company's products. While these factors or the impact of these factors are difficult to forecast, any one or more of these factors could adversely affect the Company's operations in the future or require the Company to modify its current business practices. The Company Depends on a Limited Number of Customers for a Substantial Portion - ------------------------------------------------------------------------------ Of Its Revenues, and a Loss Of, Or A Significant Reduction in Purchases By, - --------------------------------------------------------------------------- Current Major Customers Would Significantly Reduce Its Revenues - --------------------------------------------------------------- 23 The Company has derived a substantial portion of its net revenues from a limited number of customers and expects this concentration to continue. For fiscal 2000, 1999 and 1998 sales to the Company's top ten customers accounted for approximately 78%, 70% and 81% of the Company's net revenues, respectively. In addition, the Company has experienced significant changes from year to year in the composition of its major customer base and the Company believes this pattern of significant change may continue. Customers generally purchase the Company's products pursuant to short-term purchase orders, and the Company has no long-term purchase agreements with any of its customers. The loss of, or significant reduction in purchases by, current major customers of the Company would significantly reduce its revenues. The Company Is A Defendant in Several Lawsuits - ---------------------------------------------- The Company and various of its current and former officers and directors are parties to a consolidated class action lawsuit filed on behalf of all persons who purchased or acquired the Company's common stock for the period from July 27, 1995 to May 22, 1996, alleging state securities law and other violations. Additionally, various of the Company's current and former officers and directors are defendants in three consolidated derivative actions which allege a breach of fiduciary duty and a claim under California securities laws. Based on its current information, the Company believes the class action and derivative suits to be without merit and will defend its position vigorously. Although it is reasonably possible the Company may incur losses upon resolution of these claims, an estimate of loss or range of loss cannot be made. No provision for any liability that may result upon adjudication has been made in the Company's financial statements. The Company is also a party to various other legal proceedings, including a number of patent-related matters, and counterclaims filed by the named defendants in the pending patent suits. In connection with these lawsuits, management time has been, and will continue to be, expended and the Company has incurred, and expects to continue to incur, substantial legal and other expenses. The Company Must Continue To Make Significant Capital Investments, And The - -------------------------------------------------------------------------- Inability to Raise the Additional Capital Necessary to Fund These Investments - ----------------------------------------------------------------------------- On Acceptable Terms Could Seriously Harm the Company's Business - --------------------------------------------------------------- In order to remain competitive, the Company must continue to make investments in new facilities and capital equipment, and significant amounts of capital additions could be required in subsequent years. Additionally, in order to obtain an adequate supply of wafers, especially wafers manufactured using advanced process techniques, the Company has entered into and will continue to consider various possible transactions, including various "take or pay" contracts that commit the Company to purchase specified quantities of wafers over extended periods. Manufacturing arrangements such as these may require substantial capital investment, which may require the Company to seek additional financing. The Company believes that existing liquid resources and funds generated from operations, if any, combined with its ability to borrow funds will be adequate to meet its operating and capital requirements and obligations into the foreseeable future. The Company believes that the level of a Company's financial resources is an important factor in its industry. Accordingly, the Company may from time to time seek additional equity or debt financing. There can be no assurance that those funds will be available on terms acceptable to the Company when needed. Any future equity financing will also lead to dilution to existing shareholders. The Company May Make Future Acquisitions or Enter into Joint Ventures That May - ------------------------------------------------------------------------------ Not Be Successful - ----------------- In the future, the Company may acquire additional businesses, products and technologies, or enter into joint venture arrangements, that could complement or expand its business. Acquisitions involve numerous risks including: o Difficulties in integration of the operations, technologies, and products of the acquired companies; o Diverting management's attention from normal daily operations of the business; o Entering markets in which there is limited direct prior experience and where competitors have stronger market positions; o Coordination of sales, marketing and research and development; o Potential loss of key employees; and 24 o The maintenance of corporate culture, controls, procedures and policies. In addition, investments in emerging technology and emerging technology companies present risks of loss of value of one or more of the investments due to failure of the technology to gain the predicted market acceptance. Also, any future acquisitions could require the Company to issue dilutive equity securities, incur debt or contingent liabilities, amortize goodwill and other intangibles, or write-off in-process research and development and other acquisition-related expenses. Further, the Company may not be able to integrate acquired businesses, products or technologies with its existing operations. If the Company is unable to fully integrate an acquired business, product or technology, it may not receive the intended benefits of that acquisition. The Company Will Depend On Key Personnel To Manage Its Business, and the Loss - ----------------------------------------------------------------------------- of Any Key Personnel Could Seriously Harm Its Business - ------------------------------------------------------ The Company's future performance depends, to a significant degree, on the retention and contribution of members of the Company's senior management as well as other key personnel including highly skilled engineering and technical employees. Recently, the Company layed off a number of its employees as part of a restructuring to more effectively align the Company's resources to its strategic objectives. Specifically, it is important for the Company to retain the services of Young K. Sohn, the Company's current president and chief executive officer. Competition for technical, financial and operational personnel is intense because of the limited number of candidates and the growth of high-tech companies, and there can be no assurance that the Company will be able to attract and retain qualified replacements or additional technical or operational personnel. There is no assurance that the Company will be able to find suitable replacements for any senior management personnel who may leave the Company. Provisions in The Company's Charter Documents And Rights Plan Could Make It - --------------------------------------------------------------------------- More Difficult To Acquire The Company And May Reduce The Market Price Of The - ---------------------------------------------------------------------------- Company's Stock - --------------- The Company's board of directors has the authority to issue up to 2.0 million shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The rights of the holders of common stock, may be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change of control of the Company without further action by the stockholders and may adversely affect the voting and other rights of the holders of common stock. The Company has no present plans to issue shares of preferred stock. Further, certain provisions of the Company's charter documents, including provisions eliminating the ability of stockholders to take action by written consent and limiting the ability of stockholders to raise matters at a meeting of stockholders without giving advance notice, may have the effect of delaying or preventing changes in control or management of the Company, which could have an adverse effect on the market price of the stock. In addition, the Company's charter documents do not permit cumulative voting and provide that its board of directors will be divided into three classes, each of which serves for a staggered three-year term, which may also make it more difficult for a third-party to gain control of the board of directors. In addition, 400,000 shares of the Company's preferred stock are designated as series A junior participating preferred stock under a rights plan, commonly referred to as a "poison pill". Under certain circumstances involving a proposed change-in-control of the Company, the rights related to the series A junior participating preferred stock may be triggered, the effect of which may delay or prevent a third party from gaining control of or acquiring the Company. Pricing Issues - -------------- The willingness of prospective customers to design the Company's products into their products depends, to a significant extent, upon the ability of the Company to have product available at the appropriate market window and to price its products at a level that is cost effective for such customers. The markets for most of the applications for the Company's products, especially in the consumer electronics market and the optical storage market, are characterized by intense price competition. As the markets for the Company's products mature and competition increases, as has been the trend for the optical storage and digital video disk segment of the consumer electronics market, 25 the Company anticipates that average sales prices ("ASPs") on its products will decline. The Company continually attempts to pursue cost reductions, including process enhancements, in order to maintain acceptable gross profit margins. Gross profit margins also vary reflecting the impact of changes in the general condition of the economy, capacity utilization levels in the semiconductor industry, customer acceptance of new technologies and products, product functionality and capabilities, shifts in product mix, manufacturing yields and the effect of ongoing manufacturing cost reduction activities. If the Company is unable to reduce its costs sufficiently to offset declines in ASPs or is unable to successfully introduce new higher performance products with higher ASPs, the Company's operating results will be materially adversely affected. In addition, if the Company experiences yield or other production problems or shortages of supply that increase its manufacturing costs, fails to reduce its manufacturing costs, or fails to utilize its prepaid deposits with TSMC, the result would be a material adverse effect on the Company's business, financial condition and operating results. Limited Customer Base - --------------------- The Company has derived a substantial portion of its net revenues from a limited number of customers and expects this concentration to continue. These customers were all purchasers of the Company's CD-ROM and CD-RW products. (Please see the discussion above under the heading "Dependence on CD-ROM and CD-RW Controller Product" for a description of the decline in revenues the Company has experienced in connection with sales of our CD-ROM product.) At December 31, 2000, three customers accounted for approximately 24%, 15% and 13% of accounts receivable, respectively. At June 30, 2000, three customers accounted for approximately 17%, 11% and 11% of accounts receivable, respectively. In addition, the Company has experienced significant changes from year to year in the composition of its major customer base. The Company believes this pattern may continue. Customers generally purchase the Company's products pursuant to short-term purchase orders, and the Company has no long- term purchase agreements with any of its customers. The loss of or significant reduction in purchases by, current major customers of the Company would have a material adverse effect on the Company's business, financial condition and operating results. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Most of the Company's foreign sales are negotiated in US dollars; however, invoicing is often done in local currency. As a result, the Company may be subject to the risks of currency fluctuations. Assets and liabilities which are denominated in non-functional currencies are remeasured into the functional currency on a monthly basis and the resulting gain or loss is recorded within non-operating income in the statement of operations. Many of the Company's non- functional currency receivables and payables are hedged through managing net asset positions, product pricing and other means. The Company's strategy is to minimize its non-functional currency net assets or net liabilities in its foreign subsidiaries. The Company's policy is not to speculate in financial instruments for profit on the exchange rate price fluctuations, trade in currencies for which there are not underlying exposures, or enter into trades for any currency to intentionally increase the underlying exposure. As of December 31, 2000 and June 30, 2000, the Company had foreign currency exchange contracts to exchange Yen for approximately $3.2 million and $2.4 million, respectively. If foreign currency rates fluctuate by 10% from rates at December 31, 2000 and June 30, 2000, the effect on the Company's consolidated financial statements would not be material. The Company uses financial instruments, including local currency debt arrangements, to offset the gains or losses of the financial instruments against gains or losses on the underlying operations cash flows or investments. However, there can be no assurance that there will not be a material impact in the future. The Company's cash equivalents and short-term investments ("investments") are exposed to financial market risk due to fluctuation in interest rates, which may affect its interest income and the fair values of its investments. The Company manages the exposure to financial market risk by performing ongoing evaluation of its investment portfolio and investing in short-term investment grade corporate securities and U.S. government and other agencies' obligations which mature within the next 24 months. In addition, the Company does not use investments for trading or other speculative purposes. Not withstanding the forgoing, due to the divestiture of the Broadband business in January 2000, the Company is in the unusual position of also holding an investment in 293,794 shares of Conexant Systems, Inc. common stock which had an original book value of $68.05 per share. This investment is classified as being held as an available-for-sale security, and accordingly, 26 the reduction in the market value of the investment at December 31, 2000 of approximately $15.5 million is included as an item of accumulated comprehensive loss. This is a highly volatile equity security with market valuations in the range of $12.81 to $132.00 since mid January 2000. The Company intends to convert these shares into cash over time. Due to the short-term maturities of its investments, the carrying value approximates the fair value. If market rates were to increase immediately and uniformly by 10% from levels as of December 31, 2000, the decline in the fair value of the portfolio would not be material. Further, the Company has the ability to hold its fixed income investments until maturity and, therefore, the Company would not expect to recognize such an adverse impact in income or cash flows. 27 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company and various of its current and former officers and directors are parties to a consolidated class action lawsuit filed on behalf of all persons who purchased or acquired the Company's common stock (excluding the defendants and parties related to them) for the period July 27, 1995 through May 22, 1996. This state court proceeding, designated IN RE OAK TECHNOLOGY SECURITIES LITIGATION, Master File No. CV758510 was filed in Santa Clara County Superior Court in Santa Clara, California. The lawsuit originally named as defendants several of the Company's venture capital fund investors, two of its investment bankers and two securities analysts. The plaintiffs alleged violations of California securities laws and statutory deceit provisions as well as breaches of fiduciary duty and abuse of control. The plaintiffs sought unspecified monetary damages. After several rounds of demurrers, the court dismissed all claims except the California Corporations Code Sections 25400/25500 cause of action against the Company, four officers and the Company's investment bankers and securities analysts. On July 16, 1998, the court provisionally certified a national class of all persons who purchased the Company's stock during the class period. The class was provisionally certified with the order held in abeyance pending resolution of the question of whether a nationwide class may bring a California Corporations Code Sections 25400/25500 claim. This issue was resolved in favor of allowing such nationwide class actions by the California Supreme Court, Case No. 5058723, on January 4, 1999, in the DIAMOND MULTIMEDIA SECURITIES LITIGATION appeal by the California Supreme Court. On August 5, 2000 the court granted Company's motion for summary judgment and entered judgment in favor of the Company. The plaintiffs have filed a notice of their intent to appeal the court's decision. Based on its current information, the Company believes this suit to be without merit and will defend its position vigorously. Although it is possible the court's ruling may be overturned on appeal and the Company may incur a loss upon an adverse conclusion of these claims, an estimate of any such loss cannot be made. Additionally, various of the Company's current and former officers and Directors are defendants in three consolidated derivative actions pending in Santa Clara County Superior Court in Santa Clara, California, entitled IN RE OAK TECHNOLOGY DERIVATIVE ACTION, Master File No. CV758510. This lawsuit, which asserts a claim for breach of fiduciary duty and a claim under California securities law based upon the officers' and Directors' trading in securities of the Company, has been stayed pending resolution of the above described class actions. The plaintiffs are seeking monetary damages, equitable relief and an accounting for the defendants' sales of shares of the Company's common stock. Based on its current information, the Company believes the suits to be without merit and will defend its position vigorously. Although it is reasonably possible the Company may incur a loss upon conclusion of these claims, an estimate of any such loss cannot be made. If any of the above pending actions are decided adversely to the Company, it would likely have a material adverse affect on the Company's financial condition and results of operations. On July 21, 1997, the Company filed a complaint with the ITC based on the Company's belief that certain Asian companies were violating U.S. trade laws by the unlicensed importing or selling of certain CD-ROM controllers that infringed one or more of the Company's United States patents. The complaint seeks a ban on the importation into the United States of the named respondent's infringing CD-ROM controllers or products containing such infringing CD-ROM controllers. A formal investigative proceeding was instituted by the ITC (Investigation No. 337-TA-401) on August 19, 1997, naming as respondents: Winbond Electronics Corporation (Winbond); Winbond Electronics North America Corporation; Wearnes Technology (Private) Ltd.; Wearnes Electronics Malaysia Sendirian Berhad; and Wearnes Peripheal International (Pte.). On March 16, 1998, the Company and Winbond entered into a settlement agreement pursuant to which Winbond obtained a nonexclusive, royalty-bearing license to the Company's U.S. patents No.'s 5,535,327 and 5,581,715 and the Company obtained a nonexclusive, royalty-free license to several Winbond patents. The settlement agreement provided that the parties would jointly seek termination and dismissal of investigation No. 337-TA-401 as to Winbond and its four affiliated companies: Winbond Electronics North America Corporation; Wearnes Technology (Private) Ltd.; Wearnes Electronics Malaysia Sendirian Berhad; and Wearnes Peripheal International (Pte.). On April 15, 1998, Investigation No. 337-TA-401 was ordered terminated as to all parties. 28 As originally filed with the ITC, the Company's complaint also identified as proposed respondents: United Microelectronics Corporation (UMC); Lite-On Group; Lite-On Technology Corp.; Behavior Tech Computer Corp. and Behavior Tech Computer (USA) Corp. Prior to the ITC's institution of the formal investigation proceeding, the Company and UMC entered into a settlement agreement, effective July 31, 1997, pursuant to which UMC agreed to cease and desist the manufacture and/or importation into the United States of its specified CD-ROM controllers, except under certain limited conditions which expired on January 31, 1998. The settlement agreement additionally provided for the withdrawal of the Company's ITC complaint against UMC and the above-named Lite-On and Behavior Tech companies. In September 1997, October 1997, February 1998 and April 1998, the Company received $2.6 million, $4.7 million, $0.7 million and $2.6 million, respectively, pursuant to this settlement. Proceeds from the settlement were recorded as miscellaneous income and included in non-operating income for the periods ended September 30, 1997, December 31, 1997, March 31, 1998 and June 30, 1998, respectively. On October 27, 1997, the Company filed a complaint in the United States District Court, Northern District of California against UMC for breach of contract, breach of the covenant of good faith and fair dealing and fraud based on UMC's breach of the settlement agreement arising out of the ITC action, Case No. C-97-20959. Together with the filing of the complaint, the Company filed a motion for a preliminary injunction against UMC, seeking to enjoin UMC from selling the CD-ROM controllers that were the subject of the ITC action and related settlement agreement, through or to a UMC-affiliated, Taiwanese entity called MediaTek. On February 23, 1998, the federal court judge denied the Company's request for a preliminary injunction based on the court's findings that there was no evidence that UMC was presently engaged in the manufacture of CD-ROM controllers or other products covered by the settlement agreement. On December 24, 1997, UMC answered the Company's complaint and counterclaimed by asserting causes of action for recission, restitution, fraudulent concealment, mistake, lack of mutuality, interference and declaratory judgment of non- infringement, invalidity and unenforceability of the Oak patent that was the subject of the original ITC action filed against UMC. The Company believes these counterclaims to be without merit and will vigorously defend its patent. Both the Company and UMC seek compensatory and punitive damages. In addition, the Company seeks permanent injunctive relief. On June 11, 1998, this case was consolidated for all purposes with a related case brought against the Company by MediaTek (described below) under Case No. C-97-20959. On the same date, pursuant to UMC's request, the federal court judge ordered the consolidated action stayed under 28 U.S.C. Section 1659, based on the judge's conclusion that the civil action involves the same issues involved in Investigation No. 337-TA-409 before the International Trade Commission, initiated by Oak (described below). The stay was to be lifted upon final resolution of Investigation No. 337-TA-409; however, the judge has ordered that the consolidated action continue stayed pending the resolution of the parties appeal of the ITC ruling to the Federal Circuit Court of Appeals. (Described below.) In a related action to the lawsuit that was commenced by the Company against UMC (described above), on December 19, 1997, MediaTek, a UMC affiliated, Taiwanese entity, filed a complaint in the United States District Court, Northern District of California, against the Company for declaratory judgment of non-infringement, invalidity and unenforceability of the Oak patent that was the subject of the original ITC action against UMC, and intentional interference with prospective economic advantage, Case No. C-97-21126. MediaTek seeks compensatory damages of not less than $10 million and punitive damages. The Company filed its answer on January 8, 1998, denying all the allegations. The Company believes the suit to be without merit and will vigorously defend its patent. On June 11, 1998, this case was consolidated for all purposes with a related case brought by the Company against UMC (described above) under Case No. C-97-20959. On the same date, pursuant to UMC's request, the federal court judge ordered the consolidated action stayed under 28 U.S.C. Section 1659, based on the judge's conclusion that the civil action involves the same issues involved in Investigation No. 337-TA-409 before the International Trade Commission, initiated by Oak (described below). The stay was to be lifted upon final resolution of Investigation No. 337-TA-409; however, the judge has ordered that the consolidated action continue stayed pending the resolution of the parties appeal of the ITC ruling to the Federal Circuit Court of Appeals. (Described below.) On April 7, 1998, the Company filed a new complaint with the ITC alleging that five Asian companies are violating U.S. trade laws by the unlicensed importing or selling of CD-ROM drive controllers that infringe a United States patent owned by the Company. The Company's complaint is asserted against United Microelectronics Corp., MediaTek, Inc., Lite-On Group, Lite-On Technology Corp. and AOpen, Inc. In its complaint, the Company requests the ITC to investigate the five above-named companies and to enter an order barring imports into the United States of their allegedly infringing CD-ROM controllers and products containing them, including CD-ROM drives and personal computers. A formal investigative proceeding was instituted by the ITC (Investigation No. 337-TA- 409) on 29 May 8, 1998 naming as respondents United Microelectronics Corp., MediaTek, Inc., Lite-On Technology Corp. and AOpen, Inc. The following respondents, all Taiwanese drive manufacturers, were later added to the proceeding pursuant to an Initial Determination by the Administrative Law Judge (ALJ) supervising the Investigation following a motion brought by the Company on August 6, 1998 to add these respondents: Actima Technology Corp., ASUSTek Computer, Inc., Behavior Tech Computer Corp., Delta Electronics, Inc. Momitsu Multi Media Technologies, Pan-International Industrial Corp. and Ultima Electronics Corp. On August 28, 1998, the ALJ entered an Initial Determination that the investigation be terminated as to respondent UMC. On September 4, 1998, the Company filed a petition with the Commission for review of the Initial Determination. On October 7, 1998, the Commission reversed the Initial Determination of the ALJ as the Commission determined that the Company's complaint against UMC does state an unfair trade practices claim under Section 337 of the Tariff Act. On December 23, 1998, the ALJ issued another Initial Determination terminating the investigation as to respondent UMC for a second time. On December 31, 1998, the Company filed a petition with the Commission for review of the Initial Determination. On February 3, 1999, the Commission reversed the Initial Determination of the ALJ for a second time on the grounds that the Company's complaint against UMC does state an unfair trade practices claim under Section 337 of the Tariff Act. On May 10, 1999, the ALJ issued another Initial Determination terminating the investigation as to respondent UMC for a third time, finding that UMC's activities were licensed. On May 17, 1999, the Company filed a petition with the Commission for review of the Initial Determination and on June 28, 1999, the Commission determined to review the Initial Determination. Trial before the ALJ as to all respondents except UMC commenced on January 11, 1999 and concluded on January 28, 1999. On May 14, 1999, the ALJ entered an Initial Determination that no unfair trade practices were committed by Mediatek under Section 337 of the Tariff Act. On May 24, 1999, the Company filed a petition requesting the Commission to review the Initial Determination and on June 28, 1999 the Commission determined to review it. On September 27, 1999, the Commission affirmed the ALJ's finding that there were no unfair trade practices committed by MediaTek under Section 337 of the Tariff Act as the Commission determined that there was no infringement of the Company's US Patent No. 5,581,715. On this same date, the Commission also reversed the ALJ's findings that the Company's patent was invalid and unenforceable and held that the Company's US Patent No. 5,581,715 was valid and enforceable. The Commission took no position on the ALJ's Initial Determination terminating UMC from the investigation. On February 24, 2000, the Company appealed the Commission's ruling that no unfair trade practices were committed by MediaTek under Section 337 of the Tariff Act to the Federal Circuit Court of Appeals. No decision is expected to be rendered by the Federal Circuit of Appeals for twelve to eighteen months from the time of appeal. In connection with this proceeding, the Company will continue to incur legal fees and other expenses. If any of the above pending actions with respect to UMC and MediaTek are decided adversely to the Company, it would likely have a material adverse affect on the Company's financial condition and results of operations. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed as part of this report: Exhibit Number Exhibit Title ------ ------------- 27.1 Financial Data Schedule (b) Reports on Form 8-K: The Company filed no reports on Form 8-K during the quarter ended December 31, 2000 30 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. OAK TECHNOLOGY, INC. -------------------- (Registrant) Date: February 14, 2001 /s/ JOHN S. EDMUNDS ----------------------------- John S. Edmunds Vice-President Finance Chief Financial Officer (Principal Financial and Accounting Officer) 31 Exhibit Index
Exhibit Number Description ------ ----------- 27.1 Financial Data Schedule
32 EX-27.1 2 0002.txt FINANCIAL DATA SCHEDULE
5 1,000 6-MOS JUN-30-2001 JUL-01-2000 DEC-31-2000 25,386 99,228 31,596 1,038 22,361 181,813 57,032 36,168 240,947 35,223 0 0 0 57 204,535 240,947 111,621 111,621 57,366 57,366 53,995 0 58 4,892 783 4,109 0 0 0 4,109 0.08 0.07
-----END PRIVACY-ENHANCED MESSAGE-----