0001056359-01-500025.txt : 20011009
0001056359-01-500025.hdr.sgml : 20011009
ACCESSION NUMBER: 0001056359-01-500025
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 20010630
FILED AS OF DATE: 20010926
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: OAK TECHNOLOGY INC
CENTRAL INDEX KEY: 0000824225
STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674]
IRS NUMBER: 770161486
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-25298
FILM NUMBER: 1744718
BUSINESS ADDRESS:
STREET 1: 139 KIFER CT
CITY: SUNNYVALE
STATE: CA
ZIP: 94086
BUSINESS PHONE: 4087370888
MAIL ADDRESS:
STREET 1: 139 KIFER COURT
CITY: SUNNYVALE
STATE: CA
ZIP: 94086
10-K
1
oak10k2001e.txt
OAK TECHNOLOGY 2001 FORM 10-K
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For The Fiscal Year Ended June 30, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________ to ______________
COMMISSION FILE NO. 0-25298
OAK TECHNOLOGY, INC.
(Exact name of Registrant as specified in its charter)
Delaware 77-0161486
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
139 Kifer Court, Sunnyvale, California 94086
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 737-0888
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value
Preferred Stock Purchase Rights
----------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the Registrant was required
to file such reports, and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference to Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $320,778,877 as of September 21, 2001, based upon
the closing price of the Registrant's Common Stock on the Nasdaq National Market
reported for September 21, 2001. Shares of Common Stock held by each executive
officer and Director and by each person who beneficially owns more than 5% of
the outstanding Common Stock have been excluded in that such persons may under
certain circumstances be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination of affiliate
status for any other purpose.
54,692,169 shares of the Registrant's $.001 par value Common Stock were
outstanding at September 21, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated by reference into Part III of this Annual Report
on Form 10-K portions of its Proxy Statement for the 2001 Annual Meeting of
Stockholders.
================================================================================
OAK TECHNOLOGY, INC.
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED JUNE 30, 2001
Page
----
PART I
Item 1. Business.......................................................... 3
Item 2. Properties........................................................ 17
Item 3. Legal Proceedings................................................. 17
Item 4. Submission of Matters to a Vote of Security Holders............... 20
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters......................................................... 21
Item 6. Selected Financial Data........................................... 22
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........ 41
Item 8. Financial Statements and Supplementary Data....................... 41
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................ 41
PART III
Item 10. Directors and Executive Officers of the Registrant................ 42
Item 11. Executive Compensation............................................ 42
Item 12. Security Ownership of Certain Beneficial Owners and Management.... 42
Item 13. Certain Relationships and Related Transactions.................... 42
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.. 43
Signatures................................................................. 82
2
PART I
ITEM 1. BUSINESS
Except for the historical financial information contained herein, the matters
discussed in this Annual Report on Form 10-K may be considered "forward-looking"
statements within the meaning of Section 27a of the Securities Act of 1933, as
amended, and Section 21e of the Securities Exchange Act of 1934, as amended.
Such statements include declarations regarding the intent, belief or current
expectations of Oak Technology, Inc. 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. The important factors that could
cause actual results to differ materially from those indicated include, but are
not limited to, those are discussed in the section titled "Factors That May
Affect Future Results" in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations". Other risks may also be
identified from time to time in our reports and registration statements filed
with the Securities and Exchange Commission.
General
Oak Technology, Inc. and its subsidiaries ("Oak" or the "Company")
design, develop and market high performance integrated semiconductors, software
and platform solutions to original equipment manufacturers ("OEMs") worldwide
that serve the optical storage, and digital imaging equipment markets. Our
products consist primarily of integrated circuits and supporting software and
firmware, all designed to store and distribute digital content, thereby enabling
our OEM customers to deliver cost-effective, powerful systems to the end user
for the home and enterprise. We contract with independent foundries to
manufacture all of our products, enabling us to focus on our design strengths,
minimize fixed costs and capital expenditures, and gain access to advanced
manufacturing facilities. Oak's mission is to be a leading solution provider for
the storage and distribution of digital content.
Oak's operations are organized along its two market-focused groups:
the Optical Storage Group and the Imaging Group. The Imaging Group is
comprised of the combination of our Xionics Document Technologies, Inc. and
Pixel Magic subsidiaries, serving the digital imaging equipment market.
Oak was originally incorporated in California in 1987 and was
reincorporated in Delaware in 1994. Our executive offices and principal
marketing, sales and product development operations are located at 139 Kifer
Court, Sunnyvale, California 94086, telephone number (408) 737-0888. In
addition, we have facilities in: Woburn, Massachusetts; San Diego, California;
Austin, Texas; Tucson, Arizona; Taipei, Taiwan; Yokohama City, Kanagawa and
Osaka, Japan; Seoul, Korea; Manchester, England; Dortmund, Germany; and
Shenzhen, China.
Historical Corporate Structure
Oak's earlier operations were structured along three market-focused
groups: the Optical Storage Group, a Consumer Group and the Imaging Group. In
1998, we discontinued product development and marketing efforts in our PC audio
and 3D graphics businesses and disbanded the Consumer Group.
In July 1998, Oak acquired ViewPoint Technology, Inc., a privately held
company that was developing solutions for the CD-RW ("Read-Writable") drive
market. ViewPoint had developed a controller that supports high encoding speeds
for CD-RW drives. The ViewPoint acquisition provided Oak with a controller to
complement its expertise in the block decoder area, and provided a springboard
for Oak's next generation CD-RW drives.
In August 1998, Oak acquired Xerographic Laser Images Corporation
("XLI"), a provider of print quality enhancement technology for the digital
imaging equipment markets. XLI was operated as a division of Pixel Magic, a
3
wholly-owned subsidiary of Oak, and served to leverage Pixel Magic's position in
the digital equipment market by broadening its expertise in resolution
enhancement technology ("RET").
In July 1999, Oak acquired Xionics Document Technologies, Inc., which
became a wholly owned subsidiary of Oak following the merger. Xionics was
engaged in the design, development and marketing of innovative software and
silicon solutions for printing, scanning, copying, processing and transmitting
digital documents to computer peripheral devices that perform document imaging
functions. These devices include printers, copiers, scanners, fax machines and
multifunction peripherals (MFPs) that perform a combination of these imaging
functions. Oak consolidated its Pixel Magic subsidiary with Xionics to form the
Imaging Group and moved the combined entity to Woburn, Massachusetts in August
2000.
In April 2000, Oak acquired TCD Labs, Inc. This acquisition enabled us
to offer complete, integrated, retail-ready hardware/software solutions to PC
and CD-RW drive makers, and to leverage TCD's enabling software for compact disk
recording technology, allowing consumers to take full advantage of the data
capturing, sharing and archiving capabilities of the CD-RW format. As a result
of the TCD acquisition, Oak has formed an Optical Media Software Group within
our Optical Group.
In fiscal 2000, Oak allocated $25.0 million for venture investments.
Oak did not establish a separate legal entity or raise any outside capital in
connection with this internal venture fund. The primary purpose of this fund is
to invest in companies with developing technologies that leverage Oak's core
optical storage and imaging businesses. We intend to use the venture fund to
make investments that are focused on technologies that will bring together
audio, video, and data content for computing and consumer-electronics
applications and consumer Internet appliances. However, we may also make
investments outside of these focused areas. To date, we have not made any
investments utilizing the funds allocated in the venture fund.
Recent Acquisitions
In the fourth quarter of fiscal 2001, Oak purchased all of the
outstanding shares of Accel Technology Ltd., a design engineering firm based in
Osaka, Japan, pursuant to the terms of a share purchase agreement. Accel focuses
on turnkey CD-RW and DVD Recordable drives for PC and consumer use. We organized
Accel as a division within our Optical Storage Group.
Target Markets and Products
Currently, our target markets include optical storage and digital
imaging hardware and software, which correspond to our Optical Storage Group and
Imaging Group, respectively. Our business strategy and product offerings
(current and planned for fiscal 2002) for each of the target market segments are
described below.
OPTICAL STORAGE
Business Overview and Strategy
Multimedia computer applications have driven the demand for low-cost,
high-density storage mechanisms in recent years. The adoption of CD-ROM
technology as the mainstream optical storage medium on the desktop was fueled in
large measure by data-intensive, graphics/audio/video-rich applications that
required a universal, high-density storage medium. Our Optical Storage Group is
a leading provider of controllers to the optical storage market and has shipped
more than 144 million controllers to date. As a pioneer in this field with the
first IDE/ATAPI CD-ROM controller, we have focused our recent product
development efforts on emerging segments of this industry, namely CD-RW drives
and CD-RW drives with DVD read capability, commonly known as Combo drives. Our
Optical Storage Group currently has solutions for CD-RW and Combo drives. Its
core competencies include IDE and alternative interfaces, error correction code
("ECC"), DSP/servo control, disc write encoding,
4
wobble servo, write strategy, system design, and system software and firmware.
OEM customers for our optical storage products in fiscal 2001 included LG
Electronics, Samsung, Yamaha and Mitsumi.
The optical storage market is witnessing an accelerated adoption of
CD-RW drives, driven by the increased popularity of customized audio CD
recordings and the widespread availability of MP3 audio titles on the Internet.
We have prepared for these market transitions by focusing our development
efforts on the CD-RW and Combo technologies, which provide us with the
opportunity to offer valuable innovation to our customers in a growing market
faced with technological challenges. Our strategy for increasing the market
penetration of our CD-RW and "Combo" products and technologies includes
technological innovation, protection of intellectual property, and aggressive
marketing/pricing programs. We may also enter into strategic alliances with
drive manufacturers and technology partners.
The CD-RW market has picked up considerable momentum as more consumers
discover the advantages of this writable and removable medium. Re-writable CD
drives are quickly emerging as the preferred optical storage device,
particularly for the home PC market. Major applications include audio CD
generation, archival and data interchange. Increased consumer demand and the
widespread adoption of CD-RW drives by the PC OEM manufacturers over the next
year are expected to contribute to significant ongoing growth in the CD-RW
market. The anticipated industry adoption of Microsoft's Mount Rainier standard,
which will enable native operating systems to support data on CD-RW media, and
in effect replace the floppy drive, is expected to further accelerate the growth
of the CD-RW market.
We expect that ongoing functional integration and continuing
improvements in performance, particularly for the writing speeds, will play an
important role in cost reduction and consumer acceptance of the CD-RW drives,
thereby fueling its mass adoption by PC OEMs. To this end, we recently announced
the OTI-9796 and 9797 controllers. Each offers highly integrated and cost
effective solutions for high performance CD-RW drives. The OTI 9797 has 24X
CD-RW write speeds as well as 40X CD-ROM read speeds, and provides an upgrade
path to 32X recording speeds. The OTI-9796 is a 16X controller chip
incorporating Oak's ExacLink(TM) Buffer Under-run protection technology. The
OTI-9796, combined with the OTI-9073 Analog Front End signal processor, creates
a low power, low cost two chip solution for CD-RW applications. As a result of
our recent acquisition of Accel Technology, we are able to provide our customers
with a faster time to market capability, through the availability of
comprehensive reference designs based on the OTI-9796 and OTI-9073, including
the full firmware needed to build a CD-RW drive. We believe that this capability
to offer a complete solution places Oak in a unique competitive position and
offers a valuable time-to-market advantage to its customers. Both the OTI-9796
and OTI-9073 are currently in volume production.
We are also focusing our efforts on the OTI-9897 controller chip, a
fully integrated controller chip for use in Combo drives. The Combo drive offers
wide functionality to the end user and could become a mainstream product,
particularly for the notebook PC markets, if the cost challenges are
successfully addressed by the drive manufacturers. We believe the Combo drive
will facilitate the evolution from CD formats to DVD and DVD recordable formats.
As part of this evolution, the DVD writable market began to emerge in calendar
year 2001. We have joined the Digital Versatile Disk plus Re-Writable (DVD+RW)
Alliance to contribute to the development and promotion of a universally
compatible re-writable DVD format. We intend to develop DVD recordable solutions
that will support all major DVD recording formats.
The following table shows our current mix of optical storage products
for fiscal 2001. All products in the table are in production except the 9797
which is sampling. In addition, we are currently developing several
next-generation products, which are generally not disclosed until the products
have been developed.
5
Optical Storage Products
----------------- ---------------------------------------------------------- --------- --------- -----------
DVD
Write Read Read
Name Description Speed Speed Speed
----------------- ---------------------------------------------------------- --------- --------- -----------
OTI-9790 Oak's three-in-one integrated CD-RW controller. 8X 32X
Integrates encoder/decoder, DSP, servo, write strategy
and ATIP demodulator
----------------- ---------------------------------------------------------- --------- --------- -----------
OTI-9795 The first integrated 16X controller introduced into 16X 40X
the market, having the same features as the OTI-9790
plus enhanced audio and SDRAM support
----------------- ---------------------------------------------------------- --------- --------- -----------
OTI-9796 Similar to 9795 but also exact link and higher write 20X 40X
speed
----------------- ---------------------------------------------------------- --------- --------- -----------
OTI-9797 Similar to 9796 but with Mt. Rainier and higher speed 24X 40X
----------------- ---------------------------------------------------------- --------- --------- -----------
OTI-9897 Oak's first "Combo" controller 16X 40X 8X
----------------- ---------------------------------------------------------- --------- --------- -----------
OTI-9071 Oak's first analog front end for CD-RW applications 12X 32X
----------------- ---------------------------------------------------------- --------- --------- -----------
OTI-9073 Similar to 9071 but with higher write and read speed 16X 40X
----------------- ---------------------------------------------------------- --------- --------- -----------
Our Optical Media Software Group, formed at the end of the last fiscal
year as a result of the acquisition of TCD Labs, recently introduced its
SimpliCD(R) optical storage recording software. SimpliCD is designed to simplify
the burning of CDs from a Windows desktop utilizing a media player. The Optical
Media Software Group is Oak's first entry into CD-RW software as a product
offering, and represents an instrumental component of our CD-RW strategy. The
addition of SimpliCD to the Optical Storage product line allows Oak to provide
an integrated, retail-ready software solution to both drive makers and PC OEMs.
SimpliCD uses a CD-RW drive to create or copy consumer audio, video or
computer-data CDs, allowing Oak to leverage the software in compact disk
recording technology, and allowing our consumers to take full advantage of the
data capturing, sharing and archiving capabilities of the CD-RW format.
SimpliCD's drag-and-drop user interface is designed to provide ease of recording
capability in all Microsoft Windows-based environments, and is universally
compatible with all CD-RW drives and controllers.
IMAGING GROUP
Business Overview and Strategy
The Imaging Group is a leading provider of application-specific
integrated circuits and IC-based controller technology for the digital imaging
market, and digital page processing software and technology for the office
market, enabling users to print, scan, copy, process and transmit documents to
computer peripherals that perform document imaging functions. The Imaging Group
is located in Woburn, Massachusetts.
For hardware solutions, the Imaging Group designs high-performance,
full-featured compression CODECS, imaging DSPs, resolution enhancement solutions
and embedded controller board solutions for digital copiers, printers, scanners,
fax machines and multifunction peripherals ("MFPs"). For software solutions, Oak
offers integrated, modular embedded software products, along with firmware and
silicon technology products, intended to provide the performance, output quality
and network connectivity required for today's peripheral market. In addition, we
provide complementary personal computer software products, in particular printer
drivers, and standards-based technology to enable original equipment
manufacturers ("OEMs") of peripherals to design and develop differentiated
products.
Core competencies include strong expertise in color/monochrome image
processing pipelines, dot modulation and resolution enhancement technology, and
high-speed compression/decompression and systems such as its JBIG/JPEG
compression CODECS, expertise in high-speed imaging DSPs, resolution enhancement
6
technology ("RET") products and IPS, a modular, scalable, layered software and
hardware architecture which provides processing and control of document imaging
peripherals based on our expertise in the development of page description
language interpreters. We offer a broad suite of products, including integrated
semiconductors and embedded controller-board solutions, to major OEMs in the
digital imaging equipment market to power a variety of digital imaging systems,
such as digital laser copiers and printers (monochrome and color) and
copycentric, faxcentric and printcentric MFPs. Our OEM customers for these
products during fiscal 2001 included Canon, Fujitsu, Fuji-Xerox,
Hewlett-Packard, Kodak, Matsushita, Olivetti, IBM, QMS, Ricoh, Samsung, Sanyo
Seiko Epson, Sharp, Toshiba and Xerox.
Fundamental shifts are presently occurring in the digital imaging
market. These changes include distributed printing, the emergence of
multifunction peripherals, as well as PC less printing and wireless printing due
to emergence of digital hand held devices and the use of the Internet as a key
communications vehicle.
Although historically targeting the mid-range of the digital imaging
market, we are now also targeting high-volume opportunities, such as the low to
mid-range laser and inkjet products (including color systems). In fiscal 2001,
Oak introduced the PM 44i iDSP image processor that utilizes a parallel
processing architecture to provide the low price and high performance of a fixed
function ASIC solution, with the flexibility of a programmable DSP solution. A
new product initiative for fiscal for fiscal 2002 is the Quatro architecture, a
System On Chip (SOC) solution which combines the power of a RISC CPU core with
Oak's advanced DSP core to provide highly flexible SOC solutions for imaging and
printing devices. For fiscal 2002, the Imaging Group will continue its efforts
to develop new generations of products combining its software and silicon
expertise to offer solutions for OEMs in the digital imaging market.
Digital Imaging Equipment Products
ASICS
Product Description Status
------- ----------- ------
PM-1V High-speed bitonal image processor providing single-pass compression or In production
decompression of image data
PM-2m 40 MHz bitonal JBIG codec with multitasking capability. In production
Provides single pass compression or decompression,
as well as scaling and rotation of bitonal image data
PM-22 75 MHz bitonal JBIG codec with a 32-bit I/O. Provides In production
single pass compression or decompression, as
well as scaling and rotation of bi-tonal image data
PM-36 A fixed function JPEG compression and decompression processor with a Sampling
sustained data rate of up to 75 MHz
PM-44+ A programmable 85 MHz image processor with four data paths In production
PM-44i A programmable 125 MHz image processor with four data paths and In production
integrated memory
PM-48 A programmable 125 MHz image processor with eight data paths In production
PM-2050, Family of image enhancement processors and pulse width and pulse In production
2060i, PM 1075 position modulators for laser copiers, printers and MFPs
7
Software
IPS.............. A software developer package that contains page rendering
application components and supporting embedded system
service components needed to build printer controllers. The
package includes: IPS5e, IPS/5c, IPS/XL IPS/PS2, IPS/PS3.
Printer Drivers.. Printer drivers for the PCLXL, PCL5E and PostScript Levels 2
and 3 page printing environments for the Microsoft NT and
Windows operating systems.
SPS.............. Software which provides embedded networking capabilities for
printers, copiers, scanners and MFPs.
Services
The Imaging Group assists OEMs in deploying Oak products and technology
in their devices by providing engineering services. This may include complete
controller design as well as custom engineering for vendor-specific features
that complement our standard technology. We also offer driver development and
customization. In addition, we maintain a network of third-party development
partners to give the Imaging Group and OEM customers the option of using an
independent development partner closely allied with the Imaging Group for
development and integration services.
Manufacturing Services. For OEMs wishing to procure a total turnkey
----------------------
controller solution, the Imaging Group from time to time provides manufacturing
management services. This includes complete project management of the design,
development, and manufacturing start-up, as well as management of the ongoing
product of the OEM's controller board by a third-party manufacturing contractor.
OEM Services. The Imaging Group's OEM Services group provides customer
------------
support in every aspect of development, training, and maintenance. Software
maintenance service is provided on a contract basis, and includes updates of the
licensed software, if any, along with support in the form of telephonic and
electronic mail response to customer questions. Engineering support services, in
which the Imaging Group's engineers perform or assist with specific engineering
task for OEMs, are available for a fee either on a project specific or general
as needed basis.
OAK'S MANUFACTURING AND DESIGN METHODOLOGY
Manufacturing
We contract with independent foundries to manufacture all of our
products, enabling us to focus on our design strengths, minimize fixed costs and
capital expenditures and gain access to advanced manufacturing facilities. We
depend on our foundries to allocate to us a portion of their foundry capacity
sufficient to meet our needs to produce products of acceptable quality and with
acceptable manufacturing yields and to deliver products to us in a timely
manner. These foundries fabricate products for other companies and some
manufacture products of their own design. Shipments of our products could be
delayed if:
o we lose any of these foundries as a supplier,
o we are unable, in a period of increased demand for our products,
to expand the foundry capacity of our current suppliers or qualify
other wafer manufacturers for additional foundry capacity,
o we are unable to obtain timely and adequate deliveries from our
current or future suppliers; or
o any other circumstances arise that would require us to seek
alternative sources of supply.
8
Delays in shipments could damage relationships with our current and
prospective customers, provide an advantage to our competitors and have a
material adverse effect on our business, financial condition and results of
operations. Most of our devices are currently fabricated using complementary
metal oxide semiconductor ("CMOS") process technology from 0.5 micron, 0.35
micron and 0.25 micron feature sizes. In addition, we are currently designing
products for 0.18 micron feature sizes. All of our semiconductor products are
assembled and tested by independent subcontractors.
Our primary supplier of wafers during fiscal year 2001 was TSMC. In the
past, we had used wafer fabrication facilities at Chartered and NEC. The
foundries generally are not obligated to supply products to us for any specific
period, in any specific quantity or at a specific price, except as may be
provided in a particular purchase order. However, in order to obtain an adequate
supply of wafers, especially wafers manufactured using advanced process
techniques, we have entered into and will continue to consider various possible
transactions, including various "take or pay" contracts, that commit us to
purchase specified quantities of wafers over extended periods.
Our reliance on independent manufacturers and third party assembly and
testing vendors involves a number of additional risks, including the
unavailability of, or interruption in access to, certain process technologies
and reduced control over delivery schedules, quality assurance and costs. In
addition, as a result of our dependence on foreign subcontractors, we are
subject to the risks of conducting business internationally, including foreign
government regulation and general political risks, such as political and
economic instability, potential hostilities, changes in diplomatic and trade
relationships, currency fluctuations, unexpected changes in, or imposition of,
regulatory requirements, tariffs, import and export restrictions, and other
barriers and restrictions, potentially adverse tax consequences, the burdens of
complying with a variety of foreign laws and other factors beyond our control.
Substantially all of our agreements with offshore wafer fabrication and assembly
facilities provide for pricing and payment in U.S. dollars.
The design and development of semiconductors is a highly complex and
precise process. Additionally, our products are particularly complex and
difficult to manufacture. Minute levels of contaminants in the manufacturing
environment, defects in the masks used to print circuits on a wafer,
difficulties in the fabrication process or other factors can cause a substantial
percentage of wafers to be rejected or a significant number of die on each wafer
to be nonfunctional. Many of these problems are difficult to diagnose, time
consuming and expensive to remedy, all of which can affect our time to market
with a particular product. Our foundries may experience irregularities or
adverse yield fluctuations in their manufacturing processes. If we or our
foundries experience any yield or other production problems or shortages of
supply, our business could suffer.
Design Methodology
Our products compete in markets that are characterized by rapidly
developing technology and evolving industry standards. We address these issues
with a design environment based on workstations, dedicated product simulators,
system simulation with hardware and software modeling, and use of a high level
design description language in order to define, develop and deliver new and
enhanced products more rapidly. Our engineering and design capabilities are
critical to our future performance. We have invested regularly in new advanced
equipment and software tools in an effort to keep these tools updated with the
latest technology. In addition to the Imaging Group design facilities in Woburn,
Massachusetts and the Optical Storage Group design facilities in our corporate
headquarters in Sunnyvale, California, we have established Design Centers in
Austin, Texas; San Diego, California; Tucson, Arizona; Dortmund, Germany;
Manchester, England; Taipei, Taiwan R.O.C and Osaka, Japan.
Oak's library of core cells is key to its ability to reduce the time
needed to design new products. Examples of core cells include a CD-ROM decoder
core, CD-R/W encoder/decoder core, CD-DSP & CD-Servo core, a parallel,
multi-pipelined microprocessor core, MPEG2 core, DVD-DSP core, a 0.5, 0.35, 0.25
and 0.18 micron memory compiler and a 0.5, 0.35, 0.25, and 0.18 micron I/O
library. Design methodology, including equipment and software tools, is a
critical factor in our ability to successfully develop technology and products.
However, we may not be able to obtain the equipment, software tools and other
resources needed to develop technically advanced products in a timely manner.
9
Marketing and Customers
From its inception, Oak has been committed to a worldwide marketing
strategy. We utilize a direct sales force in the United States, Germany, Japan,
Taiwan and Korea and a worldwide network of manufacturers' representatives and
distributors in North America, Europe and Asia. While customers around the world
have many needs in common, each region has its own requirements. In order to
support customers in key geographic markets, we have established sales and
support offices in Woburn, Massachusetts; Yokohama City Kanagawa, Japan; Taipei,
Taiwan, Seoul, Korea and Shenzhen, China, in addition to our corporate
headquarters in Sunnyvale, California. We believe that sales and technical
support personnel based in our regional offices understand the technical needs,
business philosophy and culture of their respective customers. On-site personnel
are trained to respond to customer needs efficiently and effectively.
We believe that customer service and technical support are important
competitive factors in the optical storage and digital imaging markets. We
provide technical support to our customers worldwide. With a global presence, we
are able to provide prompt technical support to our customers. In addition, the
Company's representatives travel frequently to customer sites as part of the
product development cycle. We provide several other types of technical support,
including software distribution through an electronic bulletin board, evaluation
boards, product demonstration software, engineering design kits and application
notes. We work closely with customers in qualification of our products and
providing needed quality and reliability data. In addition, we make the latest
revision of our software available to our customers and can customize our
software to a customer's specific requirements.
Sales of our products are made pursuant to purchase orders and
long-term agreements covering licensing, maintenance, engineering services,
royalties and other fees. Purchase orders are subject to price renegotiations
and to changes in quantities of products and delivery schedules in order to
reflect changes in the customers' requirements. In addition, in certain
circumstances, orders may be canceled at the discretion of the buyer without
penalty, resulting in potential inventory reserves for Oak. Our business,
consistent with that of others in the semiconductor industry, is generally
characterized by short lead-time orders. Actual shipments of our products depend
on the manufacturing capacity of Oak's foundries. Therefore, as foundry capacity
tightens, we may not be able to meet the customer's requested delivery date or
we may have to allocate the quantity of available products among our customers.
Due to our dependence on third party manufacturing capacity, we believe that
backlog at any particular date may not be indicative of actual net revenues for
any future period.
Sales of CD-RW and "Combo" controller products comprised 66%, 42%, and
65% of Oak's net revenues in fiscal 2001, 2000, and 1999, respectively. Sales of
CD-RW and Combo controller products are expected to continue to account for a
majority of our total revenues for the foreseeable future. Sales of our Imaging
Group products accounted for 34% of our net revenue in fiscal 2001. Although we
have recently introduced several new products in an attempt to diversify our
product and market base, we cannot predict whether these products will be
successfully designed, accepted by our customers, and brought to production or
whether our customer's products will be accepted in the marketplace.
A substantial majority of our revenues in fiscal 2001, 2000, and 1999
were derived outside of the United States, primarily in Asia. Including the
results of the Xionics acquisition beginning in fiscal 2000, the geographical
areas accounting for our net revenues in fiscal 2001, 2000, and 1999 are as
follows:
10
June 30,
-------------------------------
2001 2000 1999
---- ---- ----
Korea........................ 37% 34% 10%
Japan........................ 40% 32% 52%
North America................ 16% 25% 14%
Other Asia................... 1% 4% 10%
Europe....................... 1% 4% 11%
Taiwan....................... 5% 1% 3%
---- ---- ----
100% 100% 100%
==== ==== ====
Accordingly, we are subject to the risks of conducting business outside
of the United States. These risks include unexpected changes in, or impositions
of, legislative or regulatory requirements, delays resulting from difficulty in
obtaining export licenses for certain technology, tariffs, quotas and other
trade barriers and restrictions, longer payment cycles, greater difficulty in
accounts receivable collection, potentially adverse taxes, the burdens of
complying with a variety of foreign laws and other factors beyond our control.
We are also subject to general geopolitical risks in connection with our
international operations, such as political, social and economic instability,
potential hostilities and changes in diplomatic and trade relationships. In
addition, the laws of certain foreign countries in which our products are or may
be developed, manufactured or sold, including various countries in Asia, may not
protect our products or intellectual property rights to the same extent as do
the laws of the United States. This increases the likelihood of piracy of our
technology and products. Although most of our foreign sales are negotiated in
U.S. dollars, invoicing is often done in local currency. As a result, we may be
subject to the risks of currency fluctuations. One or more of the above factors
may adversely affect our operations in the future or require us to modify our
current business practices.
A limited number of customers historically have accounted for a
substantial portion of Oak's net revenues. In fiscal 2001, 2000, and 1999, sales
to our top ten customers accounted for approximately 82%, 78%, and 70%,
respectively, of our net revenues. In fiscal 2001, LG Electronics accounted for
31% of total net revenues while in fiscal 2000, LG Electronics accounted for 26%
of our net revenues, and Hewlett-Packard Company accounted for 16%. In fiscal
1999, Yamaha Corporation accounted for 17% and Mitsumi accounted for 10% of net
revenues.
We expect that sales to a limited number of customers will continue to
account for a substantial portion of our net revenues for the foreseeable
future. We do not have long-term purchase agreements with any of our customers.
Customers generally purchase our products subject to cancelable short-term
purchase orders. We cannot predict whether our current customers will continue
to place orders or whether existing orders will be canceled. We have experienced
significant changes from year to year in the composition of our major customer
base and believe this pattern will continue. Our revenues from the Optical
Storage Group will also depend on whether our OEM customers are successful in
selling their optical drives both in aftermarket and to PC OEM customers. In
part, to address this risk, we are continuing our efforts to increase
penetration in existing large customers as well as engage new large OEM
customers. For fiscal 2002 we have commitments and product plans from existing
and new large customers to add volume so that overall, we currently expect our
Optical Storage Group to have revenues in excess of $100 million and to have as
many as four customers, including LG Electronics, who will each represent 10% or
more of our optical storage revenues. Some of our customers have chosen, and may
continue to choose, to award their design wins and business on a project by
project basis to different vendors. For instance, while we have design wins for
several projects at LG Electronics, and we expect that it will continue to be a
significant customer, due to competition among the drive manufacturers and
changes being made in sourcing chipsets, we currently expect that our revenue
from this customer will decline in fiscal 2002. The loss of, or a significant
reduction in, purchases or commitments by current major customers which is not
offset by corresponding increases from other current or future customers would
have a material adverse effect on our business, financial condition and results
of operations. If sales to current customers cease or are reduced, we may be
unable to obtain the orders from new customers necessary to offset any such
losses or reductions. Moreover, we may not be able to qualify our independent
foundries for potential new customers or do so in a timely manner.
11
We currently place non-cancelable orders to purchase our products from
independent foundries on an approximately three month rolling basis. Our
customers generally place purchase orders with us less than four weeks prior to
delivery that may be rescheduled or under certain circumstances may be canceled
without penalty. Consequently, if anticipated sales and shipments in any quarter
are rescheduled, canceled or do not occur as quickly as expected, expense and
inventory levels could be disproportionately high and our business, financial
condition and results of operations for that quarter or for the year would
suffer.
Competition
The optical storage and imaging markets in which we compete are
intensely competitive and are characterized by rapid technological change,
declining unit average selling price ("ASPs") and rapid product obsolescence. We
are currently experiencing intense competition in both the optical storage and
imaging markets, and expect competition to increase in the future from existing
competitors and from other companies that may enter our existing or future
markets with solutions that may be less costly or provide higher performance or
additional features. Our existing and potential competitors include many large
domestic and international companies that have substantially greater financial,
manufacturing, technical, marketing, distribution and other resources, broader
product lines and longer standing relationships with customers than we have. Our
competitors also include a number of emerging companies. Some of our principal
competitors in the optical storage market maintain their own semiconductor
foundries and may benefit from certain capacity, cost, quality control and
technological advantages. In general, we believe that our ability to compete
successfully depends on a number of factors, both within and outside of its
control, including:
o the price, quality and performance of our products and our customers'
products,
o the timing and success of new product introductions by us, our
customers and our competitors,
o the emergence of new industry standards,
o the development of technical innovations,
o the ability to obtain adequate foundry capacity and sources of raw
materials,
o the efficiency of production,
o the rate at which our customers design our products into their
products,
o the market acceptance of the products of our customers,
o the assertion of intellectual property rights and
o general market and economic conditions.
We cannot predict whether we will be able to compete successfully in
the future based on these, or other, factors.
The willingness of prospective customers to design Oak products into
their products depends, to a significant extent, upon our ability to have
product available at the appropriate market window, and to price our products at
a level that is cost effective for such customers. The markets for most of the
applications for our products, particularly the optical market, are
characterized by intense price competition. As the markets for our products
mature and competition increases, we anticipate that ASPs on our products will
decline. If we are unable to reduce our costs sufficiently to offset declines in
ASPs or are unable to successfully introduce new higher-performance products
with higher ASPs, our business, financial condition and result of operations
will be adversely affected. If we experience yield or other production problems,
or shortages of supply that increase our manufacturing costs, or fail to reduce
our manufacturing costs, the result could seriously harm our business.
12
Our current optical storage business is focused in the fast growing
CD-RW segment, where we currently participate with our high integration
controllers and analog front-end devices. Major competitors in the high
integration controller area include Sanyo, MediaTek and Ricoh, all established
suppliers in this market. Other competitors in this market include Cirrus Logic,
which offers a lower integration solution comprising only the ENDEC portion of
the functionality, and NEC, which offers an integrated Combo solution. In the
analog front-end market, the established competitors include MediaTek, AKM, Sony
Semiconductor and Rohm.
In the digital imaging market, our primary product offerings target the
niche, mid-range market and our merchant competition does not offer directly
competitive products. In some cases, the merchant competition offers a subset of
our product features. In other cases, the merchant competition offers a software
alternative to our hardware solution. Our competitors in the merchant market are
major semiconductor suppliers such as Conexant, Motorola and Texas Instruments.
However, we expect direct merchant competition in the niche, high-end digital
imaging equipment market to emerge in the near future. Despite this lack of
direct competition in the merchant market, we do experience competition with our
DSP, compression and resolution enhancement products from internal design groups
within our targeted customers, such as Xerox, HP, and Canon. As with the
merchant market, one of our strengths in competing with these internal design
teams comes from the breadth of the solutions we are able to provide. We must
continue to enhance and strengthen our software capabilities in order to compete
successfully in this market. As to the new lower-end of products we are
developing for the digital imaging equipment market, we expect greater direct
competition than we currently experience in the niche, high-end market.
In the market for embedded printer systems, we, through our Imaging
Group's IPS product line, have one primary competitor, Adobe Systems
Incorporated, which has significantly greater resources than we do. Adobe was
the developer of the PostScript page description language, which has a
significant brand name image. Adobe's change in its licensing practices to make
PostScript source code available to certain of its development partners may
enable Adobe to compete more effectively against us. A few other companies,
including Peerless Systems Corporation and Electronics for Imaging, Inc., offer
products and services that compete with our systems software and integrated
controller offerings. Our most significant competitor in the area of controller
design remains OEM's in-house development organizations. In addition, some large
OEMs develop their own proprietary PDL components as well.
In the market for printer driver software, we compete primarily with a
small number of companies, including Adobe and Software 2000 Limited, who also
offer such software. In addition, a few OEMs have their own internal driver
development capacity.
In the market for engineering services and manufacturing services, we
compete primarily with OEM's internal development and manufacturing groups, as
well as with third-party design houses, contract manufacturers and our
competitors in other markets.
Research and Development
We currently invest substantial resources in our product development
efforts. During fiscal 2001, 2000 and 1999, we spent approximately $50.6
million, $49.2 million and $46.2 million, respectively, on research and
development activities. We intend to continue to invest in the development of
products in each of our core technologies and in products that integrate our
core technologies.
Our performance strongly depends upon the successful development and
timely introduction of new products at competitive price and performance levels.
We cannot predict whether products currently under development or any other new
products will be successfully developed or will achieve market acceptance. If we
fail to introduce new products successfully or if our new products fail to
achieve market acceptance, our business, financial condition and results of
operations would be adversely affected. The success of new product introductions
is dependent on several factors, including recognition of market requirements,
product cost, timely completion and introduction of new product designs, quality
of new products and achievement of acceptable manufacturing yields from our
13
contract manufacturers. Due in part to the design complexity of our products, we
have in the past experienced delays in completing development and introduction
of new products. We may encounter similar delays in the development and
introduction of future products.
We may not be successful in identifying new product opportunities and
developing and bringing new products to market in a timely manner. In addition,
our products may not be selected for design into the products of our targeted
customers. Products or technologies developed by others may also render our
products or technologies obsolete or noncompetitive. The failure of our new
product development efforts or our failure to achieve market acceptance of our
new products would materially adverse affect our business, financial condition
and results of operations.
Proprietary Rights and Licenses
Our ability to compete is affected by our ability to protect our
proprietary information. We consider our technology to be proprietary and rely
on a combination of patents, trademarks, copyrights, trade secret laws,
confidentiality procedures and licensing arrangements to protect our
intellectual property rights. We currently have patents granted, patents
pending, patents in preparation in the United States, and international patents
pending. Oak's first patent was issued in 1996. Currently our patent position is
73 patents issued, 66 of which are issued in the United States, and 154 patent
applications on file, 142 of which are pending in the United States Patent and
Trademark Office. Accordingly, the duration of Oak's material patents are no
less than 12 years. We intend to seek additional international and United States
patents on our strategic technology. However, additional patents might not be
issued from our applications that are currently pending or being prepared. In
addition, we may not be issued additional patents in all countries where our
products can be sold. Any claims allowed from pending applications or
applications in preparation may not be of sufficient scope or strength to
provide meaningful protection or any commercial advantage to us. Our competitors
may also be able to design around our patents. There can be no assurance that
any patents we hold will not be challenged, invalidated or circumvented, or that
the rights granted thereunder will provide competitive advantages to us. An
action is currently pending in the Northern District of California seeking to
invalidate one of our patents relating to our optical storage products (See
Legal Proceedings).
Moreover, while we hold or have applied for patents relating to the
design of our products, our products are based in part on industry standards,
and we do not hold patents on such standards. The laws of certain foreign
countries in which our products are or may be manufactured or sold, including
various countries in Asia, may not protect our 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 our technology and products more likely. The steps
taken by Oak to protect its proprietary information may be inadequate to prevent
misappropriation of its technology. Our competitors may also independently
develop technologies that are substantially equivalent or superior to our
technology.
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights, which has resulted in significant,
often protracted and expensive litigation. Oak or its foundries may, from time
to time, be notified of claims that we may be infringing patents or other
intellectual property rights owned by third parties. We may, if it is necessary
or desirable, seek licenses under such patents or other intellectual property
rights. However, licenses that we seek may not be offered or the terms of any
offered licenses may not be acceptable to us. The failure to obtain a license
from a third party for technology used by us could cause us to incur substantial
liabilities and to suspend the manufacture of products or the use by our
foundries of processes requiring the technology.
Furthermore, Oak may initiate claims or litigation against third
parties for infringement of our proprietary rights or to establish the validity
of our proprietary rights. We may also be required under a contractual
obligation to defend our customers against claims by third parties that the use
of our products infringe a third party's proprietary rights. Oak has
historically indemnified its customers for certain costs and damages of patent
infringement in circumstances where an Oak 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 Oak products
14
with products of others or where infringement arises based on modifications made
by the customer to Oak's products. In January 2001, Samsung was notified by
Pitney Bowes that its use of Oak's RET technology infringed Pitney Bowes U.S.
Patent No. 4,386,272. Oak is defending Samsung against this allegation of
infringement pursuant to its indemnification obligation under an earlier license
agreement between Samsung and XLI, a subsidiary of Oak. This indemnification
practice could have a material adverse effect on our results of operations.
Litigation by or against Oak could result in significant expense to Oak
and divert the efforts of our technical and management personnel, whether or not
such litigation results in a favorable determination for us. In the event of an
adverse result in any such litigation, we 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 we would be successful in such development or that such
licenses would be available on reasonable terms, or at all, and any such
development or license could require expenditures by Oak of substantial time and
other resources. Patent disputes in the semiconductor industry have often been
settled through cross-licensing arrangements. Even though we have grown and
continue to grow our patent portfolio, we may not be able to settle an alleged
patent infringement claim through a cross-licensing arrangement. If a successful
claim is made against Oak or its customers and a license is not made available
to Oak on commercially reasonable terms or we are required to pay substantial
damages or awards, our business, financial condition and results of operations
would be materially adversely affected.
We generally enter into confidentiality agreements with our employees
and confidentiality and license agreements with our customers and potential
customers. We also limit access to and distribution of the source and object
code of our software and other proprietary information. Under some
circumstances, however, we grant licenses that give our customers limited access
to the source code of our software which increases the likelihood of
misappropriation or misuse of our technology. Accordingly, despite precautions
taken by Oak, it may be possible for unauthorized third parties to copy certain
portions of our technology or to obtain and use information that we regard as
proprietary. The steps taken by Oak may not be adequate to prevent
misappropriation of its technology or to provide an adequate remedy in the event
of a breach or misappropriation by others.
We have licensed technology from third parties for use in our optical
storage and digital imaging equipment business. Under these licenses, we are
required to fulfill confidentiality obligations and in certain cases pay
royalties. Some of our products require that certain copy protection software or
other software be obtained if the products are to be marketable and exportable.
Should we lose our rights to or be unable to obtain the necessary copy
protection software, we would be unable to sell and market certain of our
optical storage products geared for the DVD market.
We have also entered into a number of joint development and supply
arrangements under which we jointly develop a product with another company or
contract with another company to develop a product or component and then
purchase the product or component from that company for resale with our other
products. The terms of these arrangements may require us to defend and indemnify
another company using our technology in the event claims are asserted that the
technology infringes the rights of a third party. In addition, we have on
occasion purchased off the shelf products to resell bundled with our own
product. At times it is necessary or desirable for us to seek additional
licenses to intellectual property rights held by third parties or purchase
products manufactured or sold by third parties with respect to some or all of
our product offerings. These licenses or purchases may not be available on terms
acceptable to us, if at all. If we are unable to enter such license arrangements
on acceptable terms or to maintain our current licenses on acceptable terms, our
business, financial condition and results of operations could be materially
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Oak May Be Unable to Protect Its
Intellectual Property and Proprietary Rights" and "Oak May Be Unable to Obtain
Third Party Intellectual Property Rights and/or May Be Liable for Significant
Damages" below.
15
Management
The executive officers of Oak are elected by and serve at the
discretion of the Board of Directors. As of August 15, 2001, Oak's executive
officers were as follows:
Name Age Position
---- --- --------
Young K. Sohn.......... 45 Chief Executive Officer, President, and
Director
John S. Edmunds........ 44 Senior Vice President, Finance, and Chief
Financial Officer
Shlomo Waser........... 56 Senior Vice President of Oak, General Manager
of Optical Storage Group
Simon Dolan............ 42 Senior Vice President of Oak, General Manager
of Imaging Group
David J. Power......... 44 Vice President, General Counsel and Secretary
Mr. Sohn joined Oak as President and Chief Executive Officer in
--------
February 1999. He has also been a Director of Oak since January 1998. Prior to
joining us, and since January 1993, Mr. Sohn was employed by Quantum
Corporation, most recently as President of its Hard Drive Business. From August
1983 to January 1993, he acted as Director of Marketing at Intel Corporation.
Mr. Sohn currently serves on the Board of Directors of PLX Corporation, Inc. He
holds a B.S. in electrical engineering from the University of Pennsylvania and a
M.S. (M.B.A) from the Massachusetts Institute of Technology.
Mr. Edmunds joined Oak as Vice President of Finance and Chief Financial
-----------
Officer in January 2000. In March of 2001 he was promoted to Senior Vice
President. For a two year period prior to joining Oak, he served as Corporate
Controller and Director of Internal Audit at Electronics for Imaging ("EFI") in
Foster City, California. In addition, he spent 11 years with Tandem Computers
where his last position was VP of Tandem Computers Credit Corporation.
Previously, Mr. Edmunds was a C.P.A. for seven years with Coopers & Lybrand in
both San Francisco and San Jose. Mr. Edmunds holds a B.S. degree in Business
Administration from the University of California.
Mr. Waser joined Oak in March 2001 as Senior Vice President and General
---------
Manager of Oak's Optical Storage Group. Prior to joining Oak, he served as
Senior Vice President and General Manager of Zilog, Inc.'s Field programmable
Microcontroller Business Unit from February 1999 to July 2000. Previously he
served as Vice President and General Manager for Phillips Semiconductor's
Microcontroller Business Line from December 1988 to January 1999. Mr. Waser has
also served in management, product marketing and engineering roles at Philips,
Advanced Micro Devices, and Monolithic Memories. Mr. Waser holds MSEE and BSEE
degrees from San Jose State University, and a graduate Engineering degree from
Stanford University.
Mr. Dolan became Vice President and General Manager of Oak's Imaging
---------
Group in April 2000. In March of 2001 he was promoted to Senior Vice President.
He joined Oak as Vice President of Corporate Marketing and Strategy in October
1999. Before joining Oak, Mr. Dolan was VP of Marketing at LSI Logic's Consumer
Division. Mr. Dolan spent 11 years at LSI Logic in the U.S., Europe, and Asia.
Before that he was VP of Strategic Marketing for LSI's products group, and VP of
Marketing for LSI Logic Europe PLC. Mr. Dolan held roles in product marketing,
field applications, and engineering at Inmos Corporation before joining LSI in
1988. A native of the UK, Mr. Dolan has degrees from the Universities of London
and Oxford.
Mr. Power joined Oak as Vice President, General Counsel and Secretary
---------
in July of 2000. Prior to joining us, he was Vice President, General Counsel and
Secretary for inSilicon Corporation, a semiconductor IP company that was formed
as a subsidiary of Phoenix Technologies Ltd. and spun off in an IPO in March of
2000. Mr. Power holds a B.S. in Engineering from Arizona State University and a
J.D. from The John Marshall Law School in
16
Chicago, Illinois. He is licensed to practice law in California and before the
United States Patent and Trademark Office.
Employees
As of June 30, 2001, Oak had 426 full-time employees. We believe that
our future performance will depend, in part, on our ability to continue to
attract and retain qualified technical and management personnel, particularly
highly skilled design engineers and software programmers involved in new product
development. Our employees are not represented by any collective bargaining unit
and we have never experienced a work stoppage. We believe that our employee
relations are good.
ITEM 2. PROPERTIES
Our executive offices and its principal marketing, sales and product
development operations are located in approximately 60,000 square feet of leased
space in Sunnyvale, California, for two separate buildings, under a
non-cancelable operating lease that expires in December 2001. In June 2001 we
entered into a lease for a new building having approximately 89,000 square feet
in Sunnyvale, California, in order to consolidate our operations. We plan to
move to the new space in December 2001 and sublet a portion of the unused space.
We also own a portion of a building in Taipei, Taiwan. We lease
facilities, primarily for sales, product development, and technical support, in
Woburn, Massachusetts; Tokyo, Japan; Manchester, England; Dortmund, Germany;
Shenzhen, China; and Seoul, Korea. In July of 2000, we moved our two existing
workforces in the Boston area into one 82,000 square feet leased facility in
Woburn, Massachusetts primarily for sales, product development, technical
support and administrative functions. Approximately 8,900 square feet of that
lease has been sublet to a third party until September 2003. As a result of the
new Woburn facility, we subleased our 62,000 square foot facility in
Burlington Massachusetts and our other existing lease covering 33,000 square
feet in Andover, Massachusetts. We believe our existing facilities will be
adequate to meet our requirements for at least the next fiscal year.
ITEM 3. LEGAL PROCEEDINGS
Oak 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 our 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 Oak'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 Oak, four
officers and Oak's investment bankers and securities analysts.
On July 16, 1998, the court provisionally certified a national class of
all persons who purchased Oak 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 Oak's motion
for summary judgment and entered judgment in favor of Oak. The plaintiffs have
appealed the court's decision which is currently under review by the Sixth
District Court of Appeal. Based on its current information, Oak believes this
suit to be without merit and will
17
defend its position vigorously. Although it is possible the court's ruling may
be overturned on appeal and Oak may incur a loss upon an adverse conclusion of
these claims, an estimate of any such loss cannot be made.
Additionally, various of Oak'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
Oak, 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 Oak common stock. Based on its current
information, Oak believes the suits to be without merit and will defend its
position vigorously. Although it is reasonably possible Oak 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 us, it
would likely have a material adverse affect on our financial condition, cash
flows and results of operations.
On July 21, 1997, Oak filed a complaint with the ITC based on its
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 Oak's United States patents. The complaint sought 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. Oak's
complaint 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, Oak 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 Oak'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, Oak 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, Oak 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, Oak 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 Oak'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 Oak's complaint and counterclaimed by asserting causes of action for
rescission, 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. Oak believes these counterclaims to be without merit
and will vigorously defend its patent. Both Oak and UMC seek compensatory and
punitive damages. In addition, Oak seeks permanent injunctive relief. On June
11, 1998, this case was consolidated for all purposes with a related case
brought against Oak 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 as a result of the alleged breach of the settlement agreement.
The stay was lifted due to the final resolution of Investigation No. 337-TA-409
and the decision of the Federal Circuit Court of Appeals on May 2, 2001
affirming the ITC's determination. (Described below.)
18
In a related action to the lawsuit that was commenced by Oak 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 Oak 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. Oak
filed its answer on January 8, 1998, denying all the allegations. Oak 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
Oak 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 lifted due to the final resolution of
Investigation No. 337-TA-409 and the decision of the Federal Circuit Court of
Appeals on May 2, 2001 affirming the ITC's determination. (Described below.)
On April 7, 1998, Oak 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 Oak. Oak's complaint is asserted against United Microelectronics Corp.,
MediaTek, Inc., Lite-On Group, Lite-On Technology Corp. and AOpen, Inc. In its
complaint, Oak 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 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 Oak 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 May 10, 1999, the ALJ issued an Initial
Determination terminating the investigation as to respondent UMC, finding that
UMC's activities were licensed. On May 17, 1999, Oak filed a petition with the
Commission for review of the Initial Determination.
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
Oak's U.S. Patent No. 5,581,715; and held that Oak'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 December 15, 2000 UMC filed a separate complaint in the United
States District Court, Northern District of California requesting a review of
the decisions and recommendations by the ALJ in the ITC investigation, some of
which relate to the validity Oak's patent. On July 16, 2001 the court granted
the motions of the ITC, and Oak as an intervenor-defendant, to dismiss UMC's
separate complaint.
On February 24, 2000, Oak 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. On May 2, 2001 the Federal
Circuit Court of Appeals affirmed the Commission's determination that there was
no infringement of Oak's U.S. Patent No. 5,581, 715. The Federal Circuit Court
of Appeals did not review the Commission's determination that Oak's U.S. Patent
No. 5,581,715 was valid and enforceable.
As a result of the decision rendered by the Federal Circuit Court of
Appeals, the stay was lifted on the consolidated action pending in the United
States District Court, Northern District of California, and the parties are
proceeding with the litigation.
19
If any of the above pending actions with respect to UMC and MediaTek
are decided adversely to Oak, it would likely have a material adverse affect on
Oak's financial condition, cash flows and results of operations.
On January 4, 2001 Samsung Electronics, a customer of Oak's Imaging
Group, received a notification from Pitney Bowes alleging that the resolution
enhancement technology Samsung acquired from Xerographic Laser Images
Corporation, Inc. ("XLI") in 1998 infringed Pitney Bowes U.S. Patent No.
4,386,272 (" `272 patent"). XLI is a subsidiary of Oak as a result of an
acquisition in the first quarter of Fiscal 1999. The terms of the agreement for
the licensing of the iRET technology to Samsung require Oak, as successor in
interest to XLI's assets and liabilities, to defend and indemnify Samsung from
claims alleging the iRET technology supplied to Samsung infringes the
intellectual property rights of a third party. On June 18, 2001 Pitney Bowes
filed a complaint in the District Court of Connecticut, naming Samsung and
others, alleging infringement of the `272 patent. On June 28, 2001 Samsung
formally requested Oak to defend Samsung. Other XLI customers may be subject to
Pitney Bowes allegation of infringement of the `272 patent, and may formally
request Oak to defend and indemnify them pursuant to the terms of their
agreement.
If the above pending action, with respect to Oak's indemnification
obligation in such action, is decided adversely, it would likely have a material
adverse affect on Oak's financial condition, cash flows and results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
20
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our Common Stock trades on the Nasdaq National Market under the symbol
OAKT. The following table indicates the range of the high and low closing prices
as reported by Nasdaq for the past eight fiscal quarters up to June 30, 2001.
High Low
---- ---
Fiscal 2000
First Quarter............................... $ 5.688 $ 3.625
Second Quarter.............................. $10.438 $ 4.438
Third Quarter............................... $19.938 $ 8.813
Fourth Quarter.............................. $22.875 $ 11.875
Fiscal 2001
First Quarter............................... $30.500 $20.375
Second Quarter.............................. $28.313 $ 6.313
Third Quarter............................... $10.250 $ 4.531
Fourth Quarter.............................. $11.940 $ 4.344
The reported last sale price of our Common Stock on the Nasdaq National
Market on September 21, 2001 was $6.570. The approximate number of holders of
record of the shares of our Common Stock was 265 as of September 21, 2001. This
number does not include stockholders whose shares are held in trust by other
entities. The actual number of shareholders is greater than this number of
holders of record. We estimate that the number of beneficial shareholders of the
shares of Oak Common Stock as of September 21, 2001 was approximately 15,600.
21
ITEM 6. SELECTED FINANCIAL DATA
Oak Technology, Inc. and Subsidiaries
Selected Consolidated Financial Data
(in thousands, except per share data)
Year Ended June 30,
--------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Net revenues....................................... $ 176,183 $ 86,455 $ 71,051 $157,106 $167,395
Gross profit....................................... 84,076 45,535 31,432 74,548 94,181
Operating (loss) income............................ (19,640) (61,109) (61,946) (9,104) 32,848
Net (loss) income.................................. (30,632) (32,862) (50,669) 5,947 23,719
Diluted net (loss) income per share (1)............ $ (0.56) $ (0.71) $ (1.24) $ 0.14 $ 0.55
Shares used in diluted per share calculations (1).. 54,274 46,057 40,819 42,493 42,757
As of June 30,
--------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments.. $124,028 $120,804 $133,203 $117,225 $145,269
Working capital.................................... 129,707 136,610 150,936 144,314 168,168
Total assets....................................... 204,239 236,400 203,841 261,411 287,595
Long-term debt, excluding current portion.......... -- -- 5 27 2,496
Total stockholders' equity......................... $177,743 $201,310 $189,422 $241,208 $238,697
--------------------------
(1) Computed on the basis described in Note 2 of Notes to Consolidated Financial
Statements.
22
ITEM 7. 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-K may be considered "forward-looking" statements within
the meaning of Section 27a of the Securities Act of 1933, as amended, and
Section 21e of the Securities Act of 1934, as amended. Such statements include
declarations regarding the intent, belief or current expectations of Oak 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.
Oak 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 Oak's quarterly operating
results, (iii) general conditions in the semiconductor industry and overall
economic market, (iv) risks related to pending legal proceedings, (v)
development by competitors of new or superior products or the entry of new
competitors into Oak's markets, (vi) Oak'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 Oak's products into their products, (viii)
availability of adequate foundry capacity and access to process technologies,
(ix) Oak'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-RW and Combo controller products and
the PC market, (xiv) risks related to international business operations, (xv)
Oak's ability to maintain adequate price levels and margins with respect to its
products, (xvi) risks related to acquisitions, (xvii) the ability to attract
and retain qualified management and technical personnel and (xviii) other risks
identified from time to time in Oak's reports and registration statements filed
with the Securities and Exchange Commission.
General
Oak designs, develops and markets high performance embedded software
and integrated semiconductor solutions to original equipment manufacturers
worldwide that serve the optical storage and digital imaging markets. Our
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. Our mission is to be a leading solutions provider for
the storage and distribution of digital content.
In fiscal 2000, Oak restructured its operations along its two
re-organized market-focused groups: the Optical Storage Group and the Imaging
Group. The Imaging Group is comprised of the combination of Oak's Xionics
subsidiary and Pixel Magic subsidiary, serving the digital imaging equipment
market.
During the fiscal year ended June 30, 2001, the Oak reported a net loss
of $30.6 million after accounting for $14.7 million of amortization for
intangible assets, $1.8 million of restructuring costs and $17.4 million
impairment loss from certain equity securities received by Oak from the sale of
its Consumer business group to Conexant in fiscal 2000. Excluding the impact of
these items, Oak's adjusted pro forma earnings were $3.2 million. During the
second half of 2001, the Oak's revenues were negatively impacted by inventory
corrections occurring in the semiconductor industry and the generally weak
economic market which particularly impacts the Company's optical storage
business, which historically has accounted for approximately 80% of the
Company's revenues. Volume shipments of its next generation CD-RW controllers
are currently increasing and are expected to increase as the Company's OEM
customers achieve production volumes. However, the Company cannot predict the
product's ultimate level of customer acceptance, product life or the impact of
that acceptance or product life on future operating results.
Oak'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, its ability to introduce new products in accordance with OEM
design requirements and design cycles, rate of adoption of new technology, rate
of growth of the CD-RW market, changes in product mix or distribution channels,
demand for semiconductors and end-user products
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
incorporating semiconductors, technological difficulties and resource
constraints encountered in developing and/or using new products, new product
introductions by its competitors, and market acceptance of product sold by both
Oak and its customers.
In addition, our operating results are subject to fluctuations in the
markets for our customers' products, particularly the consumer electronics and
personal computer markets, which have been extremely volatile in the past. Oak
has devoted a substantial portion of its research and development efforts in
recent quarters to developing chips used in DVD systems, CD-RW drivers and
inkjet multi-function peripherals. Our DVD, CD-RW, and digital imaging products
are subject to the new product risks described in the preceding paragraph,
including in particular our ability to timely introduce these products and the
market's acceptance of them, which could have a materially adverse effect on our
operating results.
Results of Operations
The following table sets forth, as a percentage of net revenues,
certain consolidated statement of operations data for the periods indicated:
June 30,
--------------------------------
2001 2000 1999
---- ---- ----
Revenues:
Product revenues........................ 80.2% 75.6% 91.4%
Software and other revenues............. 19.8 24.4 8.6
----- ----- -----
Total revenues........................ 100.0 100.0 100.0
----- ----- -----
Cost of revenues and operating expenses:
Cost of product revenues (*)............ 60.7 52.9 58.6
Cost of software and other revenues (*). 18.3 30.0 25.0
Research and development expenses....... 28.6 56.8 65.0
Selling, general and administrative
expenses.............................. 20.8 38.4 49.4
Amortization of intangibles............. 8.4 12.2 6.9
Restructuring charges................... 1.0 3.8 --
Acquired in-process research and
development........................... -- 12.2 10.1
----- ----- -----
Operating loss........................ (11.1) (70.7) (87.2)
Gain on sale of business unit.............. -- 25.6 --
Non-operating income, net.................. (5.1) 7.1 7.8
----- ----- -----
Loss before income taxes................... (16.2) (38.0) (79.4)
Income tax expense (benefit)............... 1.2 -- (8.1)
----- ----- -----
Net loss................................... (17.4)% (38.0)% (71.3)%
===== ===== =====
(*) "Cost of product revenues" and "Cost of software and other revenues" are
expressed as a percentage of "Product revenues" or "Software and other
revenues", respectively. All other line items are expressed as a percentage of
total revenues.
Fiscal 2001 As Compared To Fiscal 2000
Revenues. Total revenues increased 104% to $176.2 million for fiscal
--------
2001 compared to $86.5 million for fiscal year 2000. The $89.7 million absolute
increase in revenues is comprised principally by the increase in Optical Storage
revenues of $80.9 million from $36.0 million in fiscal 2000 to $116.9 million in
fiscal 2001. This increase was directly attributable to the Company's continued
success in the OTI 9790 8X CD-RW controller introduced during fiscal 2000. Units
of Optical products shipped increased from 3.78 million units in fiscal 2000 to
17.5 million units in fiscal 2001. Imaging revenues increased $13.1 million or
28% for fiscal 2001 from $46.2 million in fiscal 2000 to $59.3 million in fiscal
2001. This increase is primarily a result of the inclusion of the Xionics
software revenues for the entire fiscal 2001 as a result of the acquisition of
Xionics which took place during January
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
of the prior fiscal year. There were no revenues of Consumer products during
fiscal 2001, compared to $4.3 million in fiscal 2000, as a result of the
divestiture of the broadband business during January 2000 of the prior fiscal
year.
For fiscal years 2001, 2000 and 1999, sales to Oak's top ten customers
accounted for approximately 82%, 77%, and 70%, respectively, of Oak's net
revenues. One customer accounted for over 10% of revenues in fiscal 2001: LG
Electronics accounted for 31% of total revenues. In Fiscal 2000, two customers
accounted for over 10% of revenues: LG Electronics 26% and Hewlett Packard 16%.
LG Electronics represents Optical Storage segment revenues and Hewlett Packard
represents Imaging segment revenues. In fiscal 1999 Yamaha Corporation accounted
for 17% and Mitsumi Electronic Co. accounted for 10%. International sales,
principally to Japan and Korea amounted to approximately 84%, 75% and 86% of
Oak's net revenues in fiscal 2001, 2000 and 1999, respectively. See Note 19 to
the Consolidated Financial Statements.
We expect that sales to a limited number of customers will continue to
account for a substantial portion of our net revenues for the foreseeable
future. We do not have long-term purchase agreements with any of our customers.
Customers generally purchase our products subject to cancelable short-term
purchase orders. We cannot predict whether our current customers will continue
to place orders or whether existing orders will be canceled. We have experienced
significant changes from year to year in the composition of our major customer
base and believe this pattern will continue. Our revenues from the Optical
Storage Group will also depend on whether our OEM customers are successful in
selling their optical drives both in aftermarket and to PC OEM customers. In
part, to address this risk, we are continuing our efforts to increase
penetration in existing large customers as well as engage new large OEM
customers. For fiscal 2002 we have commitments and product plans from existing
and new large customers to add volume so that overall, we currently expect our
Optical Storage Group to have revenues in excess of $100 million and to have as
many as four customers, including LG Electronics, who will each represent 10% or
more of our optical storage revenues. Some of our customers have chosen, and may
continue to choose, to award their design wins and business on a project by
project basis to different vendors. For instance, while we have design wins for
several projects at LG Electronics, and we expect that it will continue to be a
significant customer, due to competition among the drive manufacturers and
changes being made in sourcing chipsets, we currently expect that our revenue
from this customer will decline in fiscal 2002. The loss of, or a significant
reduction in, purchases or commitments by current major customers which is not
offset by corresponding increases from other current or future customers would
have a material adverse effect on our business, financial condition and results
of operations. If sales to current customers cease or are reduced, we may be
unable to obtain the orders from new customers necessary to offset any such
losses or reductions. Moreover, we may not be able to qualify our independent
foundries for potential new customers or do so in a timely manner.
Cost of Revenues. Product cost of revenues includes the cost of wafer
----------------
fabrication, assembly and testing performed by third-party vendors and direct
and indirect costs associated with the procurement, scheduling and quality
assurance functions performed by Oak.
Software and other cost of revenues consist of the costs of software
documentation as well as royalties that may be due to third parties and labor
associated with other smaller streams of revenue associated with nonrecurring
engineering services and OEM maintenance and support.
Gross margins declined slightly to 48% in fiscal 2001 from 53% in
fiscal 2000. The decrease was primarily attributable to the increase in Optical
storage revenues which has a lower average gross margin compared to Imaging
products, and to inventory allowances, in the amount of $5.6 million, taken for
excess inventory in the Optical Storage segment. These allowances were recorded
as a result of the reduction in demand of the Oak's products due to the
worldwide PC and semiconductor slowdown beginning in the December quarter of
2000.
Gross margins for the Optical Storage segment was 35% for fiscal 2001
as compared to 37% in fiscal 2000. This decrease is primarily due to allowances
taken for excess inventory, partially offset by higher gross margins on new
products.
Gross margin for the Imaging business segment was 74% for fiscal 2001,
compared to 66% for fiscal 2000 This was mostly due to the addition of the
higher margin Imaging Group software as a result of the acquisition of Xionics
which took place halfway through fiscal 2000 and was present for the entire
fiscal 2001.
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
Oak'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. We expect that average selling prices
("ASPs") for its existing products will decline over time and ASPs for each new
product will decline significantly over the life of the product. In addition,
given the extremely competitive nature of the optical storage market, we believe
that gross margins for new products in its optical storage market may be lower
than historical levels and that, as a result, gross margins in general may
decline in the future.
Research and Development Expenses. Research and development costs are
---------------------------------
expensed as incurred. Research and development expenses were $50.6 million and
$49.2 million for fiscal 2001 and 2000, respectively, and expressed as a
percentage of net revenues were 29% and 57%, respectively.
Selling, General and Administrative Expenses. Selling, general and
--------------------------------------------
administrative ("S,G&A") expenses increased 10% to $36.6 million in fiscal 2001
from $33.2 million in fiscal 2000 respectively. The increase is largely due to
charges recorded to bad debt expense of approximately $2.7 million during fiscal
2001 as a result of an increase in the allowance for doubtful accounts. The
inclusion of the Xionics operations for the entire fiscal 2001 also contributed
to the increase in the expenses as the acquisition took place during January of
the prior fiscal year.
Amortization of Intangibles. Amortization of intangible assets
---------------------------
increased to $14.7 million for fiscal 2001 compared to $10.5 million in fiscal
2000. The increase is a result of certain intangible assets which were amortized
for the entire fiscal 2001 as they were a result of the acquisition of Xionics
which took place during January of the prior fiscal year.
Restructuring Charge. During the third quarter of fiscal 2001, Oak
--------------------
recorded restructuring charges of $2.6 million related to the reduction in force
due to the restructuring of the overall business and the planned sublease of the
resulting excess office space offset by a recovery of $0.8 million related to
fiscal 2000 restructuring. This represents the reduction in force of
approximately 30 employees and will result in future savings in excess of
$750,000 per quarter. During fiscal 2000, the Company had accrued $3.3 million
as restructuring charges, primarily related to the abandonment of its leased
facility in Andover, Massachusetts. The Company was able to negotiate a new
sublease of the previously abandoned facility. This recovery resulted in a net
restructuring charge of $1.8 million to the fiscal 2001 income statement.
Non-operating Income. Non-operating income decreased 245% to an expense
--------------------
of $8.9 million for fiscal 2001 compared to income of $6.2 million in fiscal
2000. The decrease is primarily due to a charge of $17.4 million recorded in
fiscal 2001 as a result of an other than temporary impairment resulting from a
decline in value of an equity investment. Excluding this charge, non-operating
income increased 37% to $8.4 million for fiscal 2001 compared to $6.2 million in
fiscal 2000 resulting from approximately $8.0 million of interest income
recorded during fiscal 2001 compared to $6.6 million of interest income during
fiscal 2000.
Income Taxes. The tax provision for fiscal 2001 was primarily due to
------------
foreign jurisdiction and withholding taxes. No provision for income taxes was
recorded for fiscal 2000 due to net operating losses. Based upon the results of
the current year operations, the Company's projected operating results, and all
other available objective information, the Company's management does not believe
it is more likely than not that sufficient future taxable income will be
generated to sufficiently realize all of the net deferred tax assets.
Fiscal 2000 As Compared To Fiscal 1999
Revenues. Total revenues increased 22% to $86.5 million for fiscal
--------
2000 compared to $71.1 million for fiscal year 1999. The $15.4 million absolute
increase in revenues is comprised principally by a $25.3 million increase in
Imaging revenues offset by a decline in Optical Storage revenues of $11.0
million. The Imaging revenue increase was attributable to both the inclusion of
post-acquisition software revenues from business operations acquired from
Xionics from January 11, 2000, the date the acquisition was completed, as well
as a substantial year over year increase in the revenues from sales of
integrated semiconductors for the digital imaging market. The decline in the
Optical Storage segment revenues is the result of a continuing decline during
the first six months of fiscal 2000 in unit sales and average selling price of
CD-ROM controllers in the Optical Storage business segment compared to fiscal
1999. The decline was due to a continuing loss of CD-ROM market share, the
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
maturation of the CD-ROM market and development delays in Oak's next-generation
products. This trend was offset in the second half of fiscal 2000 by a strong
increase in Optical Storage revenues from the introduction of a new CD-RW
product. In the second half of fiscal 2000, Optical Storage revenues increased
dramatically from $3.6 million in the first six months, to $32.4 million for the
second six months of fiscal 2000. This increase was directly attributable to
Oak's newly introduced OTI 9790 8X CD-RW controller. Overall for the year, the
increase in Imaging revenues and the success of the OTI 9790 in the second half
of fiscal 2000 resulted in revenues reflecting a steady to slightly increasing
(2%) year-over-year growth rate based on the historical pro forma measurement of
revenue as outlined in Note 11 to the Consolidated Financial Statements.
Cost of Revenues. Gross margins improved to 53% in fiscal 2000 from
----------------
44% in fiscal 1999. These increases were primarily due to the higher volume of
Imaging products with higher average gross margins in the second half of fiscal
2000 as a result of the acquisition of Xionics. In addition, Oak experienced a
shift in semiconductor product mix with relatively more semiconductor coming
from Imaging and less from older Optical Storage products with declining ASP's
resulting in improved product gross margins from 41% in fiscal 1999 to 47%
in fiscal 2000.
Gross margins for the Optical Storage segment was 42% for fiscal 2000
as compared to 32% in fiscal 1999. This increase is primarily due to a shift in
product mix from predominantly older generation products with declining ASP's to
newer products with higher gross margins.
Gross margin for the Imaging business segment was 68% for fiscal 2000,
compared to 69% for fiscal 1999 This was due to a shift in semiconductor product
mix and an expected level of price degradation on older semiconductor imaging
products offset by the inclusion of higher margin Xionics software and other
revenue halfway through the year.
Oak'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. Oak expects that ASPs for its existing
products will decline over time and that ASPs for each new product will decline
significantly over the life of the product. In addition, given the extremely
competitive nature of the optical storage market, we believe that gross margins
for new products in its optical storage market may be lower than historical
levels and that, as a result, gross margins in general may decline in the
future.
Research and Development Expenses. Research and development costs are
---------------------------------
expensed as incurred. Research and development expenses were $49.2 million and
$46.2 million, and expressed as a percentage of net revenues were 57% and 65% in
fiscal 2000 and 1999, respectively. The absolute dollar increase in research and
development spending for fiscal 2000 compared to fiscal 1999 was primarily due
to the inclusion of Xionics product development expenses in the second half of
the fiscal year offset somewhat by the divestiture and sale of the Broadband
business unit to Conexant which closed on January 18, 2000. The increase in
development spending as a percentage of revenues in fiscal 1999 was largely due
to the decline in the Company's revenue base, a trend that began to reverse in
fiscal 2000.
Selling, General and Administrative Expenses. Selling, general and
--------------------------------------------
administrative ("S,G&A") expenses decreased 3% to $33.9 million in fiscal 2000
from $35.1 million in fiscal 1999. The decline is largely due to non-recurring
consulting expenses of $1.6 million and other litigation expenses incurred in
fiscal 1999 that did not recur in fiscal 2000. The decrease in SG&A expenses due
to a streamlining of the historical SG&A cost structure necessitated by the
continued decline in Optical Storage revenues in the first six months of fiscal
2000 was largely offset by increases caused by the acquisition of Xionics
Document Technologies, Inc.
Amortization of Intangibles and Acquired In-process Research and
----------------------------------------------------------------
Development. Acquisition-related charges include primarily the costs associated
-----------
with the acquisition of Xionics as well as certain other smaller acquisitions in
fiscal 2000. During the third quarter of fiscal 2000, Oak completed the
acquisition of Xionics and charged $9.9 million to operations for in-process
research and development ("IPR&D"). Additionally, $45.8 million of the purchase
price was allocated to intangible assets and is being amortized to operations on
a straight-line basis over the next five years. Approximately $5.9 million of
the $10.5 million of intangible asset amortization recognized during fiscal 2000
was related to the Xionics acquisition. The valuation of the acquired in-process
research and development used by the Company was supported by independent fair
valuation studies. The estimated value of in-process research and development
was derived using the "Income Approach", which values an asset
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
based on future cash flows that could potentially be generated by the asset
over its estimated useful life. The future cash flows were discounted to their
present value utilizing a discount rate of 14%. The amounts of the purchase
price technology assigned to the fair values of in-process research and
development and purchased technology represent management's best estimate. As of
June 30, 2001, there have been no material changes from the historical pricing,
margins and expense levels used in the valuation assumptions.
On January 11, 2000, the shareholders of both Oak and Xionics approved
a definitive acquisition agreement. Under the terms of the agreement, Oak issued
approximately 9.5 million shares of its common stock and approximately $34.7
million in cash to acquire all of the common stock of Xionics. The transaction
has been accounted for under the purchase method of accounting. Oak recorded a
special charge of approximately $9.9 million against earnings in the third
fiscal quarter of 2000 in order to write off the cost of in-process research and
development acquired in the merger. In addition to the $9.9 million charge
taken, approximately $45.8 million (representing the fair value of net
intangible assets acquired in the merger) has been recorded as intangible assets
on Oak's balance sheet and amortized over three to five years.
At the acquisition date, Xionics had several in-process research and
development projects in each of its product groups: languages, drivers, MFP's
and its new complementary product for a Tandem copy/print engine. In each
product group there were projects that had not yet achieved technological
feasibility. As image processing represents a very specialized market, it is
unlikely that Xionics' in process technology could be successfully deployed in
alternative market applications. Further, it was determined that there was
significant technological risk and substantial development expenses relating to
each of the products under development. As a result, Oak took a $9.9 million
charge against earnings in fiscal 2000 in order to reflect an allocation of the
purchase price associated with the value of the in process research and
development which, due to it's uncertain future value at the date of
acquisition, could not be considered an investment in an asset.
The valuation of the acquired in-process research and development used
by Oak in making the determination as to the amount of in-process research and
development expense was supported by valuation studies. The estimated value of
in-process research and development was derived using the "Income Approach",
which values an asset based on future cash flows that could potentially be
generated by the asset over its estimated useful life. The future cash flows
were discounted to their present value utilizing a discount rate of 14%. The
amounts of the purchase price technology assigned to the fair values of
in-process research and development and purchased technology represent
management's best estimate. Oak did not anticipate any material changes from
historical pricing, margins and expense levels used in its valuation
assumptions.
Restructuring Charge. During fiscal 2000, Oak accrued $3.3 million as
--------------------
restructuring charges primarily related to the abandonment of its leased
facility in Andover, Massachusetts. The leased facility had 69 months remaining,
however Oak negotiated a lease buyout. These costs will be were paid in fiscal
2001.
Non-operating Income. During the third quarter of fiscal 2000, Oak sold
--------------------
its broadband business unit located in the United Kingdom for $24.9 million in
cash and stock and recorded a non-operating gain of $22.1 million related to the
sale. Interest income at $6.6 million is higher than the $5.6 million earned in
fiscal 1999 due primarily to higher interest rates available in the market
during fiscal 2000.
Oak also experienced a net loss of $1.9 million on its equity method
investments. This was the result of several factors including a bankruptcy by
one of its older investees and an other than temporary impairment write-down
against another investment. These losses were offset by a $1.2 million gain on
the sale of an investment in Wavemark, which Oak had indirectly acquired through
the acquisition of Xionics. The investment was valued at fair market value on
the date of acquisition. Subsequent to the acquisition, significant economic
events occurred that resulted in an increase in the fair value of the
investment. The investment was sold prior to year-end, with Oak recording a gain
of $1.2 million.
Income Taxes. Management believes that sufficient future taxable income
------------
may not be generated in order to realize all of Oak'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 for fiscal 2000.
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
Viewpoint Technology
In the first quarter of fiscal year 1999, Oak acquired ViewPoint, a
privately held development stage company focused on developing high performance
solutions for the growing compact disc-read write market, specifically a
controller device to support high encoding speeds for next-generation CD-RW
drives, which was its only technology. At the date of acquisition, ViewPoint had
yet to introduce its first product in the market place and was in the process of
developing its VPT8008 product, but still required key firmware, drivers, design
changes and silicon testing prior to achieving technological feasibility.
ViewPoint's technology was only valuable when integrated into Oak's server
technology and physically redesigned to add significant key features. Based on
discussions with ViewPoint's technical personnel, it was determined that there
were no alternative uses for their CD-RW technology. The ViewPoint technology
has enabled Oak to develop a CD-RW controller product, the 9790, which will
support up to 32x read and 8x write speeds. Management believed that this
product could provide in excess of 50% of Oak's revenues in fiscal 2001. Oak has
commenced development of derivative products incorporating Viewpoint's base
technology.
Oak paid $10.1 million in cash for all the outstanding shares of
ViewPoint. The purchase method of accounting was used to record the acquisition
and approximately $4.8 million of the purchase price was allocated to in-process
research and development, which was charged to operations in the quarter ended
September 30, 1998. The remaining costs of the acquisition were recorded on
Oak's balance sheet. Approximately $4.4 million of the purchase price was
allocated to purchased technology and other intangible assets and is being
amortized to operations on a straight-line basis over three years, and $0.9
million was allocated to cash, fixed assets and other tangible assets.
The valuation of the acquired in-process research and development used
by Oak in making the determination as to the amount of in-process research and
development expense was supported by valuation studies. The estimated value of
in-process research and development was derived using the "Income Approach",
which values an asset based on future cash flows that could potentially be
generated by the asset over its estimated useful life. The future cash flows
were discounted to their present value utilizing a discount rate of 28%. The
amounts of the purchase price technology assigned to the fair values of
in-process research and development and purchased technology represent
management's best estimate. Oak did not anticipate any material changes from
historical pricing, margins and expense levels in its valuation assumptions.
Xerographic Laser Images Corporation
During the first quarter of fiscal 1999, Oak acquired Xerographic Laser
Images Corporation ("XLI"), a provider of print quality enhancement technology
for the digital office equipment market. At the date of acquisition, XLI had
developed one product, the XLI-2050 image enhancer, and was also in the process
of developing other high-performance products for digital copiers,
multi-function devices, scanners and display markets. Oak acquired XLI in order
to gain access to imaging technology and expertise that would complement its own
image process solutions. XLI had a number of products in the development stage,
none of which had reached the level of prototype or working sample. Three
primary projects in process at the date of acquisition were 1) the 2050CP which
enables printers to have more precise dot positioning and modulation and
thereby, more accurately apply the color on the paper; 2) the 1016P, a black and
white printer enhancement chip; and 3) a family of products for the emerging
flat panel display market. Based on discussions with XLI's technical personnel,
it was determined that there were no alternative uses for their specific
technologies outside of the digital office. Oak expected that about 20% of its
future revenues could be derived from products integrating XLI's technologies.
However, subsequent to the acquisition Oak experienced some development delays
and adjusted future estimates accordingly. Oak's management does not believe
that failure to complete in-process products will have a material adverse impact
on Oak's business, results of operations or financial condition.
Oak paid $3.7 million in cash for all the outstanding shares of XLI.
The purchase method of accounting was used to record the acquisition and
approximately $2.4 million was allocated to in-process research and development,
which was charged to operations in the quarter ended September 30, 1998. The
remaining costs of the
29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
acquisition were recorded on Oak's balance sheet and are being amortized to
operations on a straight-line basis over three years.
In addition to the purchase price, XLI shareholders had the right to
receive additional payments subject to the achievement of certain milestones by
XLI. Under the terms of the merger agreement, revenue levels from products
utilizing XLI's technologies in excess of a base amount of $3.7 million each
year of a three-year period ending December 31, 2000 were required to be
attained for XLI to receive additional contingency payments, up to the maximum
amount of $10.3 million. These milestones were not achieved and no additional
payments were made to XLI shareholders. Such payments would have been recorded
on Oak's balance sheet as an adjustment to the purchase price of XLI.
The valuation of the acquired in-process research and development used
by Oak in making the determination as to the amount of in-process research and
development was supported by valuation studies. The estimated value of
in-process research and development was derived using the "Income Approach". The
future cash flows were discounted to their present value utilizing a discount
rate of 25%. The amounts of the purchase price technology assigned to the fair
values of in-process research and development and purchased technology represent
management's best estimate. Oak did not anticipate any material changes from
historical pricing, margins and expense levels in its valuation assumptions.
Recently Issued Accounting Standards
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations." SFAS 141 requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. The Company believes that the adoption of SFAS 141
will not have a significant impact on its financial statements.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets", which is effective for fiscal years beginning after March
15, 2001. SFAS 142 requires, among other things, the discontinuance of goodwill
amortization. In addition, the standard includes provisions upon adoption for
the reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the testing for impairment of existing goodwill and other intangibles. The
Company is currently assessing but has not yet determined the impact SFAS 142
will have on its financial position and results of operations.
Liquidity and Capital Resources
Since its inception, Oak 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. Oak's principal sources of liquidity as of
June 30, 2001 consisted of approximately $124.0 million in cash, cash
equivalents and short-term investments. Oak also has approximately $7.7 million
in lines of letters of credit with Taiwanese financial institutions, all of
which were available at June 30, 2001.
Oak's working capital decreased by $6.9 million to $129.7 million as of
June 30, 2001 from $136.6 million as of June 30, 2000. The decrease was
primarily attributable to a decrease in inventory of approximately $13.5 million
and prepaid and other current assets of $4.8 million offset by a decrease in
accounts payable of $11.9 million. Oak's short-term investments were principally
invested in investment grade, interest-bearing securities.
The Company's working capital decreased by $14.3 million to $136.6
million as of June 30, 2000 from $150.9 million as of June 30, 1999. The
decrease was primarily attributable to decreases in cash, cash equivalents and
short-term investments of $12.4 million and foundry deposits of $9.1 million,
and increases in accounts payable of $16.4 million, accrued expenses of $2.9
million and deferred revenue of $2.5 million which were partially offset by
increases in inventories of $18.3 million and accounts receivable of $10.0
million.
30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
Oak's cash provided by operating activities increased to $20.1 million
for fiscal 2001 compared to an outflow of $18.6 million for fiscal 2000. Fiscal
2001 cash provided in operating activities is primarily a result of a decrease
in the inventory balance of $13.5 million, decrease in prepaid expenses, other
current assets and other assets of $6.4 million, depreciation and amortization
expense of $22.6 million and an impairment loss on equity securities of $17.4
million recorded during fiscal 2001 offset by a net loss of $30.6 million and a
decrease in accounts payable and accrued expenses of $9.6 million.
Oak's cash used in operating activities increased to $18.6 million for
fiscal 2000 from $10.5 million for fiscal 1999 primarily as a result of
increased inventories and accounts receivable, partially offset by a decrease in
net loss in fiscal 2000. The Company's cash flows used in operating activities
in fiscal 2000 were primarily attributable to a net loss of $22.5 million after
adding back non-cash activities, and an $18.3 million increase in inventories,
combined with a $5.2 million increase in accounts receivable which were
partially offset by increases in accounts payable and accrued expenses of $16.8
million and a $9.1 million decrease in foundry deposits. The Company has
invested in building inventory and allowed for the growth in receivables and
expects to continue to do due to the increasing volume of business driven by new
products, particularly in Optical Storage.
Oak's investing activities during fiscal 2001 used cash of $14.0
million compared to a proceed of $12.6 million during fiscal 2000. Cash used in
investing activities during fiscal 2001 resulted primarily from a net outflow
from purchase and sales of short-term investments of $7.4 million and purchases
of property and equipment of $6.6 million.
Oak's investing activities during fiscal 2000 provided cash of $12.6
million as compared to $26.3 million of cash used for investing activities
during fiscal 1999. Cash provided by investing activities during fiscal 2000
resulted primarily from net proceeds from matured short-term investments of
$26.0 million and $4.9 million in proceeds from the sale of a business unit,
which were partially offset by the purchase of Xionics for $9.5 million, net of
cash acquired, $4.6 million in additions to property and equipment, and $4.3
million for the purchase of other equity investments. The acquisition of Xionics
also involved the non-cash elements of issuing $36.8 million in common stock and
assuming outstanding stock options valued at $8.4 million. Proceeds from the
sale of a business unit also included the non-cash element of 293,794 shares of
common stock in Conexant Systems, Inc. valued at $20.0 million at the date of
divestiture. As of June 30, 2000, this amount was reflected in short-term
investments on the balance sheet, which also included a non-cash valuation
reserve of $6.0 million, the offset of which was included in the equity section
of the balance sheet.
Oak's financing activities during fiscal 2001 were minimal as compared
to proceeds of $5.6 million recorded during fiscal 2000. Cash provided by
issuance of common stock through the exercise of employee stock options and
employee stock purchase plan activity of approximately $11.9 million was offset
by the acquisition of treasury stock of $12.0 million during the year.
The Company's financing activities during fiscal 2000 provided cash of
approximately $5.6 million as compared to cash used of $3.5 million during
fiscal 1999. Cash provided by financing activities during fiscal 2000 was the
result of $7.4 million in proceeds from the issuance of common stock through the
exercise of employee stock options and employee stock purchase plan activity,
which was partially offset by $1.8 million in the acquisition of treasury stock.
In the first quarter of fiscal 2000, Oak allocated $25.0 million that
is earmarked for venture investments. Oak did not establish a separate legal
"fund" or raise money independent of Oak funds for these purposes. The primary
purpose of the fund is to invest in companies with developing technologies that
leverage our core optical storage and imaging businesses. We intend to make
investments that are focused on technologies that will bring together audio,
video, and data content for computing and consumer-electronics applications and
consumer Internet appliances. We may also make investments outside of these
focused areas. To date we have not made any investments utilizing the funds
allocated in the venture fund.
We believe that our existing cash, cash equivalents, short-term
investments and credit facilities will be sufficient to provide adequate working
capital and to fund operations over the next twelve months. If, however, during
the next twelve to eighteen month period we fail to increase our revenue or are
unable to reduce our expenses below our revenues, then we may be in a position
31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
where we will need to seek additional financing. However, there can be no
assurance that we will not be required to seek other financing sooner or that
such financing, if required, will be available on terms satisfactory to us. We
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, we evaluate potential acquisitions of
such businesses, products or technologies. However, Oak has no present
understandings, commitments or agreements with respect to any material
acquisition of other businesses, products or technologies, other than those
disclosed above or elsewhere in this Annual Report on Form 10-K.
Factors That May Affect Future Results
You should read the following factors in conjunction with the factors
discussed elsewhere in this and our other filings with the SEC and in materials
incorporated by reference in these filings. The following is intended to
highlight certain factors that may affect the financial condition and results of
operations of Oak and are not meant to be an exhaustive discussion of risks that
apply to companies with broad international operations, such as Oak. Like other
businesses, Oak is susceptible to macroeconomic downturns in the United States
or abroad that may affect the general economic climate and performance of Oak or
its customers.
Oak Has Experienced and Expects to Continue to Experience Significant
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Period-To-Period Fluctuations in Its Revenues and Operating Results, Which May
------------------------------------------------------------------------------
Result In Volatility In The Price Of Its Stock. Oak'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 our stock price to fluctuate. If quarterly
results fail to meet public expectations, the price of our stock may decline.
Oak'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 we face in our business is our dependence on the optical storage market.
Other factors specific to our business and product lines include the following:
o Our ability to diversify our product offerings and the markets for
our products;
o Fluctuations in manufacturing costs;
o The loss or gain of important customers;
o The timing of significant orders and order cancellations or
re-scheduling;
o Pricing policy changes by Oak and its competitors and suppliers;
o The potential for significant inventory exposure;
o The timing of the development and introduction of new products or
enhanced versions of existing products;
o Market acceptance of new products;
o Increased competition in product lines, and competitive pricing
pressure;
o Failure to anticipate changing customer product requirements;
o The competitiveness of our customers;
o Cyclical semiconductor industry conditions; and
o The inability to obtain foundry capacity.
The above factors have affected our business in the past and may affect
us in the future. In addition, our quarterly operating results could be
materially adversely affected by legal expenses incurred in connection with, or
32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
any judgment or settlement in, our current or future legal proceedings. See "Oak
is a Defendant in Several Lawsuits."
We operate in the highly cyclical semiconductor industry, which is
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subject to significant downturns. We have diversified our business so that our
--------------------------------
product offerings include not only integrated circuits, but also embedded
software and platform solutions. However, a significant portion of our revenue
will continue to come from our 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.
The industry has experienced significant economic downturns at various
times. These downturns 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, such as those
experienced in the second half of fiscal 2001. Downturns in the semiconductor
industry have been characterized by diminished product demand, production
over-capacity, high inventory levels and accelerated erosion of product prices.
Even if customers' aggregate demand were not to decline, the availability of
additional capacity can adversely impact pricing levels, which can also depress
revenue levels.
We have experienced in the past and may in the future experience
downturns due to general semiconductor conditions and general economic
conditions. A significant downturn in the industry may cause our business,
financial condition and results of operations to suffer.
Oak Has a Recent History of Operating Losses and May Not Become or
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Remain Profitable. Oak has sustained significant losses in recent years and may
-----------------
not become profitable in the future. While Oak had net income of $5.9 million in
fiscal 1998, its current loss trend began in calendar year 1998, resulting in an
operating loss of $9.1 million for fiscal 1998, an operating loss of $61.9
million for fiscal 1999, an operating loss of $61.1 million for fiscal 2000 and
an operating loss of $19.6 for fiscal 2001 (in each case before adjustments for
non-operating income or loss, or income tax expense or benefit). Oak'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 the third quarter of fiscal 2000, Oak 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, we cannot accurately predict the product's
impact on operating results nor whether revenue from this product will enable
Oak to return to profitability. We expect that the average selling prices, or
ASP's, for our optical storage products will continue to decline over time and
that ASPs 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, we believe that gross margins for new products in
our optical storage market will be lower than historical levels. However, we
believe that with the additional planned software and solution product offerings
from the Optical Storage and Imaging Groups, gross margins in general will
increase in the future. If Oak incurs additional losses or fails to achieve
profitability in the future, this will significantly harm our business and may
affect the trading price of its common stock.
Oak's Financial Performance Is Highly Dependent On The Timely And
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Successful Introduction Of New Products. Our financial performance depends in
---------------------------------------
large part on our ability to successfully develop and market next generation and
new products in a rapidly changing technological environment. If we fail to
successfully identify new product opportunities and timely develop and introduce
new products that achieve market acceptance, we may lose our market share and
our future revenue and earnings may suffer.
In the optical storage market, our performance is highly dependent upon
the successful development and timely introduction of our next generation CD-RW
controller, and Combo (combination DVD and CD-RW) controller. A variety of
standards and formats are being proposed in this market, making it difficult to
develop products to market requirements, and making it even more difficult for
the market to develop. In the digital office market, our performance depends on
our ability to successfully develop embedded imaging processing SOC solutions
for the digital office market, in particular, embedded digital color copier
technology and image processing chips for multifunction peripherals. Among other
technological changes, embedded PDF and color capability are rapidly emerging as
33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
market requirements for printers and other imaging devices. Some of our
competitors have the capacity to supply these solutions, and some of their
solutions are well-received in the marketplace. We face 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. If we are unable to meet these challenges
with the development of products that can effectively compete in the OEM
software and solutions market, our future results of operations could differ
materially from current expectations.
In the past, product delays in the Optical Storage Group have resulted
primarily from difficulties in allocating engineering personnel among competing
projects, engineering resource limitations, and unanticipated engineering
complexity. Product delays in the Imaging Group, including our recently acquired
business, have resulted from these same factors, as well as changing OEM
customer product specifications, difficulties with independent contractors, and
changing markets or competitive requirements. These or other factors may also
contribute to future delays. The design complexity of our products, especially
with the increased levels of integration that are required, have previously
contributed to delays in completing development and introduction of new products
in both of our markets. If we fail in our new product development efforts or our
products fail to achieve market acceptance, our revenues will decline and our
business, financial condition and results of operations will be suffer.
Oak's Future Revenues Are Highly Dependent On Sales of Its CD-RW
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Controller Product. Our future revenue will largely depend on the success of our
------------------
recently introduced and next generation CD-RW product as well as our Combo
(combination DVD and CD-RW) product. We are no longer developing any CD-ROM
controllers and since the early part of fiscal 1999, have instead been focusing
our development efforts on controllers for CD-RW and Combo drives. We cannot
predict whether these products or their successors will be competitive in the
marketplace or carried into production by targeted customers. The current trend
toward integrating increased speed and functionality on the CD-RW or Combo
controller potentially adds to the development and manufacturing costs of
producing the controller. Our revenues and gross margins from our optical
storage controller products will depend on our ability to introduce integrated
products for the CD-RW and Combo markets in a commercially competitive manner.
Even if our CD-RW or Combo products prove to be competitive and are accepted by
targeted customers, our customers and their products may not be successful. If
our CD-RW product fails to achieve market acceptance, we will need other sources
of revenue to offset the loss. In fiscal 2001, revenue generated from Oak's
optical storage CD-RW business increased by 224%, compared to the previous year,
primarily due to the ongoing success of products introduced in fiscal 2000 and
the introduction of new CD-RW products in fiscal 2001. A decrease in the overall
level of sales of, and prices for, Oak's older generation CD-RW controller
product due to introductions of newer products by competitors, product
obsolescence and delays in Oak's next generation CD-RW product, could also
adversely affect on our business, financial condition and results of operation.
Oak's Future Revenues Will Depend on Future Royalties from Shipment of
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OEM Devices. We anticipate that the royalty streams derived from OEMs' shipments
-----------
of office equipment containing Oak products, and the sale of related products
and services to manufacturers of office equipment will account for a significant
portion of our revenue for the foreseeable future, although not as significant
as CD-RW for fiscal 2002. In order to assure that Oak will derive future royalty
streams from the shipment of OEM devices, Oak 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. OEMs are under tremendous pressure
to continually shorten the development cycles of these products, leading to
increased complexity and development costs to Oak and its OEMs. Our success will
depend on, among other things, the rate at which OEMs serving the digital office
market outsource their technology needs, market acceptance of our technology and
products and the office devices of our OEMs; the ability of Oak and its OEMs to
meet industry changes and market demands in a timely manner; achievement of new
design wins by Oak; successful implementation of Oak's technology and products
in new office devices being developed by its OEMs; and successful marketing of
those devices by the OEMs.
Oak's Markets Are Intensely Competitive and Experience Rapid
------------------------------------------------------------
Technological Change. We face intense competition in the markets in which we
--------------------
compete. We expect that the level of competition will increase in the future
from existing competitors and from other companies that may enter our existing
or future markets with solutions that may be less costly or provide higher
performance or additional features. Our principal competitors in the optical
storage market include MediaTek, Sanyo, Ricoh and Cirrus Logic. Our principal
34
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
competitors in the digital office market include Adobe Systems, Inc., Peerless
Systems Corporation, Electronics for Imaging, Inc., and in-house, captive
suppliers. We also expect 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 we do. In addition, much
of our success is dependent on the success of our OEM customers. Our OEM
customers in both the optical storage and digital imaging 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.
We anticipate that we will have to continue to lower the prices of many
of our products to stay competitive. The markets for most of the applications
for our 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, we
anticipate that average sales prices on products will decline. If we are unable
to reduce costs sufficiently to offset declines in average sales prices or are
unable to successfully introduce new higher performance products with higher
average sales prices, our operating results will suffer greatly.
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 our OEM customers has
accelerated in recent years, any reversal of this trend could seriously harm our
business. Similarly, significant market trends leading to changes in the way our
competitors do business may enable them to compete more effectively against Oak
than they have in the past. Additionally, changes in strategy by our
competitors, for example price reductions, new product introductions or new
marketing/distribution methods, could make it more difficult for us to compete
effectively, cause reduced market demand for our products or render our products
obsolete.
Oak and its OEM customers may be unable to compete successfully against
current or future competitors. Competitive pressures faced by Oak and its
customers may result in reduced revenues and profit margins and otherwise
seriously harm our business, financial condition and results of operations.
Oak May Be Unable To Protect Its Intellectual Property and Proprietary
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Rights, Which May Affect Its Ability to Compete. We consider our technology to
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be proprietary and rely on a combination of patents, trademarks, copyrights,
trade secret laws, confidentiality procedures and licensing arrangements to
protect our intellectual property rights. However, these measures afford only
limited protection. The steps that we take to protect our proprietary
information may not be adequate to prevent misappropriation of our technology.
For example, our competitors may be able to effectively design around our
patents, or our patents may be challenged, invalidated or circumvented. Our
competitors may also independently develop technologies that are substantially
equivalent or superior to our technology. In addition, the rights granted under
those patents may not necessarily provide competitive advantages. Moreover,
while Oak 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. The laws of certain
foreign countries in which our products are or may be manufactured or sold,
including various countries in Asia, may not protect our 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 our technology and products
more likely.
While we intend to seek additional international and United States
patents on our technology, it is possible that no additional patents may be
issued from any of our applications that are pending or in the process of being
prepared. Additional patents may not be issued in all countries where our
products can be sold. Any claims allowed from pending applications or
applications in preparation may not be of sufficient scope or strength to
provide meaningful protection or any commercial advantage to us.
Oak also generally enters into confidentiality agreements with its
employees and consultants and confidentiality and license agreements with its
customers and potential customers. We generally limit access to and distribution
of the source and object code of our software and other proprietary information.
With respect to our page description language software and drivers for the
digital office market and in limited circumstances with respect to firmware and
drivers for our optical storage products, we grant licenses that give our
customers access to and restricted use of the source code of our software. This
increases the likelihood of misappropriation or misuse of our technology.
Accordingly, despite our precautions, it may be possible for unauthorized third
parties to copy certain portions of our technology or to obtain and use
information that we regard as proprietary. The steps we take may not be adequate
to prevent misappropriation of our technology or to provide an adequate remedy
in the event of a breach or misappropriation by others. Furthermore, we may
initiate claims or litigation against third parties for infringement of our
35
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
proprietary rights or to establish the validity of our proprietary rights and in
the past has incurred significant legal expenses in connection with claims of
this type we have initiated. Additionally, we may be required to defend and
indemnify against third party infringement claims pursuant to terms of existing
agreements with our customers. In January 2001, Samsung was notified by Pitney
Bowes that its use of our RET technology infringed Pitney Bowes U.S. Patent No.
4,386,272. Oak is defending Samsung against this allegation of infringement
pursuant to its indemnification obligation under an earlier license agreement
between Samsung and XLI, a subsidiary of Oak.
Any litigation by or against Oak could result in significant expense to
Oak and divert the efforts of its technical and management personnel, whether or
not that litigation results in a favorable determination for us. In the event of
an adverse result in any litigation, we 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. We may not
be able to develop new technology or license the infringing technology on
reasonable terms, or at all. Any development or license of the technology could
require us to expend substantial time and other resources.
Oak May Be Unable To Obtain Third Party Intellectual Property Rights or
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May Be Liable For Significant Damages. Certain technology used in Oak's products
-------------------------------------
is licensed from third parties, and in connection with these licenses, Oak is
required to fulfill confidentiality obligations and, in some cases, pay
royalties. Some of our products require various types of copy protection
software that we must license from third parties. Should we lose our rights to,
or be unable to obtain the necessary copy protection software, we would be
unable to sell and market these products. Oak'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. Our 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 Oak to seek additional licenses to intellectual property rights
held by third parties or purchase products manufactured or sold by third parties
with respect to some or all of its product offerings. However, those licenses or
purchases may not be available on terms acceptable to Oak, if at all. If we are
unable to enter into those license arrangements on acceptable terms or to
maintain our current licenses on acceptable terms, our business, financial
condition and results of operations could suffer.
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. Oak or its foundries
may, from time to time, be notified of claims that we may be infringing patents
or other intellectual property rights owned by third parties. If necessary or
desirable, we may seek licenses under those patents or other intellectual
property rights. However, these licenses may not be offered or the terms of any
offered licenses might not be acceptable to us. If we fail to obtain a license
from a third party for technology used by Oak, we may incur substantial
liabilities and suspend the manufacture of products or the use by our foundries
of processes requiring the technology.
Oak has historically indemnified its customers for certain costs and
damages of patent infringement in circumstances where an Oak 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 Oak products with products of others or where infringement arises
based on modifications made by the customer to Oak's products. In January 2001,
Samsung was notified by Pitney Bowes that its use of Oak's RET technology
infringed Pitney Bowes U.S. Patent No. 4,386,272. Oak is defending Samsung
against this allegation of infringement pursuant to its indemnification
obligation under an earlier license agreement between Samsung and XLI, a
subsidiary of Oak. 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, we may not be able in any or every
instance, to settle an alleged patent infringement claim through a
cross-licensing arrangement. We have a more limited patent portfolio than many
of our competitors. If a successful claim is made against Oak or its customers
and a license is not made available to us on commercially reasonable terms or we
36
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
are required to pay substantial damages or awards, our business, financial
condition and results of operations would be materially adversely affected.
Oak Depends on Third Party Foundries And Vendors to Manufacture
---------------------------------------------------------------
Products. Oak contracts with independent foundries to manufacture a majority of
--------
its products and with independent vendors to assemble and test these products.
If we fail to adequately manage our relationships with these foundries and
vendors, our ability to manufacture and sell our products and our results of
operations would be negatively impacted. We rely on our foundries to allocate to
us a portion of their foundry capacity sufficient to meet our needs to produce
products of acceptable quality and with acceptable manufacturing yield and to
deliver products to us 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 our product, quality and other
requirements, our business, financial condition and results of operation could
suffer.
We also rely on third-party subcontractors to assemble and test our
products. If these subcontractors fail to meet our production requirements, our
business, financial condition and operating results would suffer.
Our reliance on independent manufacturers and third party assembly and
testing vendors involve 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 our products;
o Inability to obtain timely and adequate deliveries from current or
future suppliers;
o Delays in shipments of our products resulting in delay;
o Disruption of operations at any of our manufacturing facilities;
o Product defects and the difficulty of detecting and remedying product
defects resulting in a delay of shipment to customers or customer
rejection;
o The unavailability of, or interruption in access to, certain process
technologies; and
o Reduced control over delivery schedules, quality assurance and costs.
Oak generally does not use multiple sources of suppliers for its
products. As a result, the likelihood of and the consequences from the
occurrence of these factors are magnified. In fiscal year 2001, Oak did not
experience any material delays of its wafer deliveries from its primary
manufacturer. While we believe we have sufficient capacity to meet our needs
through calendar 2001, we have no firm commitments in place. We may not be able
to secure capacity for our manufacturing needs or may experience delays in the
future.
Oak's Failure to Accurately Forecast Demand for Its Products Could
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Negatively Impact Its Results of Operations. Under its foundry agreements, Oak
-------------------------------------------
is required to place non-cancelable orders and purchase its products on an
approximately three-month rolling basis. Our customers, on the other hand,
generally place purchase orders with us less than four weeks prior to delivery
that may be rescheduled or under certain circumstances may be cancelled, without
significant penalty. This limits our ability to react to fluctuations in demand
for our products. If we overestimate the product necessary to fill orders, or
fail to foresee a technology change that could render a product obsolete, we
will build excess inventories, which could harm our gross margins and operating
results. If we underestimate the product necessary to fill orders, we may not be
able to obtain an adequate supply of products which could harm our revenues. We
have experienced inventory write-offs of our optical storage products in the
past primarily due to unforeseen and rapid changes in our 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. The industry has
moved from a period of capacity shortages in the first half of calendar year
2000, to the current condition of excess capacity. We cannot predict whether Oak
37
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
can or will achieve timely, cost-effective access to that capacity when needed,
or if there will be a capacity shortage again in the future.
Oak 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 our revenues are derived from
--------------------
international sales. International sales, principally to Korea, Japan, Singapore
and Europe, accounted for approximately 84%, 75% and 86%, of our net revenues
for fiscal 2001, 2000 and 1999, respectively. Oak also depends on foreign
subcontractors for the manufacture of its products. Most of our foreign sales
and purchases are negotiated in US dollars, although invoicing is often done in
local currency. As a result, we may be subject to the risks of currency
fluctuations in the foreign countries in which we do business.
Oak 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 government, diplomatic or trade relationships; and
o Fluctuations in foreign currencies
As an example, Oak's significant investment in foundry capacity in
Taiwan exposes it to the risk of political instability in Taiwan, including the
potential for conflict between Taiwan and the People's Republic of China. We
have several significant OEM customers in Japan, South Korea, and other parts of
Asia. Adverse economic circumstances in Japan and elsewhere in Asia could affect
these customers' willingness or ability to do business with Oak in the future or
their success in developing and launching devices containing our products.
Oak 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 which is not offset by a gain or, or a significant
--------------------------------------------------------------------------
increase in purchases by, new or current customers, Would Significantly Reduce
------------------------------------------------------------------------------
Oak's Revenues. A limited number of customers historically have accounted for a
--------------
substantial portion of Oak's net revenues. In fiscal 2001, 2000, and 1999, sales
to our top ten customers accounted for approximately 82%, 78%, and 70%,
respectively, of our net revenues. In fiscal 2001, LG Electronics accounted for
31% of total net revenues while in fiscal 2000, LG Electronics accounted for 26%
of our net revenues, and Hewlett-Packard Company accounted for 16%. In fiscal
1999, Yamaha Corporation accounted for 17% and Mitsumi accounted for 10% of net
revenues.
We expect that sales to a limited number of customers will continue to
account for a substantial portion of our net revenues for the foreseeable
future. We do not have long-term purchase agreements with any of our customers.
Customers generally purchase our products subject to cancelable short-term
purchase orders. We cannot predict whether our current customers will continue
to place orders or whether existing orders will be canceled. We have experienced
significant changes from year to year in the composition of our major customer
base and believe this pattern will continue. Our revenues from the Optical
Storage Group will also depend on whether our OEM customers are successful in
selling their optical drives both in aftermarket and to PC OEM customers. In
part, to address this risk, we are continuing our efforts to increase
penetration in existing large customers as well as engage new large OEM
customers. For fiscal 2002 we have commitments and product plans from existing
and new large customers to add volume so that overall, we currently expect our
Optical Storage Group to have revenues in excess of $100 million and to have as
many as four customers, including LG Electronics, who will each represent 10% or
more of our optical storage revenues. Some of our customers have chosen, and may
continue to choose, to award their design wins and business on a project by
project basis to different vendors. For instance, while we have design
38
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
wins for several projects at LG Electronics, and we expect that it will continue
to be a significant customer, due to competition among the drive manufacturers
and changes being made in sourcing chipsets, we currently expect that our
revenue from this customer will decline in fiscal 2002. The loss of, or a
significant reduction in, purchases or commitments by current major customers
which is not offset by corresponding increases from other current or future
customers would have a material adverse effect on our business, financial
condition and results of operations. If sales to current customers cease or are
reduced, we may be unable to obtain the orders from new customers necessary to
offset any such losses or reductions. Moreover, we may not be able to qualify
our independent foundries for potential new customers or do so in a timely
manner.
Oak Is A Defendant In Several Lawsuits. Oak 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 Oak common
stock for the period from July 27, 1995 to May 22, 1996, alleging state
securities law and other violations. Additionally, various of Oak'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, Oak believes the class action
and derivative suits to be without merit and will defend its position
vigorously. Although it is reasonably possible we 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 Oak's financial statements. Oak is also a party to various other legal
proceedings, including a number of patent-related matters. In connection with
these lawsuits, however, management time has been, and will continue to be,
expended and Oak has incurred, and expects to continue to incur, substantial
legal and other expenses.
Oak Must Continue To Make Significant Capital Investments, And The
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Inability to Raise the Additional Capital Necessary to Fund These Investments On
--------------------------------------------------------------------------------
Acceptable Terms Could Seriously Harm Our Business. In order to remain
--------------------------------------------------
competitive, Oak must continue to make investments in new facilities and capital
equipment. 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, we have
entered into and will continue to consider various possible transactions,
including various "take or pay" contracts that commit Oak to purchase specified
quantities of wafers over extended periods. Manufacturing arrangements such as
these may require substantial capital investment, which may require us to seek
additional financing. We believe that existing liquid resources and funds
generated from operations, if any, combined with the ability to borrow funds
will be adequate to meet our operating and capital requirements and obligations
into the foreseeable future. We may, from time to time, seek additional equity
or debt financing. However, those funds, when needed, might not be available on
terms that we find acceptable. Any future equity financing will also lead to
dilution to existing shareholders.
Oak May Make Future Acquisitions Or Enter Into Joint Ventures That May
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Not Be Successful. In the future, Oak 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
o The maintenance of corporate culture, controls, procedures and
policies.
In addition, investments in emerging technology 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 Oak 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, we may
not be able to integrate acquired businesses, products or technologies with our
existing operations. If we are
39
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
unable to fully integrate an acquired business, product or technology, we may
not receive the intended benefits of that acquisition.
Oak Will Depend On Key Personnel To Manage Its Business, and the Loss
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of Any Key Personnel Could Seriously Harm Its Business. Our future performance
------------------------------------------------------
depends, to a significant degree, on the retention and contribution of members
of Oak's senior management as well as other key personnel including highly
skilled engineering and technical employees. In particular, it is important for
Oak to retain the services of Young K. Sohn, our current president and chief
executive officer. We continue to recruit financial, technical and operational
personnel. Competition for these people is intense, and we may not be able to
attract and retain qualified replacements or additional technical or operational
personnel. We may not be successful in finding suitable replacements for any
senior management personnel who may leave Oak.
Provisions in Oak's Charter Documents And Rights Plan Could Make It
-------------------------------------------------------------------
More Difficult To Acquire Oak And May Reduce The Market Price Of Oak Stock. Our
--------------------------------------------------------------------------
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 Oak without further action by the stockholders and may adversely
affect the voting and other rights of the holders of common stock. We have no
present plans to issue shares of preferred stock. Further, certain provisions of
our 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 Oak, which could have an adverse effect on the market price of
the stock. In addition, our charter documents do not permit cumulative voting
and provide that our 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 our 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 Oak, 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 us.
Oak's Business May be Affected by the Events of September 11, 2001. Our
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business and operating results may differ materially from our expectations due
to consequences attributable to the events that took place in New York City and
Washington D.C. on September 11, 2001. We cannot predict the nature or effect on
Oak of any future political or economic events and policies that may arise
directly or indirectly as a result of those events. In addition, these events
may continue to have a negative impact on the general emotions and psychology of
the marketplace, which could cause our stock price to fluctuate.
40
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Most of Oak's foreign sales are negotiated in US dollars; however,
invoicing is often done in local currency. As a result, Oak may be subject to
the risks of currency fluctuations. Assets and liabilities which are denominated
in non-functional currencies are re-measured 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 Oak's non-functional currency
receivables and payables are hedged through managing net asset positions,
product pricing and other means. Our strategy is to minimize its non-functional
currency net assets or net liabilities in our foreign subsidiaries. Our 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 June 30, 2001, Oak had foreign currency forward
exchange contracts to exchange Yen for approximately $1.2 million. Oak 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. If foreign currency rates
fluctuate by 10% from rates at June 30, 2001 and 2000, the effect on our
consolidated financial statements would not be material. However, there could be
a material effect on our financial statements in the future.
Oak's cash equivalents and short-term investments ("debt and equity
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. Oak 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, Oak does not
use investments for trading or other speculative purposes. Not withstanding the
foregoing, due to the divestiture of the Broadband business in January 2000, we
are 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. During fiscal 2001, Oak reduced the basis of this investment to a
book value of $8.95 per share as a result of a permanent impairment in the
market value of the common stock. This resulted in a charge to non-operating
expenses of $17.4 million during the fourth quarter of fiscal 2001. This
investment is classified as being held as an available-for-sale security. This
is a highly volatile equity security with market valuations in the range of
$7.07 to $132.00 since mid January 2000.
Due to the short maturities of its investments, the carrying values
generally approximate the fair value. If market interest rates were to increase
immediately and uniformly by 10% from levels as of June 30, 2001 and 2000, the
decline in the fair value of the portfolio would not be material. Further, Oak
has the ability to hold its fixed income investments until maturity and,
therefore, we would not expect to recognize such an adverse impact in income or
cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data of Oak required by this
item are set forth at the pages indicated at Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On June 5, 2001, Oak dismissed KPMG LLP as its independent
accountants and engaged PricewaterhouseCoopers LLP as its new independent
accountants. KPMG LLP had served as Oak Technology, Inc.'s (the "Company's")
auditors and had advised the Company on Federal, State and local tax matters.
The decision was made by the Audit Committee of the Board of Directors of the
Company after an evaluation of services provided by a number of independent
accounting firms as well as their knowledge of the industry.
41
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning our directors is
incorporated by reference to the sections captioned "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" contained in the Proxy
Statement related to Oak's 2001 Annual Meeting of Stockholders, to be filed by
Oak with the Securities and Exchange Commission within 120 days of the end of
our fiscal year pursuant to General Instruction G(3) of Form 10-K (the "Proxy
Statement"). Certain information required by this item concerning executive
officers is set forth in Part I of this Report in "Business -- Management" and
certain other information required by this item is incorporated by reference
from the section captioned "Section 16(a) Beneficial Ownership Reporting
Compliance" contained in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the section captioned "Executive Compensation and Other Matters" contained in
the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
the sections captioned "Security Ownership of Certain Beneficial Owners and
Management" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the sections captioned "Executive Compensation -- Compensation Committee
Interlocks and Insider Participation" and "Certain Relationships and Related
Transactions" contained in the Proxy Statement.
42
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
Page
----
1 Financial Statements.
Report of Independent Accountants.......................... 48
Independent Auditors' Report............................... 49
Consolidated Balance Sheets - As of June 30, 2001 and 2000. 50
Consolidated Statements of Operations - For the Three Year
Period Ended June 30, 2001............................... 51
Consolidated Statements of Stockholders' Equity - For the
Three Year Period Ended June 30, 2001.................... 52
Consolidated Statements of Cash Flows - For the Three Year
Period Ended June 30, 2001............................... 53
Notes to Consolidated Financial Statements................. 54
2 Financial Statement Schedule. The following Financial
Statement Schedule of the Registrant is filed as part of
this report:
Schedule II--Valuation and Qualifying Accounts............. 81
All other schedules are omitted because they are not applicable or
the required information is shown in the Consolidated Financial
Statements or notes thereto.
3 Exhibits. The following Exhibits are filed as part of, or
--------
incorporated by reference into, this report:
Exhibit
Number Exhibit Title
------ -------------
3.01 The Company's Restated Certificate of Incorporation, amended(1)
3.02 The Company's Restated Bylaws(2)
3.03 Certificate of Correction to the Restated Certificate of
Incorporation of the Company(16)
4.01 Form of Specimen Certificate for the Company's Common Stock(3)
4.02 Amended and Restated Registration Rights Agreement dated as of
October 15, 1993 among the Company and various investors(3)
4.03 The Company's Restated Certificate of Incorporation, as amended
(See Exhibit 3.01)
4.04 The Company's Restated Bylaws (See Exhibit 3.02)
4.05 Form of Certificate of Designation of Series A Junior Participating
Preferred Stock of the Company dated August 18, 1997(16)
4.06 Rights Agreement between the Company and BankBoston, N.A. dated
August 19, 1997(16)
43
10.01 1988 Stock Option Plan, as amended and related documents(3)*
10.02 1994 Stock Option Plan and related documents(3) and amendment
thereto dated February 1, 1996(4)*
10.03 1994 Outside Directors' Stock Option Plan and related documents(3)*
10.04 1994 Employee Stock Purchase Plan(3)*
10.05 401(k) Plan and related documents(3) and Amendment Number One and
Supplemental Participation Agreement thereto(5)*
10.07 Lease Agreement dated August 22, 1994 between John Arrillaga,
Trustee, or his Successor Trustee, UTA dated 7/20/77 (John
Arrillaga Separate Property Trust) as amended and Richard T.
Peery, Trustee, or his Successor Trustee, UTA dated 7/20/77
(Richard T. Peery Separate Property Trust) as amended, and Justin
Jacobs, Jr., dba Siri-Kifer Investments, a joint venture, and the
Company (lease agreement for 140 Kifer Court, Sunnyvale,
California)(3), and amendment thereto dated June 15, 1995(5)
10.08 Form of Indemnification Agreement, between the Company and each of
its Directors and executive officers(14)
10.09 VCEP Agreement dated July 30, 1990 between the Company and Advanced
Micro Devices, Inc.(3)
10.1 Product License Agreement dated April 13, 1993 between the Company
and Media Chips, Inc., as amended September 16, 1993(3)
10.11 Resolutions of the Board of Directors of the Company dated July 27,
1994 setting forth the provisions of the Executive Bonus Plan(3)(12)*
10.12 Employee Incentive Plan effective January 1, 1995(3)*
10.13 Option Agreement between Oak Technology, Inc., and Taiwan
Semiconductor Manufacturing Co., Ltd. dated as of August 8,
1996(14)**
10.14 Foundry Venture Agreement between the Company and United
Microelectronics Corporation dated as of October 2, 1995(6)(12)
10.15 Fab Ven Foundry Capacity Agreement among the Company, Fab Ven and
United Microelectronics Corporation dated as of October 2,
1995(7)(12)
10.16 Written Assurances Re: Foundry Venture Agreement among the Company,
United Microelectronics Corporation and Fab Ven dated as of October
2, 1995(8)(12)
10.17 Lease Agreement dated June 15, 1995 between John Arrillaga,
Trustee, or his Successor Trustee, UTA dated 7/20/77 (John
Arrillaga Separate Property Trust) as amended and Richard T.
Peery, Trustee, or his Successor Trustee, UTA dated 7/20/77
(Richard T. Peery Separate Property Trust) as amended, and the
Company (lease agreement for 130 Kifer Court, Sunnyvale,
California)(9), and amendments thereto dated June 15, 1995 and
August 18, 1995(10)
10.18 Deposit Agreement dated November 8, 1995 between Chartered
Semiconductor Manufacturing Ltd. and the Company(11), and Amendment
Agreement (No. 1) thereto dated September 25, 1996(13)**
10.19 Amendment Agreement (No. 2) dated April 7, 1997 to Deposit Agreement
dated November 8, 1995 between Chartered Semiconductor Manufacturing
Ltd. and the Company(15) and addendum thereto dated September 26,
1997(17)**
10.2 First Amendment to Plan of Reorganization and Agreement of Merger
dated October 27, 1995 among the Company, Oak Acquisition
Corporation, Pixel Magic, Inc. and the then shareholders of Pixel
dated June 25, 1996 and Second Amendment thereto dated June 13,
1997(16)**
44
10.21 First Amendment to Non-Compete and Technology Transfer Agreement by
and among the Company, Pixel Magic, Inc. and Peter D. Besen dated
June 13, 1997(16)**
10.22 Agreement of Termination of Employment Agreement between Pixel Magic,
Inc. and Peter D. Besen dated June 13, 1997(16)
10.23 Agreement of Termination of Employment Agreement between Pixel Magic,
Inc. and Don Schulsinger dated June 13, 1997(16)
10.24 Release and Settlement Agreement between the Company and United
Microelectronics Corporation dated July 31, 1997(16)**
10.25 Sublease Agreement dated December 1, 1997 between Global Village
Communication, Inc. and the Company (lease agreement for 1150 East
Arques Avenue, Sunnyvale, California) and accompanying lease and
amendment thereto(18)
10.26 Amendment to Option Agreement be and between Taiwan Semiconductor
Manufacturing Co., Ltd., and the Company(19)**
10.27 Settlement Agreement between Winbond Electronics Corporation and the
Company(19)**
10.28 Amendment Agreement (No. 3) to Deposit Agreement dated November 8,
1995 between Chartered Semiconductor Manufacturing Ltd. and Oak
Technology Inc.(20)
10.29 Employment Agreement between Oak Technology Inc. and Young K. Sohn
dated February 27, 1999(21)
10.3 Loan agreement between Oak Technology Inc. and Young K. Sohn dated
February 27, 1999(21)
10.31 Oak Technology Inc. Executive Stock Option Plan(21)
10.32 Letter Agreement dated January 22, 1999 between the Special Committee
of the Board of Directors of Oak Technology, Inc. and David T. Tsang
and Ta-Lin Hsu(21)
10.33 Amendment to Option Agreement dated June 30, 1999 between Oak
Technology Inc. and Taiwan Semiconductor Manufacturing Co., Ltd.(22)
10.34 Agreement and Plan of Merger and Reorganization between Oak
Technology, Inc., Vermont Acquisition Corp. and Xionics Document
Technologies, Inc. dated July 29, 1999(22)
23.1 Consent of Independent Accountants
23.2 Consent of Independent Auditors
24.1 Power of Attorney (signature page)
------------------------------------
(1) Incorporated herein by reference to Exhibit 3.01 of the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996.
(2) Incorporated herein by reference to Exhibit 3.05 filed with the Company's
Registration Statement on Form S-1 (File No. 33-87518) declared effective
by the Securities and Exchange Commission on February 13, 1995 (the
"February 1995 Form S-1").
(3) Incorporated herein by reference to the Exhibit with the same number
filed with the February 1995 Form S-1.
(4) Incorporated herein by reference to Exhibit 10.1 filed with the Company's
Registration Statement on Form S-8 (File No. 333-4334) on May 2, 1996.
45
(5) Incorporated herein by reference to the Exhibit with the same number
filed with the Company's Annual Report on Form 10-K for the year ended
June 30, 1996.
(6) Incorporated herein by reference to Exhibit 2.1 filed with the Company's
Form 8-K dated October 2, 1995 (the "October 1995 form 8-K").
(7) Incorporated herein by reference to Exhibit 2.2 filed with the October
1995 Form 8-K.
(8) Incorporated herein by reference to Exhibit 2.3 filed with the October
1995 Form 8-K.
(9) Incorporated herein by reference to Exhibit 10.08 filed with the Company's
Annual Report on Form 10-K for the year ended June 30, 1995.
(10) Incorporated herein by reference to Exhibit 10.08 filed with the Company's
Annual Report on Form 10-K for the year ended June 30, 1996.
(11) Incorporated herein by reference to Exhibit 10.04 filed with the Company's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1995.
(12) Confidential treatment has been granted with respect to portions of this
Exhibit.
(13) Incorporated herein by reference to Exhibit 10.17 filed with the Company's
Annual Report on Form 10-K for the year ended June 30, 1996.
(14) Incorporated herein by reference to the Exhibit with the same number filed
with the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996.
(15) Incorporated herein by reference to the Exhibit with the same number filed
with the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997.
(16) Incorporated herein by reference to the Exhibit with the same number filed
with the Company's Annual Report on Form 10-K for the year ended June 30,
1997.
(17) Incorporated herein by reference to the Exhibit with the same number filed
with the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997.
(18) Incorporated herein by reference to the Exhibit with the same number filed
with the Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1997.
(19) Incorporated herein by reference to the Exhibit with the same number filed
with the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998.
(20) Incorporated herein by reference to the Exhibit with the same number filed
with the Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1998.
(21) Incorporated herein by reference to the Exhibit with the same number filed
with the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999.
(22) Incorporated herein by reference to the Exhibit with the same number filed
with the Company's Registration Statement No. 333-92541 on Form S-4 dated
December 10, 1999.
+ Previously Filed
* Indicates Management incentive plan.
** Confidential treatment granted and/or requested as to portions of the
Exhibit.
46
(b) Reports on Form 8-K.
The Company filed Current Reports on Form 8-K on June 12, 2001 and July
24, 2001.
Trademark Acknowledgments
Oak Technology, Inc. and the Oak logo are registered trademarks of the
Company. Pixel Magic, XLI Corporation, iDSP, iCodec, and iRET, are trademarks of
the Company.
All other brand names or trademarks appearing in the Annual Report on
Form 10-K are the property of their respective owners.
47
Report of Independent Accountants
To the Board of Directors and Stockholders of
Oak Technology, Inc:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Oak
Technology, Inc. and its subsidiaries at June 30, 2001, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the
accompanying index appearing under Item 14 (a)(1) on page 43 for the year ended
June 30, 2001 presents fairly, in all material respects, the information set
forth therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Jose, California
July 20, 2001
48
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Oak Technology, Inc.:
We have audited the accompanying consolidated balance sheet of Oak Technology,
Inc. and subsidiaries (the Company) as of June 30, 2000, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the two-year period ended June 30, 2000. In connection with
our audits of the consolidated financial statements, we have also audited the
consolidated financial statement schedule II "Valuation and Qualifying
Accounts", insofar as it relates to the two-year period ended June 30, 2000.
These consolidated financial statements and consolidated financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and
consolidated financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Oak Technology, Inc.
and subsidiaries as of June 30, 2000, and the results of their operations and
their cash flows for each of the years in the two-year period ended June 30,
2000, in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, the related consolidated financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG LLP
Mountain View, California
July 24, 2000
49
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share and share data)
June 30,
-----------------------------
2001 2000
---- ----
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 25,141 $ 19,100
Short-term investments............................................... 98,887 101,704
Accounts receivable, net of allowance for doubtful accounts of $3,198
and $671, respectively........................................... 18,347 18,294
Inventories.......................................................... 6,626 20,137
Prepaid expenses and other current assets............................ 6,884 11,658
-------- --------
Total current assets............................................. 155,885 170,893
Property and equipment, net............................................... 18,448 19,738
Intangible assets, net.................................................... 29,337 44,053
Other assets.............................................................. 569 1,716
-------- --------
Total assets.............................................................. $204,239 $236,400
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt.................. $ -- $ 7
Accounts payable..................................................... 8,161 20,062
Accrued expenses..................................................... 13,680 11,357
Deferred revenue..................................................... 4,337 2,857
-------- --------
Total current liabilities........................................ 26,178 34,283
Deferred income taxes..................................................... -- 697
Other long-term liabilities............................................... 318 110
-------- --------
Total liabilities......................................................... 26,496 35,090
-------- --------
Commitments and contingencies (Notes 13 and 14)
Stockholders' equity:
Preferred stock, $0.001 par value; 2,000,000 shares authorized; none
issued and outstanding as of June 30, 2001 and 2000.............. -- --
Common stock, $0.001 par value; 130,000,000 shares authorized at June
30, 2001 and 2000; 58,628,451 shares issued and 54,330,971 shares
outstanding as of June 30, 2001; and 55,059,984 shares issued and
52,677,504 shares outstanding as of June 30, 2000................ 59 55
Additional paid-in capital........................................... 229,280 217,357
Treasury stock....................................................... (23,273) (11,257)
Retained earnings (deficit).......................................... (29,461) 1,171
Accumulated other comprehensive income (loss)........................ 1,138 (6,016)
-------- --------
Total stockholders' equity....................................... 177,743 201,310
-------- --------
Total liabilities and stockholders' equity................................ $204,239 $236,400
======== ========
See accompanying notes to consolidated financial statements.
50
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share and share data)
Year Ended June 30,
-----------------------------------------
2001 2000 1999
---- ---- ----
Revenues:
Product revenues............................................. $141,294 $ 65,348 $ 64,965
Software and other revenues.................................. 34,889 21,107 6,086
-------- -------- --------
Total revenues............................................. 176,183 86,455 71,051
Cost of revenues and operating expenses:
Cost of product revenues..................................... 85,706 34,577 38,095
Cost of software and other revenues.......................... 6,401 6,343 1,524
Research and development expenses............................ 50,628 49,151 46,165
Selling, general, and administrative expenses................ 36,607 33,159 35,110
Amortization of intangibles.................................. 14,716 10,516 4,942
Restructuring charges........................................ 1,765 3,285 --
Acquired in-process research and development................. -- 10,533 7,161
-------- -------- --------
Operating loss............................................. (19,640) (61,109) (61,946)
Gain on sale of business unit................................... -- 22,075 --
Impairment loss................................................. (17,371) -- --
Other non-operating income, net................................. 8,429 6,172 5,530
-------- -------- --------
Loss before income taxes........................................ (28,582) (32,862) (56,416)
Income tax expense (benefit).................................... 2,050 -- (5,747)
-------- -------- --------
Net loss........................................................ $(30,632) $(32,862) $(50,669)
======== ======== ========
Net loss per share -- basic and diluted......................... $ (0.56) $ (0.71) $ (1.24)
======== ======== ========
Weighted average common and potential common shares used in
computing basic and diluted net loss per share............... 54,274 46,057 40,819
======== ======== ========
See accompanying notes to consolidated financial statements.
51
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Common Stock Treasury Stock Accumulated
------------------ Additional ----------------- Retained Other Total
Number of $.001 Par Paid-In Number of Earnings Comprehensive Stockholders' Comprehensive
Shares Value Capital Shares Cost (Deficit) Income (Loss) Equity Loss
------ ----- ------- ------ ---- ----------- ------------- ------ ----
Balances, June 30, 1998.. 42,291 $42 $163,172 (1,142) $(6,708) $ 84,702 -- $241,208
Net loss and
comprehensive loss.... -- -- -- -- -- (50,669) -- (50,669) $(50,669)
========
Repurchase of common -- -- -- (859) (2,729) -- -- (2,729)
stock.................
Exercise of stock options 346 -- 713 -- -- -- -- 713
Employee stock purchase
plan.................. 280 -- 899 -- -- -- -- 899
------ ---- -------- ------ -------- -------- -------- --------
Balances, June 30, 1999.. 42,917 42 164,784 (2,001) (9,437) 34,033 -- 189,422
Net loss................. -- -- -- -- -- (32,862) -- (32,862) $(32,862)
Other comprehensive loss
- change in net
unrealized loss on
investments........... -- -- -- -- -- -- (6,016) (6,016) (6,016)
--------
Comprehensive loss....... $(38,878)
========
Repurchase of common -- -- -- (381) (1,820) -- -- (1,820)
stock.................
Issuance of common stock
in connection with
purchase of Xionics 9,483 10 45,163 -- -- -- -- 45,173
Document Technologies.
Exercise of stock options 2,216 2 6,057 -- -- -- -- 6,059
Employee stock purchase
plan.................. 444 1 1,353 -- -- -- -- 1,354
------ ---- -------- ------ -------- -------- -------- --------
Balances, June 30, 2000.. 55,060 55 217,357 (2,382) (11,257) 1,171 (6,016) 201,310
Net loss................. -- -- -- -- -- (30,632) -- (30,632) $(30,632)
Other comprehensive
income - change in
net unrealized gain
on investments, net
of realized losses.... -- -- -- -- -- -- 7,154 7,154 7,154
--------
Comprehensive loss....... $(23,478)
========
Repurchase of common -- -- -- (1,915) (12,016) -- -- (12,016)
stock.................
Exercise of stock options 3,379 3 10,206 -- -- -- -- 10,209
Employee stock purchase
plan.................. 189 1 1,717 -- -- -- -- 1,718
------ ---- -------- ------ -------- -------- -------- --------
Balances, June 30, 2001.. 58,628 $ 59 $229,280 (4,297) $(23,273) $(29,461) $ 1,138 $177,743
====== ==== ======== ====== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
52
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended June 30,
-------------------------------------------
2001 2000 1999
---- ---- ----
Cash flows from operating activities:
Net loss........................................................ $ (30,632) $ (32,862) $ (50,669)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Depreciation and amortization................................ 22,557 17,459 12,411
Gain on sale of business..................................... -- (22,075) --
Acquired in-process technology............................... -- 10,533 7,161
Loss on equity method investments, net....................... -- 1,863 194
Impairment loss on equity securities 17,371 -- --
Restructuring charges........................................ -- 1,270 --
Foundry deposit reserve adjustments.......................... -- 700 2,800
Loss on disposal of fixed assets............................. 31 1,381 1,293
Deferred income taxes........................................ (1,086) (741) 4,187
Changes in operating assets and liabilities:
Accounts receivable.......................................... (53) (5,247) 9,354
Inventories.................................................. 13,511 (18,318) 5,739
Foundry deposits............................................. -- 9,061 1,554
Prepaid expenses, other current assets and other assets...... 6,310 1,606 (153)
Accounts payable and accrued expenses........................ (9,578) 19,306 (4,156)
Income taxes payable, deferred revenue and other liabilities. 1,688 (2,487) (226)
---------- ---------- ----------
Net cash provided by (used in) operating activities........ 20,119 (18,551) (10,511)
---------- ---------- ----------
Cash flows from investing activities:
Purchases of short-term investments............................. (126,495) (193,870) (114,021)
Proceeds from matured short-term investments.................... 119,095 219,853 57,740
Additions to property and equipment, net........................ (6,582) (4,566) (5,998)
Other acquisitions and equity investments....................... -- (4,281) --
Proceeds from sale of business unit............................. -- 4,900 --
Acquisition of Xionics, net of cash acquired.................... -- (9,453) --
Acquisition of ViewPoint, Inc., net of cash acquired............ -- -- (9,467)
Acquisition of XLI Inc. common stock............................ -- -- (3,675)
Payment of certain XLI, Inc. liabilities at acquisition date.... -- -- (2,094)
Proceeds from sale of foundry venture........................... -- -- 51,234
---------- ---------- ----------
Net cash provided by (used in) investing activities........ (13,982) 12,583 (26,281)
---------- ---------- ----------
Cash flows from financing activities:
Issuance of debt................................................ -- -- 3,773
Repayment of debt............................................... (7) (23) (6,167)
Treasury stock acquisition...................................... (12,016) (1,820) (2,729)
Issuance of common stock........................................ 11,927 7,411 1,612
---------- ---------- ----------
Net cash provided by (used in) financing activities........ (96) 5,568 (3,511)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents............ 6,041 (400) (40,303)
Cash and cash equivalents, beginning of period.................. $ 19,100 $ 19,500 $ 59,803
========== ========== ==========
Cash and cash equivalents, end of period........................ $ 25,141 $ 19,100 $ 19,500
========== ========== ==========
Supplemental information:
Cash paid during the period:
Interest..................................................... $ 59 $ -- $ 52
========== ========== ==========
Income taxes................................................. $ 1,792 $ -- $ --
========== ========== ==========
Equity securities received in sale of business.................. $ -- $ 20,000 $ --
========== ========== ==========
Fair value of stock options assumed in Xionics acquisition. $ -- $ 8,380 $ --
========== ========== ==========
Fair value of stock issued for Xionics acquisition.............. $ -- $ 36,793 $ --
========== ========== ==========
See accompanying notes to consolidated financial statements.
53
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY
Oak Technology, Inc. and subsidiaries ("Oak" or the "Company") designs,
develops and markets high performance integrated semiconductors, software and
platform solutions to original equipment manufacturers ("OEMs") worldwide that
serve the optical storage, and digital imaging equipment markets. The Company's
products consist primarily of integrated circuits and supporting software and
firmware, all designed to store and distribute digital content, thereby enabling
its OEM customers to deliver cost-effective, powerful systems to the end user
for the home and enterprise. The Company contracts with independent foundries to
manufacture all of its products, enabling the Company to focus on its design
strengths, minimize fixed costs and capital expenditures and gain access to
advanced manufacturing facilities. The Company's mission is to be a leading
solution provider for the storage and distribution of digital content.
The Company's operations are organized along its two market-focused
groups: the Optical Storage Group and the Imaging Group. The Imaging Group
comprises the combination of the Company's earlier acquisition of Xionics
Document Technologies, Inc. and its Pixel Magic subsidiary, serving the digital
imaging equipment market.
The Company was originally incorporated in California in 1987 and was
reincorporated in Delaware in 1994. The Company has facilities in: Woburn,
Massachusetts; San Diego, California; Austin, Texas; Tucson, Arizona; Taipei,
Taiwan; Yokohama City Kanagawa and Osaka Japan; Seoul, Korea; Manchester,
England; Dortmund, Germany; and Shenzhen, China.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Preparation
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries. All significant intercompany
transactions and accounts have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents and Investments
The Company's policy is to invest cash in excess of operating
requirements in interest-bearing investments. Securities purchased with
remaining maturities of three months or less at the date of acquisition are
considered to be cash equivalents. Securities purchased with remaining
maturities greater than three months at the date of acquisition are included in
short-term investments.
The Company accounts for its investments in debt and equity securities
with readily determined fair values as "held-to-maturity," "available-for-sale"
or "trading" and establishes accounting and reporting requirements for each
classification. The Company has classified all securities held at June 30, 2001
and June 30, 2000 as available-for-sale securities. Such securities are reported
at fair value with unrealized gains or losses, if material, included in other
comprehensive income and reported as a separate component of stockholders'
54
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
equity. Realized gains and losses are reported as a component of other
non-operating income or loss.
Fair Value of Financial Instruments
The carrying value of the Company's financial instruments, including
cash and cash equivalents, accounts receivable, foreign currency forward
exchange contracts and notes payable and long-term debt approximates fair value.
Cash and cash equivalents and accounts receivable approximate fair value due to
their short-term nature. Notes payable and long-term debt approximate fair
market value as interest rates on these notes approximate market rates.
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. The Company does not enter into
foreign exchange contracts for speculative or trading purposes. As of June 30,
2001, the Company had short-term foreign currency exchange contracts with face
values of approximately $1.2 million to purchase U.S. Dollars with Japanese Yen
for accounts receivables denominated in Japanese Yen and fixed purchase
commitments. 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.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), which was effective
for the Company's fiscal year 2001. SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument, including
certain derivative instruments embedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statement also requires that changes in the derivative's fair value be
recognized in earnings unless specific hedge accounting criteria are met. The
Company adopted SFAS No. 133 during fiscal 2001 effective as of the beginning of
the year. The adoption did not have a significant impact on the consolidated
financial statements.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily cash and cash equivalents,
short-term investments and accounts receivable. The Company's cash equivalents
and short-term investments are primarily in money market accounts, certificates
of deposit, corporate notes and US government obligations. The Company's
short-term investments have maturities ranging from 2001 through 2003. Also
included in cash and cash equivalents as of June 30, 2001 and 2000, are
approximately $7,213,000 and $4,000,000, respectively, in accounts with foreign
banks and financial institutions primarily in Taiwan, Japan, and Germany. The
Company periodically discounts notes receivable with recourse due from some
customers with banks in Japan. As of June 30, 2001 and 2000, the Company had no
discounted notes receivable outstanding.
Generally, the Company requires no collateral on trade receivables,
although a substantial portion of export sales are guaranteed by letters of
credit. The Company believes that any credit risks are substantially mitigated
by its credit evaluation process and its maintenance of reserves for estimated
credit losses.
55
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Inventories
Inventories are stated at the lower of cost (first in, first out) or
market. The Company periodically reviews its inventories for potential
slow-moving or obsolete items and writes down specific items to net realizable
value as appropriate.
Depreciation and Amortization
Property and equipment is stated at cost. Depreciation is computed
using the straight-line method. Useful lives of three to five years are used for
computer equipment, purchased software and furniture and fixtures; useful lives
of up to five years are used for leasehold improvements and a useful life of 60
years is used for a building.
Amortization of Intangible Assets
Goodwill, purchased technology and other intangible assets are
amortized on a straight-line basis over periods of 3 to 5 years.
Equity Investments
Where the Company has investments in which it has the ability to
exercise significant influence over operating and financial policies, these
investments are accounted for using the equity method. Accordingly, the
Company's share of the income/(loss) in these investments is included in other
operating income.
Long-Lived Assets
The Company reviews its long-lived assets, including its intangible
assets, for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability of assets
held and used is measured by a comparison of the carrying amount of an asset to
the future undiscounted net cash flows expected to be generated by such asset.
If the carrying amount is in excess of the future undiscounted net cash flows of
such assets, an impairment is recognized and is measured by the amount by which
the carrying value of the asset exceeds its fair value. Assets to be disposed of
are reported at the lower of their carrying amount or fair value less cost to
sell.
The Company also assesses the impairment of enterprise level goodwill
periodically in accordance with the provision of Accounting Principles Board
(APB) Opinion No. 17, Intangible Assets. An impairment review is performed
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. Factors the Company considers important which could trigger
an impairment review include, but are not limited to, significant under
performance relative to expected historical or projected future operating
results, significant changes in the manner of use of the acquired assets or the
strategy for the overall business, significant negative industry or economic
trends, a significant decline in stock price for a sustained period, and our
market capitalization relative to net book value. When the Company determines
that the carrying value of goodwill and other intangible assets may not be
recoverable based upon the existence of one or more of the above indicators of
impairment, any impairment is measured based on a projected discounted cash flow
method using a discount rate commensurate with the risk inherent in the
Company's current business model.
56
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Revenue Recognition
Product revenue is recognized upon shipment to credit worthy customers.
Provisions for sales returns and allowances are estimated and provided at the
time of shipment.
Software and other revenues include software license fees, services,
software maintenance and royalty revenues. Software and other revenues originate
primarily from the business operations which were acquired from Xionics on
January 11, 2000.
Revenue from transactions involving the Company's software products is
accounted for in accordance with Statement of Position ("SOP") 97-2 and SOP
98-9, "Software Revenue Recognition with Respect to Certain Arrangements". SOP
97-2 generally requires revenue earned on software arrangements involving
multiple elements to be allocated to each element based on relative fair values
of the elements. The determination of the fair value is based on evidence that
is specific to the vendor. When the Company does not have evidence of the fair
value for one or more of the delivered elements in a multiple-element
arrangement, the residual method is applied to recognize revenue. Under the
residual method, the total fair value of the undelivered elements is deferred
and subsequently recognized in accordance with SOP 97-2. When the Company does
not have evidence of the fair value for all elements in a multiple-element
arrangement, all revenue from the arrangement is deferred until such evidence
exists or until all elements are delivered.
Revenue from software is recognized upon shipment of software and
related documentation, based upon fixed price purchase orders from customers
provided there are no obligations remaining and collectibility of the receivable
is reasonably assured. Revenue from software maintenance contracts is deferred
and recognized ratably as it is earned over the term of the contract, generally
one year. Unearned software maintenance revenue is included in deferred revenue.
In addition, deferred revenue includes certain prepaid royalties and advance
billings under software development contracts for services not yet performed.
Service revenue and royalty revenue are recognized as the service is performed
and the royalty is earned. The Company recognizes revenue under agreements for
non-recurring engineering services as provided for in either per diem contracts
or by using the percentage of completion method of accounting based on the ratio
of actual labor hours incurred to total estimated labor hours for individual
fixed price contracts. Provisions for any estimated losses on uncompleted
contracts are made in the period in which such losses become evident or
estimatable. During the period from the acquisition of Xionics on January 11,
2000 until the end of fiscal 2001, no material contract loss reserves for
uncompleted contracts have been provided.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101
("SAB 101"), "Revenue Recognition" in Financial Statements. SAB 101 summarizes
certain of the SEC's views in applying generally accepted accounting principles
to revenue recognition in financial statements. The Company adopted SAB 101
during fiscal 2001, effective as of the beginning of the year. The impact of the
adoption was not significant to the consolidated financial statements.
Foreign Currency Translation and Transactions
The majority of the Company's purchasing and sales transactions are
denominated in US dollars, which is considered to be the functional currency of
the Company and its subsidiaries. Certain sales to customers in Japan and Taiwan
are invoiced in local currencies. Monetary assets and liabilities of the
Company's foreign subsidiaries are remeasured into U.S. dollars from the local
currency at rates in effect at period-end and non-monetary assets and
liabilities are remeasured at historical rates. Revenues and expenses are
remeasured at average rates during the period. Gains and losses arising from the
remeasurement of local currency financial statements are included in other
non-operating income.
57
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Stock-Based Compensation
The Company accounts for stock option grants, as permitted by SFAS No.
123, Accounting For Stock-Based Compensation, in accordance with the provisions
of Accounting Principles Board (APB) Opinion No. 25, Accounting For Stock Issued
To Employees. As such, compensation expense is recorded on the date of grant if
the current market price of the underlying stock exceeds the exercise price. In
accordance with SFAS No. 123, the Company discloses pro forma loss and pro forma
loss per share amounts assuming the Company had accounted for employee stock
option grants using the fair value-based method defined in SFAS No. 123.
In March 2000, the FASB issued FASB Interpretation No. 44 (FIN 44),
Accounting for Certain Transactions Involving Stock Compensation - an
Interpretation of APB Opinion No. 25. FIN 44 clarifies certain elements of APB
Opinion No. 25. Among other issues, this interpretation clarifies: the
definition of employee for purposes of applying APB Opinion No. 25, the criteria
for determining whether a plan qualifies as non-compensatory, the accounting
consequences of various modifications to the terms of a previously fixed stock
option award, and the accounting for an exchange of stock compensation in a
business combination. The Company adopted this interpretation during fiscal
2001, effective as of the beginning of the year. The adoption of this
interpretation did not have a material impact on the Company's financial
position or results of operations.
Income Taxes
The Company records income taxes using an asset and liability approach
that results in the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized differently
in the Company's consolidated financial statements and tax returns. In
estimating future tax consequences, all expected future events other than
enactment of changes in tax laws or rates are considered. A valuation allowance
is established when necessary to reduce deferred tax assets to amounts expected
to be realized. Under certain provisions of the Internal Revenue Code of 1986,
as amended, the availability of the Company's net operating loss and tax credit
carryforwards may be subject to limitation if it should be determined that there
has been a change in ownership of more than 50% of the value of the Company's
stock. Such determination could limit the utilization of net operating loss and
tax credit carryforwards.
US income taxes are provided on income from foreign subsidiaries to the
extent the Company plans to repatriate such income.
Net Loss Per Share
Basic net loss per share is computed using the weighted average number
of common shares outstanding during the period. Diluted net loss per share is
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the period, using the treasury stock method
for options and warrants. The computation of diluted net loss per share excludes
common equivalent shares since they are anti-dilutive in a loss period.
58
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The following is a reconciliation of the numerators and denominators of
the basic and diluted loss per share computations for the periods presented (in
thousands except per share amounts):
Years Ended June 30,
---------------------------------
2001 2000 1999
---- ---- ----
Net loss................................... $(30,632) $(32,862) $(50,669)
======== ======== ========
Shares:
Weighted average common shares........ 54,274 46,057 40,819
Dilutive stock options and other
common stock equivalents............ -- -- --
-------- -------- --------
Dilutive potential common shares.. 54,274 46,057 40,819
======== ======== ========
Loss per share:
Basic................................. $ (0.56) $ (0.71) $ (1.24)
======== ======== ========
Diluted............................... $ (0.56) $ (0.71) $ (1.24)
======== ======== ========
All outstanding options and warrants were excluded from dilutive
earnings per share calculation because of their anti-dilutive impact on the
Company's loss per share.
Comprehensive Loss
The components of comprehensive loss, as required by SFAS 130 in fiscal
2001 and 2000 were due entirely to net unrealized losses on short-term
investments (see Note 3) and as presented in the Statement of Stockholder's
Equity. In fiscal 1999, there were no differences between comprehensive loss and
net loss.
Reclassifications
Certain prior year items have been reclassified to be consistent with
current year presentation. The reclassifications have no effect on previously
disclosed net loss or stockholders' equity.
Recently Issued Accounting Standards
In July 2001, the FASB issued SFAS No. 141, "Business Combinations."
SFAS 141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method.
The Company believes that the adoption of SFAS 141 will not have a significant
impact on its financial statements.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets", which is effective for fiscal years beginning after March
15, 2001. SFAS 142 requires, among other things, the discontinuance of goodwill
amortization. In addition, the standard includes provisions upon adoption for
the reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the testing for impairment of existing goodwill and other intangibles. The
Company is currently assessing but has not yet determined the impact SFAS 142
will have on its financial position and results of operations.
59
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(3) CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
As of June 30, 2001, all investments were considered available-for-sale
securities and consisted of the following (in thousands):
Estimated
Unrealized Fair
Cost Gain Value
---- ---- -----
Money market funds.................... $ 25,141 $ -- $ 25,141
Certificates of deposit............... 517 -- 517
Corporate notes....................... 46,119 447 46,566
US government obligations............. 48,484 691 49,175
Equity securities..................... 2,629 -- 2,629
-------- ------- --------
$122,890 $ 1,138 $124,028
======== ======= ========
As of June 30, 2001, approximately $31.6 million of these investments
had contractual maturities within one year and approximately $92.4 million had
contractual maturities between one and two years. These investments were
classified on the consolidated balance sheet as follows (in thousands):
Cash and cash equivalents....................................... $ 25,141
Short-term investments.......................................... 98,887
--------
$124,028
========
Due to the divestiture of the Broadband business in January 2000, the
Company has an investment in 293,794 shares of Conexant Systems Inc. common
stock which had an original book value of $68.05 per share. During fiscal 2001,
the Company reduced the basis of this investment to a book value of $8.95 per
share as a result of an impairment in the market value of the common stock which
the Company believes is other than temporary. This resulted in a charge to
non-operating expenses of $17.4 million during fiscal 2001.
As of June 30, 2000, all investments were considered available-for-sale
securities and consisted of the following (in thousands):
Estimated
Unrealized Fair
Cost Gain Value
---- ---- -----
Money market funds.................... $ 18,649 $ -- $ 18,649
Certificates of deposit............... 532 -- 532
Corporate notes....................... 46,477 (263) 46,214
US government obligations............. 41,162 (39) 41,123
Equity securities..................... 20,000 (5,714) 14,286
-------- ------- --------
$126,820 $(6,016) $120,804
======== ======= ========
As of June 30, 2000, approximately $22.4 million of these investments
had contractual maturities within one year and approximately $98.4 million had
contractual maturities between one and two years. These investments were
classified on the consolidated balance sheet as follows (in thousands):
Cash and cash equivalents....................................... $ 19,100
Short-term investments.......................................... 101,704
--------
$120,804
========
60
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(4) INVENTORIES
Inventories consisted of the following (in thousands):
June 30,
----------------------
2001 2000
---- ----
Purchased materials and work in process.... $ 3,724 $16,193
Finished goods............................. 2,902 3,944
------- -------
$ 6,626 $20,137
======= =======
(5) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
June 30,
----------------------
2001 2000
---- ----
Land........................................... $ 3,487 $ 3,487
Building, vehicles and leasehold improvements.. 3,017 2,509
Computers, equipment and purchased software.... 38,155 44,526
Furniture and fixtures......................... 2,723 1,584
------- -------
47,382 52,106
Less accumulated depreciation and amortization. (28,934) (32,368)
------- -------
$18,448 $19,738
======= =======
(6) INTANGIBLE ASSETS
Intangible assets consisted of the following (in thousands):
June 30,
----------------------
2001 2000
---- ----
Purchased technology........................... $29,094 $29,094
Goodwill....................................... 20,328 20,328
Other intangibles.............................. 6,309 6,309
------- -------
55,731 55,731
Accumulated amortization....................... (26,394) (11,678)
------- -------
$29,337 $44,053
======= =======
At June 30, 2001 and 2000, intangible assets consisted of purchased
technology, goodwill and other miscellaneous intangibles acquired via a series
of acquisitions including Xionics, Viewpoint, XLI and Odeum. Purchased
technology and other specific intangibles such as acquired workforce, patents,
tradename and other miscellaneous acquisition expenses have been identified via
independent fair value appraisals. Goodwill represents the excess purchase price
over the fair value of assets acquired. See Note 11 for a more in-depth
61
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
discussion of each acquisition. All intangible assets are being amortized over a
period of three to five years from the respective dates of acquisition.
(7) OTHER ASSETS
Other assets consisted of the following (in thousands):
June 30,
----------------------
2001 2000
---- ----
Note receivable from officer (see Note 19)..... $ -- $ 1,333
Deposits....................................... 542 383
Other.......................................... 27 --
------- -------
$ 569 $ 1,716
======= =======
(8) ACCRUED EXPENSES
Accrued expenses consisted of the following (in thousands):
June 30,
----------------------
2001 2000
---- ----
Compensation and benefits related items........ $ 5,366 $ 4,420
Accrued legal and other fees................... 365 1,017
Taxes payable.................................. 1,503 140
Royalties...................................... 139 1,353
Restructuring (see Note 17).................... 831 1,270
Other.......................................... 5,476 3,157
------- -------
$13,680 $11,357
======= =======
(9) NOTES PAYABLE AND LONG-TERM DEBT
The Company has established a revolving credit line with two Taiwanese
financial institutions. Under these arrangements, the Company may borrow up to
an aggregate amount of approximately $7.7 million subject to annual renewal
without collateral. As of June 30, 2001 and 2000, there were no borrowings
outstanding at any financial institution. At June 30, 2000, a capital lease
obligation of $7,000 was outstanding which was subsequently paid. There were no
outstanding capital lease obligations at June 30, 2001.
62
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(10) OTHER NON-OPERATING INCOME
Non-operating income, net consisted of the following (in thousands):
June 30,
---------------------------------
2001 2000 1999
---- ---- ----
Interest income......................... $ 8,009 $ 6,555 $ 5,617
Interest expense........................ (59) (32) (52)
Foreign currency (loss)/gain............ (207) 760 147
Loss on equity method investments....... -- (1,863) (368)
Other income............................ 686 752 186
------- ------- -------
$ 8,429 $ 6,172 $ 5,530
======= ======= =======
(11) ACQUISITIONS, DIVESTITURES AND INVESTMENTS
Acquisitions
On April 24, 2000 the Company signed an Asset Purchase Agreement by and
between Oak, TCD Labs and the shareholders of TCD Labs. Under the agreement, the
Company paid $1.5 million in cash for the net assets of TCD and may be liable
for an additional $1.5 million in contingent payments for the achievement of
specific milestones, as well as a percentage of the direct contribution margins,
both of which may be earned over the next three years.
On January 11, 2000, the shareholders of both the Company and Xionics
Document Technologies, Inc. (Xionics) approved a definitive acquisition
agreement. Xionics designs, develops and markets innovative software and silicon
solutions for printing, scanning, copying, processing and transmitting digital
documents to computer peripheral devices that perform document imaging
functions. Such devices include printers, copiers, scanners and multifunction
peripherals that perform a combination of these imaging functions.
Under the terms of the acquisition agreement, Oak issued approximately
9.5 million shares of its common stock and paid approximately $34.7 million in
cash to acquire all of the common stock of Xionics. The Company recorded a
charge of approximately $9.9 million against earnings in the third fiscal
quarter of 2000 in order to write off the cost of in-process research and
development acquired in the merger.
At the acquisition date, Xionics had several in-process research and
development projects in each of its product groups: languages, drivers, MFP's
and its new complementary product for a Tandem copy/print engine. In each
product group there were projects that had not yet achieved technological
feasibility. As image processing represents a very specialized market, it is
unlikely that Xionics' in process technology could be successfully deployed in
alternative market applications. Further, it was determined that there was
significant technological risk and substantial development expenses relating to
each of the products under development. As a result, the Company took a $9.9
million charge against earnings in fiscal 2000 in order to reflect an allocation
of the purchase price associated with the value of the in process research and
development which, due to it's uncertain future value at the date of
acquisition, could not be considered an investment in an asset.
The valuation of the acquired in-process research and development used
by the Company was supported by independent fair valuation studies. The
estimated value of in-process research and development was derived using the
"Income Approach", which values an asset based on future cash flows that could
potentially be generated by the asset over its estimated useful life. The future
cash flows were discounted to their present value utilizing a discount rate of
14%. The amounts of the purchase price technology assigned to the fair values of
63
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
in-process research and development and purchased technology represent
management's best estimate. The Company did not anticipate any material changes
from historical pricing, margins and expense levels in its valuation
assumptions.
In addition to the $9.9 million charge taken, approximately $45.8
million (representing the fair value of net intangible assets acquired in the
merger) has been recorded as intangible assets on the Company's balance sheet
and is being amortized over three to five years. The $45.8 million is made up of
$18.6 million in purchased technology, $18.9 million in Goodwill and $8.3
million in other miscellaneous intangible assets including Acquired Workforce,
Patents, Tradename and certain acquisition costs. The transaction has been
accounted for under the purchase method of accounting, and accordingly, the
financial statements include the results of operations of Xionics form the date
of acquisition.
The amounts and components of the purchase price and the allocation of
the purchase price to assets purchased are as follows (in thousands):
Cash $34,715
Common stock................................................ 36,793
Fair value of Xionics stock options assumed................. 8,380
-------
Total purchase price................................... $79,888
=======
Fair value of net tangible assets of Xionics................ $24,187
Intangible assets and goodwill.............................. 45,843
Purchase of in-process research and development............. 9,858
-------
Total net tangible and intangible assets acquired...... $79,888
=======
The following unaudited pro forma financial information presents the
combined results of operations of Oak and Xionics as if the acquisition had
occurred as of the beginning of fiscal 2000 and 1999, after giving effect to
64
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
certain adjustments, including amortization of intangibles. The unaudited pro
forma financial information does not necessarily reflect the results of
operations that would have occurred had the combined companies constituted a
single entity during such periods, and is not necessarily indicative of results
which may be obtained in the future.
June 30,
------------------------
2000 1999
---- ----
In thousands except for per share data:
Pro forma revenues.................................. $104,721 $102,454
Pro forma net loss.................................. $(35,682) $(59,575)
Pro forma basic and diluted loss per share.......... $ (0.68) $ (1.18)
On July 2, 1998, the Company paid $10.1 million for all the outstanding
shares of ViewPoint Technology, Inc. The purchase method of accounting was used
to record the acquisition and approximately $4.8 million of the purchase price
was allocated to in-process research and development. Approximately $4.4 million
of the purchase price was allocated to purchased technology and other intangible
assets and is being amortized to operations on a straight-line basis over three
years, and $0.9 million was allocated to cash, fixed assets and other tangible
assets.
On August 11, 1998, the Company signed a merger agreement with
Xerographic Laser Images Corporation "XLI"). Under the terms of a merger
agreement the Company may be obligated to pay up to an additional $10.3 million
if revenues from products utilizing XLI's technologies are in excess of a base
amount of $3.7 million for each year of a 3 year period ending December 31,
2000. To date, revenues have not exceeded the base amount and, accordingly, no
additional payments to XLI have been made or accrued for.
On April 2, 1998, the Company paid $4.1 million in cash to acquire
certain assets from ODEUM Microsystems, Inc., a subsidiary of Hyundai
Electronics America. The acquisition was accounted for using the purchase method
of accounting and approximately $1.3 million of the purchase price was allocated
to in-process research and development with the remaining amount allocated to
purchased technology.
The purchased technology and other intangible assets acquired from
ViewPoint, XLI and ODEUM are being amortized over three years. The amounts of
the purchase price assigned to the fair value of such assets and in-process
research and development represent Company management's best estimate.
Equity Investments
On April 30, 1998, the Company entered into several agreements with
Omni Peripherals Pte. Ltd., a private Singaporean company ("Omni") and two other
investors pursuant to which the Company acquired a preferred equity interest in
Omni. Omni was incorporated in Singapore on January 2, 1996, and has been in the
business of designing, developing, and marketing mechatronics modules for
optical storage drives. As of June 30, 2000 Omni had ceased operations and was
in the process of liquidating it's assets. Oak continues to have an interest and
rights in a portion of the Intellectual property of Omni. However, the book
value of these assets has now been fully written-off.
During the second quarter of fiscal 2000 the Company made an equity
investment in a start-up venture, Earjam.com, with a first payment of
approximately $1.0 million for a minority equity position. The Company recorded
a charge of $0.2 million against earnings in the second fiscal quarter of 2000
to write-off the amount of the investment allocated to in-process research and
development. In January 2000, the Company made an additional $2.0 million
payment in Earjam.com during the third quarter of fiscal 2000 and recorded an
additional special charge of $0.3 million in the third fiscal quarter of 2000 to
write-off the remaining amount of the investment allocated to in-process
65
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
research and development. The amounts allocated to the in-process research and
development charges during the second and third quarters of fiscal 2000 were
determined through an established valuation technique used in the high
technology industry. The amount allocated to in-process research and development
was expensed upon acquisition, because technological feasibility had not been
established and no alternative uses exist. The investment has been accounted for
under the equity method of accounting. Although the companies are continuing to
work together, as of June 30, 2000, due to a shift in the sentiment of the
equity markets with respect to financing internet based start-up ventures and
concerns about Earjam.com's ability to finance ongoing operations, the Company
decided to record an other than temporary impairment reserve against the
remaining book value of this investment.
Divestiture
On June 21, 2000, the Company received notice that a company in which
it held a small equity investment had been sold. The Company had indirectly
acquired this equity interest through the acquisition of Xionics and valued it
at fair market value on the date of acquisition. Subsequent to the acquisition,
significant economic events occurred that resulted in an increase in the fair
value of the investment. Under the terms of the sales agreement, Oak recorded a
receivable for $2.6 million in other current assets which was subsequently
received and a gain in other income of $1.2 million.
On January 19, 2000, the Company announced the sale of its broadband
business group located in the United Kingdom and associated intellectual
property in the United States to Conexant Systems, Inc. Under the terms of the
agreement, Oak received $24.9 million in cash and 293,794 shares of Conexant
Systems Inc. common stock which had an original book value of $68.05 per share.
The Company realized a gain of $22.1 million from the sale. During fiscal 2001,
the Company reduced the basis of the shares of Conexant Systens Inc. common
stock to a book value of $8.95 as a result of an impairment in the market value
of the common stock which the Company believes is other than temporary. This
resulted in a charge to non-operating expenses of $17.4 million during fiscal
2001.
(12) INCOME TAXES
The components of the income tax expense (benefit) are as follows (in
thousands):
June 30,
---------------------------------
2001 2000 1999
---- ---- ----
Current:
Federal............................... $ 120 $ -- $(10,261)
State................................. -- 2 2
Foreign............................... 3,016 739 325
Deferred:
Federal............................... -- -- 4,501
State................................. -- -- 865
Foreign............................... (1,086) (741) (1,179)
------- ------- --------
Total income tax expense (benefit)....... $ 2,050 $ -- $ (5,747)
======= ======= ========
66
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The domestic and foreign components of the net loss before income taxes
is as follows (in thousands):
June 30,
---------------------------------
2001 2000 1999
---- ---- ----
US net loss before income taxes.......... $(32,313) $(31,102) $(52,643)
Foreign net income (loss) before income
taxes.................................. 3,731 (1,760) (3,773)
-------- -------- --------
Net loss before income taxes............. $(28,582) $(32,862) $(56,416)
======== ======== ========
A reconciliation between the income tax expense (benefit) computed at
the federal statutory rate and the effective tax rate is as follows (in
thousands):
June 30,
---------------------------------
2001 2000 1999
---- ---- ----
Benefit at federal statutory tax rate.... $(10,003) $(11,502) $(19,181)
State income tax, net of federal benefit. -- 2 867
Rate differential on foreign income...... 662 (2) 428
Goodwill amortization.................... 1,603 797 --
Utilization of prior year net operating
loss................................... (2,580) -- --
Valuation allowance...................... 12,368 10,705 12,139
-------- -------- --------
Total income tax expense (benefit)....... $ 2,050 $ -- $ (5,747)
======== ======== ========
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities are as follows (in thousands):
June 30,
------------------------
2001 2000
---- ----
Deferred Tax Assets:
Various reserves and accruals............... $ 7,620 $ 3,978
Acquired intangibles........................ 4,597 5,992
Net operating loss carryforwards............ 44,920 26,488
Tax credits................................. 18,482 11,636
Other....................................... 651 256
-------- --------
Total gross deferred tax assets............. 76,270 48,350
Less valuation allowance.................... (68,781) (38,835)
-------- --------
Gross deferred tax assets, net of valuation
allowance................................. 7,489 9,515
Deferred Tax Liabilities:
Acquired intangibles........................ (5,705) (8,682)
Fixed assets depreciation differences....... (1,395) (833)
Other....................................... -- (697)
-------- --------
Total gross deferred tax liabilities........ (7,100) (10,212)
-------- --------
Net deferred tax assets (liabilities)....... $ 389 $ (697)
======== ========
The Company has set up a valuation allowance of $68,781,000 as of June
30, 2001. Based upon the results of the current year operations, the Company's
projected operating results, and all other available objective information, the
Company's management does not believe it is more likely than not that sufficient
future taxable income will be generated to sufficiently realize all of the net
deferred tax assets. Included in the valuation allowance as of June 30, 2001 and
2000 are tax benefits attributable to noncompensatory stock options of
$26,724,000 and $9,055,000 which, when realized, will be a credit to additional
paid-in-capital, respectively.
As of June 30, 2001 and 2000, the Company has federal and state net
operating loss ("NOL") carryforwards of approximately $109,521,000 and
$67,005,000, respectively, available to reduce future income subject to income
taxes. The federal net operating loss carryforwards will begin to expire in
fiscal year 2019. Approximately $7,980,000 of the net operating loss is
attributable to the acquisition of Xionics, which is subject to an annual
limitation from ownership change of $5,000,000. As of June 30, 2001 and 2000,
the Company has state net operating loss carryforwards of approximately
$73,240,000 and $31,486,000, respectively. State net operating loss
carryforwards expire in fiscal years 2004 through 2006.
As of June 30, 2001 and 2000, the Company has federal research and
experimentation credit carryforwards of approximately $7,442,000 and $5,726,000,
respectively, which expire from 2013 to 2020. As of June 30, 2001 and 2000, the
Company also has state research and experimentation tax credit carryforwards of
approximately $6,334,000 and $4,247,000, respectively, which will be carried
forward indefinitely.
As of June 30, 2001 and 2000, the cumulative amount of unremitted
earnings of non-US subsidiaries which the Company had not provided US taxes is
approximately $13,171,000 and $9,962,000, respectively. The additional taxes
that could arise if those earnings were to be remitted to the US would not be
material after consideration of existing foreign tax credits. It is management's
intent that these earnings will remain indefinitely invested outside the US.
67
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(13) COMMITMENTS
Leases
The Company leases its US headquarters and certain facilities and
equipment under non-cancelable operating leases. The Company is responsible for
its share of expenses under the terms of certain of the leases.
Future minimum lease payments under non-cancelable operating leases are
as follows (in thousands):
Year Ending June 30,
--------------------
2002..................................................... $ 6,635
2003..................................................... 6,064
2004..................................................... 5,848
2005..................................................... 5,918
2006..................................................... 6,257
Thereafter............................................... 3,189
-------
$33,911
=======
Rent expense was approximately $3,103,000, $2,602,000 and $3,467,000
for the years ended June 30, 2001, 2000 and 1999, respectively.
Inventory Purchase Commitments
The Company subcontracts all of its manufacturing to independent
foundries. As of June 30, 2001 and 2000, the Company had approximately $4.4
million and $16.4 million, respectively, in non-cancelable purchase commitments
with various wafer fabrication subcontractors.
(14) CONTINGENCIES
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 appealed the court's decision which in currently
under review by the Sixth District Court of Appeal. Based on its current
68
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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, cash flows 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
sought 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.
The Company's complaint 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-
69
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
TA-409 before the International Trade Commission, initiated by Oak as a result
of the alleged breach of the settlement agreement. The stay was lifted due to
the final resolution of Investigation No. 337-TA-409 and the decision of the
Federal Circuit Court of Appeals on May 2, 2001 affirming the ITC's
determination. (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 lifted due to the final
resolution of Investigation No. 337-TA-409 and the decision of the Federal
Circuit Court of Appeals on May 2, 2001 affirming the ITC's determination.
(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 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 May 10, 1999, the ALJ issued an Initial Determination
terminating the investigation as to respondent UMC, 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.
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 U.S. Patent No. 5,581,715; 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 December 15, 2000 UMC filed a separate complaint in the United
States District Court, Northern District of California requesting a review of
the decisions and recommendations by the ALJ in the ITC investigation, some of
which relate to the validity the Company's patent. On July 16, 2001 the court
granted the motions of the ITC, and Oak as an intervenor-defendant, to dismiss
UMC's separate complaint.
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. On May 2, 2001 the Federal
Circuit Court of Appeals affirmed the Commission's determination that there was
no infringement of the Company's U.S. Patent No. 5,581, 715. The Federal Circuit
Court of Appeals did not review the Commision's determination that the Company's
U.S. Patent No. 5,581,715 was valid and enforceable.
70
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
As a result of the decision rendered by the Federal Circuit Court of
Appeals, the stay was lifted on the consolidated action pending in the United
States District Court, Northern District of California, and the parties are
proceeding with the litigation.
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, cash flows and results of
operations.
On January 4, 2001 Samsung Electronics, a customer of the Company's
Imaging Group, received a notification from Pitney Bowes alleging that the
resolution enhancement technology Samsung acquired from Xerographic Laser Images
Corporation, Inc. ("XLI") in 1996 infringes Pitney Bowes U.S. Patent No.
4,386,272 ("272 patent"). XLI is a subsidiary of the Company as a result of an
acquisition in the first quarter of Fiscal 1999. The terms of the agreement for
the licensing of the iRET technology to Samsung require the Company, as
successor in interest to XLI's assets and liabilities, to defend and indemnify
Samsung from claims alleging the iRET technology supplied to Samsung infringes
the intellectual property rights of a third party. On June 18, 2001 Pitney Bowes
files a complaint in the District Court of Connecticut, naming Samsung and
others, for infringement of the `272 patent. On June 28, 2001 Samsung formally
requested the Company to defend Samsung. Other XLI customers's may be subject to
Pitney Bowes allegation of infringement of the `272 patent, and may formally
request the Company to defend and indemnify them pursuant to the terms of their
agreement.
If the above pending action, with respect to the Company's
indemnification obligation in such action, is decided adversely, it would likely
have a material adverse affect on the Company's financial condition, cash flows
and results of operations.
(15) STOCKHOLDERS' EQUITY
The Company is authorized to issue two classes of stock, preferred
stock and common stock, each with a par value of $0.001 per share. The Company
has paid no cash dividends on its Common Stock since its incorporation and
anticipates that for the foreseeable future it will continue to retain any
earnings for use in its business. In addition, the Company's bank arrangements
currently prohibit the Company from issuing cash dividends.
Preferred Stock
The Company's Board of Directors has authorized 2,000,000 undesignated
shares of preferred stock; none of these preferred shares have been issued. The
Board is authorized, subject to any limitations prescribed by Delaware law, to
provide for the issuance of shares of preferred stock in one or more series, to
establish the number of shares to be included in each series, and to fix the
powers, preferences and rights of the shares.
71
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Stock Repurchase Plan
On January 22, 1998, the Company announced that its board of directors
had authorized the repurchase of up to 2.0 million shares of its common stock
either in the open market or in private transactions. As of June 30, 1999 the
Company had repurchased all 2.0 million shares for approximately $9.4 million.
On July 29, 1999 the Company announced that its Board of Directors had approved
a stock repurchase plan authorizing up to an additional four million shares of
the Company. Repurchase was to be made from time to time at certain price
thresholds over a one-year period. In fiscal 2000, the Company repurchased an
additional 381,000 of its common stock for $1.8 million at $4.78 per share. As
of June 30, 2000, the Company was holding approximately 2.4 million shares in
treasury stock for approximately $11.3 million. On January 23, 2001, the
Company's Board of Directors approved a stock repurchase authorizing the
repurchase of up to four million shares of Oak Technology common stock in the
open market or privately negotiated transactions over a one year period, unless
further extended by the Board. The plan authorized but does not require the
Company to repurchase all four million shares. During fiscal 2001, the Company
repurchased 1,915,000 of its common stock for approximately $12.0 million at an
average price of $6.275 per share. As of June 30, 2001, the Company has
approximately 4.3 million shares of treasury stock at a book value of
approximately $23.3 million.
Stock Options
Upon the re-incorporation of the Company in Delaware in February 1995,
the Company assumed the obligations of its predecessor under the 1988 Stock
Option Plan (the "1988 Plan"), as amended and restated. The Company does not
intend to issue any additional options under the 1988 Plan.
In December 1994, the Board of Directors approved the 1994 Stock Option
Plan (the "1994 Plan") under which 6,000,000 shares of Common Stock, determined
after the effect of a two for one stock split, were reserved for issuance.
6,000,000 additional shares were approved in November 1998 and 1,900,000 shares
were approved in December 2000. Under the 1994 Plan, either incentive or
non-qualified options to purchase the Company's common stock may be granted to
employees as determined by the Board of Directors at prices generally at market
value at the date of grant (110% in certain cases of non-qualified options).
Non-qualified options may be granted to employees, other non-employee directors
and consultants as determined by the Board of Directors at prices not lower than
85% of market value at the date of grant. The Board of Directors also has the
authority to set exercise dates (generally no longer than five years from date
of grant), payment terms and other provisions for each grant.
In December 1994 the Board of Directors also approved the 1994 Outside
Directors' Stock Option Plan (the "Directors Plan"), under which 500,000 shares
of Common Stock were reserved for issuance. The Directors Plan provides for the
automatic grant of options to purchase shares of Common Stock to non-employee
Directors of the Company.
On August 12, 1998, the Company repriced 2,638,750 options under the
1994 Plan to $3.25, the fair market value as of that date. The repriced options
were treated as cancelled and regranted and did not retain their original
vesting terms.
On July 17, 2001, the Company's Board of Directors authorized a stock
option exchange program in which employees who hold Oak options at a grant price
of $15.00 or above would have the option to exchange their existing options for
new options to be issued at a later date (at least 6 months from date of
cancellation) or to continue to hold the options they presently hold.
Stock options are subject to vesting, generally over 50 months and
typically have a ten year life. Under the 1988 Plan, shares are exercisable
prior to vesting and are held in escrow until vested; however, unvested shares
are subject to a right of repurchase by the Company at their original purchase
price upon termination of employment. Unexercised options expire 90 days after
termination of employment with the Company.
72
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
A summary of all the Company's stock option plans is set forth below:
Weighted Weighted
Average Average
Options Exercise Options Exercise
Outstanding Price Exercisable Price
----------- ----- ----------- -----
Balances, June 30, 1998........................ 4,361,638 $ 7.61 1,153,658 $6.06
Granted........................................ 10,973,478 $ 3.14
Exercised...................................... (346,504) $ 2.35
Canceled....................................... (4,637,448) $ 6.73
------------
Balances, June 30, 1999........................ 10,351,164 $ 3.44 2,417,486 $3.90
Granted........................................ 7,509,503 $ 7.29
Exercised...................................... (2,216,406) $ 2.64
Canceled....................................... (2,397,369) $ 3.76
------------
Balances, June 30, 2000........................ 13,246,892 $ 5.70 5,005,923 $3.25
Granted........................................ 3,968,580 $ 10.67
Exercised...................................... (3,378,678) $ 3.00
Canceled....................................... (2,949,868) $ 8.02
------------
Balances, June 30, 2001........................ 10,886,926 $ 7.72 4,076,770 $5.32
===========
In connection with the Company's acquisition during fiscal 2000 of
Xionics, the Company assumed all outstanding options granted by Xionics prior to
the acquisition date which converted into 3.3 million Company options.
The weighted average fair market values of options granted in fiscal
years 2001, 2000 and 1999 were $7.71, $5.19 and $4.60, respectively.
The following table summarizes information about the stock options
outstanding as of June 30, 2001:
Options Outstanding Options Exercisable
-------------------------------------------------- --------------------------
Weighted
Average Weighted Weighted
Options at Remaining Average Shares at Average
June 30, Contractual Life Exercise June 30, Exercise
Exercise Prices 2001 (Years) Price 2001 Price
--------------- ---- ----- ----- ---- -----
$ 0.13 to $ 3.00 3,124,910 7.50 $ 2.76 2,271,960 $ 2.75
$ 3.02 to $ 3.97 1,194,213 6.99 $ 3.33 581,270 $ 3.32
$ 4.05 to $ 8.00 3,389,577 9.23 $ 7.00 343,102 $ 6.27
$ 8.06 to $11.88 751,890 8.47 $ 11.01 303,710 $ 10.51
$13.00 to $13.81 1,558,556 8.84 $ 13.31 454,066 $ 13.30
$14.25 to $28.88 867,780 8.91 $ 21.58 122,662 $ 17.43
---------- ---------
$ 0.13 to $28.88 10,886,926 8.35 $ 7.72 4,076,770 $ 5.32
========== =========
73
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
At June 30, 2001, 7,648,153 shares were available for future grants
under the Company's stock option plans.
Stock Purchase Plan
In December 1994, the Board of Directors approved the 1994 Stock
Purchase Plan (the "Stock Purchase Plan") under which 600,000 shares of common
stock were reserved for issuance with the stock split; 1,000,000 additional
shares were approved in November 1998 and 700,000 shares were approved in
December 2000. The Stock Purchase Plan permits eligible employees to purchase
shares at a price equal to 85% of the lower of the market value at the beginning
or end of each 24-month offering period effective February 1, 2001. Under the
Stock Purchase Plan, 189,520, 444,012 and 279,668 shares were issued in fiscal
years 2001, 2000 and 1999 at weighted average prices of $9.06, $3.05 and $2.68,
and weighted average fair values of $6.86, $1.51 and $1.16, respectively.
On August 19, 1997 the Board of Directors of the Company declared a
dividend of one preferred share purchase right (a "Right") for each outstanding
share of Common Stock, par value $0.001 per share (the "Common Stock") of the
Company. The dividend was payable on August 29, 1997 (the "Record Date") to the
stockholders of record on that date. Each Right entitles the registered holder
to purchase from the Company one one-thousandth of a share (a "Unit") of Series
A Junior Participating Preferred Stock, par value $0.001 per share of the
Company at a price of $60.00 per Unit subject to adjustment. The description and
terms of the Rights are set forth in a Rights Agreement dated as of August 19,
1997 between the Company and BankBoston, N.A., as Rights Agent. The Rights
expire on August 19, 2007.
Fair Value Information
The Company applies APB Opinion 25 and related Interpretations in
accounting for its stock options plans. As the fair value of the options at the
date of grant were equivalent to the exercise price, no compensation cost has
been recognized for its stock option plans or its Stock Purchase Plan. Had
compensation cost for the Company's option plans been determined consistent with
FASB Statement No. 123, the Company's net income (loss) and net income (loss)
per share would have been reduced to the pro forma amounts indicated below (in
thousands, except per share data):
2001 2000 1999
---- ---- ----
Net loss:
As reported........................ $(30,632) $(32,862) $(50,669)
Pro forma.......................... $(43,156) $(44,009) $(57,765)
Basic net loss per share:
As reported........................ $ (0.56) $ (0.71) $ (1.24)
Pro forma.......................... $ (0.80) $ (0.96) $ (1.42)
Diluted net income (loss) per share:
As reported........................ $ (0.56) $ (0.71) $ (1.24)
Pro forma.......................... $ (0.80) $ (0.96) $ (1.42)
74
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with a dividend yield of zero
percent and the following weighted average assumptions:
Stock Option Plans Stock Purchase Plan
---------------------------- ----------------------------
2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
Expected life (years).................. 5.25 3.76 3.76 0.50 0.50 0.50
Expected volatility.................... 88% 79% 75% 88% 79% 75%
Risk-free interest rate................ 5.31% 6.11% 5.18% 5.27 6.11% 5.02%
(16) EMPLOYEE BENEFIT PLAN
In July 1990, the Company adopted a 401(k) Profit Sharing Plan ("401(k)
Plan") which is intended to qualify under section 401(k) of the Internal Revenue
Code of 1986, as amended. The 401(k) Plan covers substantially all of the
Company's US employees. Participants may elect to contribute a percentage of
their compensation to this plan, up to the statutory maximum amount. The Company
makes contributions to the 401(k) Plan based on 25% of an employee's
contribution up to a maximum of 1.25% of total compensation. Approximately
$408,000, $326,000 and $242,000 in matching contributions were recorded during
fiscal years 2001, 2000 and 1999, respectively.
(17) RESTRUCTURING
During fiscal 2001, the Company recorded restructuring charges of $2.6
million related to the reduction in force due to the restructuring of the
overall business and the planned sublease of the resulting excess office space
offset by a recovery of $0.8 million related to fiscal 2000 restructuring.
Approximately 30 employees were included in the reduction in force. During
fiscal 2000, the Company had accrued $3.3 million as restructuring charges,
primarily related to the abandonment of its leased facility in Andover,
Massachusetts. The Company was able to negotiate a new sublease of the
previously abandoned facility. This recovery resulted in a net restructuring
charge of $1.8 million to the fiscal 2001 income statement.
The expenses relating to the fiscal 2001 restructuring charges are
summarized as follows (in thousands):
Provision Recorded in Provision Utilized Balance at
Fiscal 2001 in Fiscal 2001 June 30, 2001
----------- -------------- -------------
Severance..... $ 1,631 $ 1,631 $ --
Facilities.... 845 113 732
Other......... 162 63 99
------- -------- -------
$ 2,638 $ 1,807 $ 831
======= ======== =======
(18) 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").
75
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the first two quarters of fiscal year 2000, Oak Technology had
three reportable segments offering different product lines to each of its target
markets: Optical Storage, Imaging and Consumer. The Optical Storage Group
provides high-performance controllers for CD-ROM and CD-RW to OEM's who serve
the optical storage market. The Imaging Group provides high-performance imaging
systems for the digital imaging environment, including products used in digital
laser copiers and printers as well as multifunction peripherals. The Consumer
Group targeted its products for the digital entertainment system market, with
focus on integrated circuits for video disk player systems (DVD and VCD) and
digital broadcast applications. With the sale of the broadband business to
Conexant in early January 2000, the Company has two remaining reportable
segments: Optical Storage and Imaging. The Company evaluates operating segment
performance based on net revenues and direct operating expenses of these
segments. The accounting policies of the operating segments are the same as
those described in the summary of accounting policies. Imaging segment
information reported for the fiscal year ended June 30, 2001 and 2000 includes
the effects of the Xionics acquisition completed on January 11, 2000. The
Company does not allocate assets to its individual operating segments. No
reportable segments have been aggregated.
Information about reported segment income or loss is as follows for the
years ended June 30, 2001, 2000 and 1999 (in thousands):
2001 2000 1999
---- ---- ----
Net revenues
Optical Storage........... $116,864 $36,035 $ 46,992
Imaging................... 59,319 46,156 20,897
Consumer.................. -- 4,264 3,162
-------- ------- --------
$176,183 $86,455 $ 71,051
======== ======= ========
Cost of goods sold and direct
operating expenses:
Optical Storage........... $104,346 $43,764 $ 39,583
Imaging................... 38,162 37,118 19,131
Consumer.................. -- 9,843 20,817
-------- ------- --------
$142,508 $90,725 $ 79,531
======== ======= ========
Contribution Margin:
Optical Storage........... $ 12,518 $(7,729) $ 7,409
Imaging................... 21,157 9,038 1,766
Consumer.................. -- (5,579) (17,655)
-------- ------- --------
$ 33,675 $(4,270) $ (8,480)
======== ======= ========
76
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the fiscal years ended June 30, 2001, 2000 and 1999, the "Other"
revenue category consists of various corporate revenues. A reconciliation of the
totals reported for the operating segments to the applicable line items in the
consolidated financial statements for the fiscal years ended June 30, 2001, 2000
and 1999 is as follows (in thousands):
2001 2000 1999
---- ---- ----
Contribution margin from operating segments............... $ 33,675 $ (4,270) $ (8,480)
Indirect costs of goods sold and expenses................. 28,993 25,562 33,894
Amortization of intangibles............................... 14,716 10,516 4,942
Depreciation expense...................................... 7,841 6,943 7,469
Acquired in-process research and development.............. -- 10,533 7,161
Restructuring expenses.................................... 1,765 3,285 --
-------- -------- --------
Total operating loss...................................... (19,640) (61,109) (61,946)
Gain on sale of business.................................. -- 22,075 --
Other income.............................................. (8,942) 6,172 5,530
-------- -------- --------
(Loss) income before taxes................................ $(28,582) $(32,862) $(56,416)
======== ======== ========
Indirect costs of goods sold and operating expenses includes all costs
and expenses not specifically charged to the operating segments in the financial
information reviewed by Oak's chief decision making officer. These include
inventory reserve provisions and adjustments; operating overhead included in
consolidated cost of goods sold; corporate research and development expenses;
and most of the Oak's selling, general and administrative expenses.
77
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Oak maintains operations in the United States, Taiwan, Japan, United
Kingdom, Korea and Germany. Activities in the United States consist of corporate
administration, product development, logistics and worldwide sales management.
Foreign operations consist of regional sales and limited board-level
manufacturing.
The following distribution of net revenues, identifiable assets by
geographic areas, and property and equipment for the years ended June 30, 2001,
2000 and 1999 are as follows (in thousands):
2001 2000 1999
---- ---- ----
Revenue from unaffiliated
customers originating from:
North America.................. $ 28,775 $ 21,881 $ 10,147
Japan.......................... 70,485 27,856 36,728
Korea.......................... 64,629 29,428 7,002
Taiwan......................... 9,438 932 2,104
Other Asia..................... 683 3,425 6,962
Europe......................... 2,173 2,933 8,108
-------- -------- --------
$176,183 $ 86,455 $ 71,051
======== ======== ========
Identifiable assets:
United States.................. $181,669 $208,562 $181,699
Japan.......................... 10,644 9,544 7,750
Taiwan......................... 7,491 12,036 8,917
Korea.......................... 368 -- --
Europe......................... 4,067 6,258 5,475
-------- -------- --------
$204,239 $236,400 $203,841
======== ======== ========
Property and equipment, net:
United States.................. $ 11,765 $ 13,820 $ 15,472
Japan.......................... 363 430 551
Taiwan......................... 4,955 5,089 5,175
Korea.......................... 178 -- --
Europe......................... 1,187 399 841
-------- -------- --------
$ 18,448 $ 19,738 $ 22,039
======== ======== ========
The following table summarizes the annual percentage contribution to
net revenues by customers when sales to such customers exceeded 10% of net
revenues and the associated percentage of total accounts receivable due from
these customers. Customers included herein were primarily from the Optical
Storage business segment.
78
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Percentage Of Net Revenues
Year Ended June 30,
----------------------------------------
2001 2000 1999
---- ---- ----
A.............................. 31% 26% --
B.............................. -- 16% --
C.............................. -- -- 17%
D.............................. -- -- 10%
Percentage of Net
Accounts Receivable
As of June 30,
---------------------------------------
2001 2000 1999
---- ---- ----
E.............................. 21% -- --
F.............................. 19% -- --
C.............................. 15% -- 21%
A.............................. 10% 17% --
B.............................. -- 11% --
G.............................. -- 11% --
D.............................. -- -- 10%
(19) RELATED PARTY TRANSACTION
At June 30, 2001 and 2000, Oak had a full recourse outstanding note
receivable from one of its officers with balances outstanding of $0.7 million
and $1.3 million, respectively. The note incurs interest at 4.62% per annum, and
is payable in three equal annual installments (plus interest), due on the
anniversary dates of the note. The remaining balance at June 30, 2001 will be
repaid during fiscal 2002; and therefore, is included in prepaid and other
current assets.
(20) SUBSEQUENT EVENTS
In the fourth quarter of fiscal 2001, Oak entered into a Share Purchase
Agreement ("Agreement") with Accel Technology Ltd. ("Accel"), an Osaka,
Japan-based design engineering firm that focuses on turnkey CD-RW and DVD
Recordable drives for PC and consumer use. During July 2001, Oak completed the
acquisition of Accel in which Oak acquired all of the outstanding shares of
Accel for an amount less than $3.5 million and organized Accel as a division
within the Oak's Optical Storage Group. This acquisition was accounted for under
the purchase method of accounting. The effect of this acquisition was not
material to the operations nor financial position of the Company.
78
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(22) QUARTERLY RESULTS -- UNAUDITED
Three Months Ended
------------------------------------------------------------------------------
Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30,
1999 1999 2000 2000 2000 2000 2001 2001
---- ---- ---- ---- ---- ---- ---- ----
(In Thousands, Except Per Share Data)
Net revenues........................ $ 10,142 $ 11,029 $ 28,502 $ 36,782 $50,988 $ 60,633 $ 27,730 $ 36,832
Gross profit........................ $ 5,071 $ 4,418 $ 15,935 $ 20,111 $25,963 $ 28,292 $ 11,400 $ 18,421
Operating loss...................... $(14,531) $(20,074) $(20,315) $ (6,189) $ (940) $ 1,200 $(14,129) $ (5,771)
Net income (loss)................... $(12,186) $(18,292) $ 2,645 $ (5,029) $ 1,284 $ 2,825 $(12,661) $(22,080)
Diluted net income (loss) per share $ (0.30) $ (0.45) $ 0.04 $ (0.10) $ 0.02 $ 0.05 $ (0.23) $ (0.41)
(1)..............................
Shares used in diluted per share
calculations (1)................. 41,086 40,925 59,573 52,364 63,130 62,014 54,884 54,034
----------------------------
(1) Computed on the basis described in Note 2 of Notes to Consolidated Financial
Statements.
80
SCHEDULE II
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions
Charged To
Beginning Costs and Deductions Ending
Allowance For Doubtful Accounts Balance Expenses Write-offs Balance
------------------------------- ------- -------- ---------- -------
Year ended June 30, 2001......... $ 671 $2,739 $ (212) $3,198
===== ====== ====== ======
Year ended June 30, 2000......... $ 555 $ 155 $ (39) $ 671
===== ====== ====== ======
Year ended June 30, 1999......... $ 809 $ -- $ (254) $ 555
===== ====== ====== ======
81
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Date: September 25, 2001 OAK TECHNOLOGY, INC.
By: /s/ YOUNG K. SOHN
-----------------------------------
Young K. Sohn,
President and Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Young K. Sohn and John S. Edmunds, and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, to sign any and all amendments (including
post-effective amendments) to this Annual Report on Form 10-K and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto each of said
attorneys-in-fact and agents, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that each of said
attorneys-in-facts and agents, or his substitute or substitutes, or any of them,
shall do or cause to be done by virtue hereof.
Name Title Date
---- ----- ----
Chairman of the Board of Directors, September 25, 2001
/s/ YOUNG K. SOHN Chief Executive Officer, and
---------------------- Director (Principal Executive Officer)
Young K. Sohn
/s/ JOHN S. EDMUNDS Vice President and Chief Financial September 25, 2001
---------------------- Officer (Principal Financial and
John S. Edmunds Accounting Officer)
/s/ RICHARD B. BLACK Director September 25, 2001
----------------------
Richard B. Black
/s/ DAVID J. RYNNE Director September 25, 2001
----------------------
David J. Rynne
/s/ Peter J. Simone Director September 25, 2001
----------------------
Peter J. Simone
/s/ TIMOTHY TOMLINSON Director September 25, 2001
----------------------
Timothy Tomlinson
/s/ ALBERT Y. C. YU Director September 25, 2001
----------------------
Albert Y. C. Yu
82
EX-23
3
ot200110kex231b.txt
OAK TECHNOLOGY 2001 FORM 10-K EXHIBIT 23.1
EXHIBIT 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 033-89446, 333-04334, 333-70175, 333-85381,
333-65182 and 333-94471) of Oak Technology, Inc. of our report dated July 20,
2001 relating to the financial statements and financial statement schedule,
which appears in this Form 10-K.
PricewaterhouseCoopers LLP
San Jose, California
September 24, 2001
EX-23
4
ot200110kex232b.txt
OAK TECHNOLOGY 2001 FORM 10-K EXHIBIT 23.2
EXHIBIT 23.2
Consent of Independent Auditors
The Board of Directors
Oak Technology, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
033-89446, 333-04334, 333-70175, 333-85381, and 333-65182) on Form S-8 of Oak
Technology, Inc. of our report dated July 24, 2000, relating to the consolidated
balance sheet of Oak Technology, Inc. and subsidiaries as of June 30, 2000, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the two-year period ended June 30, 2000, and
the related financial statement schedule, which report appears in the June 30,
2001, annual report on Form 10-K of Oak Technology, Inc.
KPMG LLP
Mountain View, California
September 24, 2001