-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KJAZjOA6+23NMk9iffmwVkLgAwuLWjxMOQ2DweHMXj06rsv/anJsZ31N7Yd4IJb1 UGfckEAD+p+Oahsf5YP5Ag== 0001056359-01-500033.txt : 20020410 0001056359-01-500033.hdr.sgml : 20020410 ACCESSION NUMBER: 0001056359-01-500033 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OAK TECHNOLOGY INC CENTRAL INDEX KEY: 0000824225 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 770161486 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25298 FILM NUMBER: 1789869 BUSINESS ADDRESS: STREET 1: 139 KIFER CT CITY: SUNNYVALE STATE: CA ZIP: 94086 BUSINESS PHONE: 4087370888 MAIL ADDRESS: STREET 1: 139 KIFER COURT CITY: SUNNYVALE STATE: CA ZIP: 94086 10-Q 1 ot10q1q02v7b.txt OAK TECHNOLOGY 1Q02 FORM 10-Q =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from to ----------------- ------------------ Commission File No. 0-25298 OAK TECHNOLOGY, INC. (Exact name of registrant as specified in its charter) Delaware 77-0161486 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 139 Kifer Court Sunnyvale, California 94086 (Address of principal executive offices, including zip code) (408) 737-0888 (Registrant's telephone number, including area code) ------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of November 9, 2001, there were outstanding 54,999,023 shares of the Registrant's Common Stock, par value $0.001 per share. =============================================================================== OAK TECHNOLOGY, INC. AND SUBSIDIARIES FORM 10-Q INDEX For the Quarter Ended September 30, 2001
Page No. --- PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited): Condensed Consolidated Balance Sheets as of September 30, 2001 and June 30, 2001........................................ 3 Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2001 and 2000................ 4 Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2001 and 2000...................... 5 Notes to Condensed Consolidated Financial Statements............ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................... 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 26 PART II. OTHER INFORMATION Item 1. Legal Proceedings................................................. 27 Item 6. Exhibits and Reports on Form 8-K.................................. 29 Signatures................................................................ 30
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
OAK TECHNOLOGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) (Unaudited) September 30, June 30, 2001 2001 ---- ---- ASSETS Current assets: Cash and cash equivalents........................... $ 27,332 $ 25,141 Short-term investments.............................. 99,587 98,887 Accounts receivable, net of allowance for doubtful accounts of $4,005 and $3,198, respectively....... 16,902 18,347 Inventories......................................... 4,485 6,626 Prepaid expenses and other current assets........... 5,969 6,884 -------- -------- Total current assets.................................. 154,275 155,885 Property and equipment, net........................... 17,553 18,448 Intangible assets, net................................ 28,813 29,337 Other assets.......................................... 799 569 -------- -------- Total assets.......................................... $201,440 $204,239 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.................................... $ 8,924 $ 8,161 Accrued expenses.................................... 12,628 13,680 Deferred revenue.................................... 5,240 4,337 -------- -------- Total current liabilities......................... 26,792 26,178 Other long-term liabilities........................... 372 318 -------- -------- Total liabilities..................................... 27,164 26,496 -------- -------- Commitments and contingencies (Note 5) 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 September 30, 2001 and June 30, 2001; 59,056,103 shares issued and 54,762,623 shares outstanding as of September 30, 2001; and 58,628,451 shares issued and 54,330,971 shares outstanding as of June 30, 2001................... 59 59 Additional paid-in capital.......................... 231,333 229,280 Treasury stock...................................... (23,273) (23,273) Accumulated deficit................................. (35,710) (29,461) Accumulated other comprehensive income.............. 1,867 1,138 -------- -------- Total stockholders' equity........................ 174,276 177,743 -------- -------- Total liabilities and stockholders' equity............ $201,440 $204,239 ======== ========
See accompanying notes to consolidated financial statements. 3
OAK TECHNOLOGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (Unaudited) Three Months Ended September 30, ------------------------- 2001 2000 ---- ---- Revenues: Product revenues.................................. $ 25,567 $ 40,184 Software and other revenues....................... 7,734 10,804 --------- --------- Total revenues.................................. 33,301 50,988 Cost of revenues and operating expenses: Cost of product revenues.......................... 15,692 22,494 Cost of software and other revenues............... 1,366 2,531 Research and development expenses................. 13,105 13,541 Selling, general, and administrative expenses..... 7,357 9,683 Amortization of intangibles....................... 3,428 3,679 --------- --------- Operating loss.................................. (7,647) (940) Other non-operating income, net..................... 2,121 2,469 --------- --------- Income (loss) before income taxes................... (5,526) 1,529 Income tax expense.................................. 723 245 --------- --------- Net income (loss)................................... $ (6,249) $ 1,284 ========= ========= Net income (loss) per basic share................... $ (0.11) $ 0.02 ========= ========= Net income (loss) per diluted share................. $ (0.11) $ 0.02 ========= ========= Shares used in computing basic net income (loss) per share......................................... 54,540 53,472 ========= ========= Shares used in computing diluted net income (loss) per share......................................... 54,540 63,130 ========= =========
See accompanying notes to condensed consolidated financial statements. 4
OAK TECHNOLOGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) Three Months Ended September 30, -------------------- 2001 2000 ---- ---- Cash flows from operating activities: Net income (loss)................................... $ (6,249) $ 1,284 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization..................... 5,080 5,531 Deferred income taxes............................. (7) -- Changes in operating assets and liabilities: Accounts receivable................................. 1,717 (7,203) Inventories......................................... 2,266 (5,143) Prepaid expenses, other current assets and other assets...................................... 1,016 4,922 Accounts payable and accrued expenses............... (782) 8,382 Income taxes payable, deferred revenue and other liabilities................................. 933 (1,981) -------- -------- Net cash provided by operating activities....... 3,974 5,792 -------- -------- Cash flows from investing activities: Purchases of short-term investments................. (10,740) (8,413) Proceeds from matured short-term investments........ 10,769 6,509 Additions to property and equipment, net............ (627) (2,541) Acquisition of Accel, net of cash acquired.......... (3,238) -- -------- -------- Net cash used in investing activities........... (3,836) (4,445) -------- -------- Cash flows from financing activities: Repayment of debt................................... -- (5) Issuance of common stock, net....................... 2,053 5,289 -------- -------- Net cash provided by financing activities....... 2,053 5,284 -------- -------- Net increase in cash and cash equivalents............. 2,191 6,631 Cash and cash equivalents, beginning of period........ 25,141 19,100 -------- -------- Cash and cash equivalents, end of period.............. $ 27,332 $ 25,731 ======== ======== Supplemental information: Cash paid during the period: Interest............................................ $ -- $ 10 ======== ======== Income taxes........................................ $ 2,045 $ 268 ======== ========
See accompanying notes to consolidated financial statements. 5 OAK TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Preparation -------------------- The accompanying unaudited condensed consolidated financial statements of Oak Technology, Inc. and subsidiaries ("Oak" or the "Company") have been prepared in conformity with accounting principles generally accepted in the United States of America. However, certain information or footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the "Commission"). In the opinion of management, the condensed consolidated financial statements reflect all adjustments considered necessary for a fair presentation of the consolidated financial position, operating results and cash flows for the periods presented. The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the full fiscal year or in any future period. This quarterly report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended June 30, 2001, included in the Oak Technology, Inc. 2001 Annual Report on Form 10-K filed with the Commission. Reclassifications ----------------- Certain prior period amounts have been reclassified to conform to the current period presentation. Derivative Instruments and Hedging Activities --------------------------------------------- The Company periodically enters into economic hedges by purchasing foreign exchange contracts as a hedge against foreign currency denominated accounts receivables or fixed sales commitments. The Company does not enter into foreign exchange contracts for speculative or trading purposes. As of September 30, 2001, the Company had short-term foreign currency exchange contracts with face values of approximately $1.5 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. Recently Issued Accounting Standards ------------------------------------ In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," that requires business combinations initiated after June 30, 2001, to be accounted for using the purchase method of accounting and broadens the criteria for recording intangible assets separate from goodwill. The adoption of SFAS No. 141 will not change the method of accounting used in previous business combinations accounted for under the pooling-of-interest method. The Company believes that the adoption of this statement will not have a significant impact on its financial position, results of operations or cash flows. In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," that requires the use of a non-amortization approach to account for purchased goodwill and certain intangible assets. Under a non-amortization approach, goodwill and certain intangible assets will not be amortized into results of operations, but instead would be reviewed for impairment and written down and charged to results of operations only in the periods in which the recorded value of goodwill and certain intangible assets exceed their fair values. As of September 30, 2001, the Company had intangible assets with net carrying values of approximately $28.8 million and a resulting amortization expense of approximately $3.4 million for the quarter ended September 30, 2001 which is attributable to business combinations initiated prior to the adoption of SFAS No. 141. This Statement is effective for fiscal years beginning after December 15, 2001. Oak will adopt SFAS No. 142 effective July 1, 2002. The Company believes that the adoption of this statement will not have a significant impact on its financial position, results of operations or cash flows. 6 OAK TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (Unaudited) In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," that develops one accounting model for long-lived assets that are to be disposed of by sale and expands the scope of discontinued operations. This Statement is effective for fiscal years beginning after December 15, 2001. Oak will adopt SFAS No. 144 effective July 1, 2002 and believes that the adoption of this statement will not have a significant impact on its financial position, results of operations or cash flows. 2. Inventories ----------- Inventories are stated at the lower of cost (first in, first out) or market and consisted of the following (in thousands):
September 30, June 30, 2001 2001 ---- ---- Purchased parts and work in process....... $ 2,886 $ 3,724 Finished goods............................ 1,599 2,902 ------- ------- $ 4,485 $ 6,626 ======= =======
3. Net Income (Loss) Per Share --------------------------- Basic and diluted net income (loss) per share have been computed using the weighted average number of shares of common stock and dilutive common equivalent shares from stock options and warrants outstanding during the period in accordance with Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." The following table provides a reconciliation of the components of the basic and diluted income (loss) per share computations:
Three Months Ended September 30, ----------------------- 2001 2000 ---- ---- Net income (loss) from continuing operations: $ (6,249) $ 1,284 ======== ======== Basic common shares 54,540 53,472 Effect of dilutive securities: Common stock options -- 9,658 -------- -------- Dilutive weighted average shares 54,540 63,130 ======== ======== Net income (loss) per share from continuing operations: Basic $ (0.11) $ 0.02 ======== ======== Diluted $ (0.11) $ 0.02 ======== ========
For the three month period ended September 30, 2001, there were approximately 3,072,000 weighted average options outstanding which were excluded from the calculation of diluted weighted average shares outstanding as inclusion of these options would have had an anti-dilutive effect. For the three month period ended September 30, 2000, there were no antidilutive common shares excluded from the calculation. 7 OAK TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (Unaudited) 4. Acquisitions ------------ On July 5, 2001, the Company acquired privately held Accel Technology, K.K. ("Accel") a Company based in Osaka, Japan which develops the mechanical construction and design of computers and relevant equipment, such as CD-R/RW drives and DVD players. This acquisition allows Oak to move more quickly into the consumer space by providing turnkey platforms to consumer electronics customers to minimize their development efforts. The Company paid approximately $3.2 million in cash for all the outstanding common shares and stock options of Accel. The transaction has been accounted for under SFAS No. 141, "Business Combinations," using the purchase method of accounting. The results of operations of Accel have been included in the results of Oak's consolidated financial statements from July 12, 2001. The historical operations of Accel are not material to the financial position or results of operations of the Company; therefore, no pro forma information is presented. The acquisition resulted in goodwill of approximately $2.9 million, which will not be amortized in accordance with the provisions of SFAS 141. 5. 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 information, the Company believes this suit to be without merit and will continue to 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. 8 OAK TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (Unaudited) 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. 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. 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. In a related action to the lawsuit that was commenced by the Company against UMC, 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. The Company filed its answer on January 8, 1998, denying all the allegations. The Company believes UMC's counterclaims and Mediatek's claims to be without merit. On June 11, 1998, the cases were consolidated for all purposes and stayed under 28 U.S.C. Section 1659, based on the judge's conclusion that the civil action involves the same issues 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 the ITC investigation and the decision of the Federal Circuit Court of Appeals on May 2, 2001 affirming the ITC's determination. (Described below.) On May 10, 1999, the ITC issued an Initial Determination terminating the investigation as to UMC, finding that UMC's activities were licensed. On May 17, 1999, the Company filed a petition for review of the Initial Determination. On September 27, 1999, the ITC affirmed that there were no unfair trade practices committed by MediaTek under Section 337 of the Tariff Act, 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. 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. 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 9 OAK TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (Unaudited) 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 filed 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. XLI's customers, Sharp Corporation and Minolta-QMS, Inc., are also subject to Pitney Bowes allegation of infringement of the '272 patent, and have formally requested the Company to defend and indemnify them pursuant to the terms of their agreements. 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. 6. Segment Information ------------------- SFAS No. 131 establishes standards for the reporting by public business enterprises of information about operating segments, products and services, geographic areas, and major customers. The method for determining what information to report is based on the way that management organizes the operating segments within the Company for making operational decisions and assessments of financial performance. The Company's chief operating decision- maker is considered to be the Chief Executive Officer ("CEO"). For fiscal year 2001 and 2002, the Company has two reportable segments which offer different product lines to each of its target markets: Optical Storage Group and Imaging Group. The Company evaluates operating segment performance based on net revenues and direct operating expenses of the segment. The accounting policies of the operating segments are the same as those described in the summary of accounting policies. No segments have been aggregated. The Company does not allocate assets to its individual operating segments. Information about reported segment income or loss is as follows for the three months ended September 30, 2001 and 2000 (in thousands):
Three Months Ended September 30, ----------------------- 2001 2000 ---- ---- Net Revenues: Optical Storage $ 21,079 $ 33,813 Imaging 12,222 17,175 -------- -------- $ 33,301 $ 50,988 ======== ======== Cost of Goods Sold and Direct Operating Expenses: Optical Storage $ 22,154 $ 27,550 Imaging 7,654 11,891 -------- -------- $ 29,808 $ 39,441 ======== ======== Contribution Margin: Optical Storage $ (1,075) $ 6,263 Imaging 4,568 5,284 -------- -------- $ 3,493 $ 11,547 ======== ========
10 OAK TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (Unaudited) A reconciliation of the totals reported for the operating segments to the applicable line items in the condensed consolidated financial statements for the three months ended September 30, 2001 and 2000, is as follows (in thousands):
Three Months Ended September 30, ----------------------- 2001 2000 ---- ---- Contribution margin from operating segments $ 3,493 $11,547 ======= ======= Indirect operating expenses 6,060 6,956 Depreciation expense 1,652 1,852 Amortization of intangibles 3,428 3,679 ------- ------- Total operating loss (7,647) (940) Non-operating income, net 2,121 2,469 ------- ------- Income (loss) before income taxes $(5,526) $ 1,529 ======= =======
Indirect operating expenses include all costs and expenses not specifically charged to the operating segments in the financial information reviewed by the Company's chief operating decision-maker. These include various overhead and indirect sales expenses as well as corporate marketing and general and administrative expenses. The Company maintains significant operations in the United States, United Kingdom, Taiwan and Japan. Activities in the United States consist of corporate administration, product development, logistics and worldwide sales management. Foreign operations consist of regional sales and limited board- level manufacturing and engineering support services. The distribution of net revenues for the three months ended September 30, 2001 and 2000 are as follows (in thousands):
Three Months Ended September 30, ----------------------- 2001 2000 ---- ---- Revenue from unaffiliated customers originating from: North America $ 5,965 $ 7,926 Japan 13,697 18,429 Korea 7,899 22,627 Taiwan 3,297 766 Other Asia 1,850 547 Europe 593 693 -------- -------- $ 33,301 $ 50,988 ======== ========
For the three months ended September 30, 2001, one customer accounted for 22% of total revenues. For the same period of the prior fiscal year, two customers accounted for 36% and 10% of total revenues, respectively. As of September 30, 2001, two customers accounted for 23% and 20% of total net accounts receivable, respectively, and as of June 30, 2001, four customers accounted for 21%, 19%, 15% and 10% of total net accounts receivable, respectively. 11 OAK TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (Unaudited) 7. Comprehensive Loss ------------------ The following table presents the calculation of comprehensive loss as required by SFAS 130. The components of comprehensive loss, net of tax, are as follows (in thousands):
Three Months Ended September 30, ----------------------- 2001 2000 ---- ---- Net income (loss) $ (6,249) $ 1,284 Other comprehensive income (loss): Change in unrealized gain (loss) on investments, net 729 (1,605) -------- -------- Total comprehensive loss $ (5,520) $ (321) ======== ========
8. Income Taxes ------------ For the three months ended September 30, 2001, the Company recorded tax expense based on actual taxes incurred. For the three months ended September 30, 2000, the Company recorded tax expense based on projected fiscal year 2001 operating results. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Except for the historical information contained herein, the matters discussed in this Report on Form 10-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. For the results of operations for the three months ended September 30, 2001 and 2000, the Company reported a net loss of $6.2 million and net income of $1.3 million, respectively. The decrease in net income in the first quarter of fiscal 2002 compared to the first quarter of fiscal 2001 is a result of decreased revenues caused by the recent slowdown in the PC industry as well as a decrease in overall global economic conditions. Oak continues to develop its next generation CD-RW product with six of the top seven CD-RW manufacturers. However, the Company cannot predict the future level of customer acceptance of the product and the product's impact on operating results. 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 13 in product mix or distribution channels, demand for semiconductors and end-user products 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 severely impacted by the current slow down in the semiconductor industry and the overall weak macro-economic environment. Oak has devoted a substantial portion of its research and development efforts in recent quarters to developing chips used in DVD systems, CD-RW drives 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 - --------------------- Net Revenues. Net revenues decreased 35% to $33.3 million for the three ------------ months ended September 30, 2001 from $51.0 million in the comparable period of fiscal 2000. The year over year decrease in revenues is a result of the global economic slowdown compared to the same period of the prior fiscal year. Net revenues in the Optical Storage business segment were $21.1 million for the quarter ended September 30, 2001, representing a 38% decrease from the segment's net revenues of $33.8 million reported in the same period of fiscal 2000. Although the Company continued shipping the 8X (9790) and 16X (9795) products in volume, the market was impacted by the overall economic slowdown experienced in the personal computer industry. Net revenues for the Imaging business segment were $12.2 million for the three months ended September 30, 2001, representing a 29% decrease from the $17.2 million reported in the same quarter of fiscal 2000. The decrease is primarily the result of a change in business model with regard to imaging software and, to a lesser extent, a decline in revenues of imaging hardware products due to a recent slowdown in the industry and in the economy in general. Over the past year, the Company has been shifting its business model to share more completely in profit opportunities with our customers. In the past, the Company had licensed its technology to some customers and had received a fixed fee from them over the life of the contract, at the end of which the customer would have had a paid up license to the technology. The Company's recent practice has been to negotiate a royalty arrangement instead of a license fee, which allows Oak to have a participation in its customers' success and which Oak believes offers better upside potential. The Company expects to continue to see a period of transition over the next few quarters as fixed contract license fees decline and royalty revenue begins to ramp as its customers are deploying the software into their product lines. Gross Margin. Cost of revenues includes the cost of wafer fabrication, ------------ assembly, and testing performed by third-party vendors and direct and indirect costs associated with the procurement, scheduling and quality assurance functions performed by the Company. The Company's total gross margin decreased to 49% for the three month period ended September 30, 2001, as compared to 51% during the comparable period in the prior year. Gross margin for the Optical Storage business segment was 34% for the first quarter of fiscal 2002 compared to 41% for the comparable quarter of the prior year. The decrease in the gross margin for the Optical Storage business segment for the three months ended September 30, 2001 compared to the same period in the prior fiscal year is due to a number of factors. The economic environment for consumers and the market environment for PC related products was much more favorable in the first quarter of fiscal 2001 than in the first quarter of fiscal 2002. The market for CD-RW drives in the first quarter of fiscal 2001 was also growing rapidly as the result of what was then a new phenomenon of downloading music from the internet. In the first quarter of fiscal 2002, the economic environment for consumers and PC's has been bordering on recession and, while some segments of the PC environment are growing, the largest part of the CD-RW volume business lies with PC manufacturers who have been in a price war for several months. In that vain, the PC-OEM's have been more focused on staying with older 14 technologies and getting lower prices. As a result, the now older products used in 8X and 12X drives have experienced declining ASP's. This has been offset to some degree by an increase in dollar content per controller shipped due to a higher mix of combo and chip set products shipping which includes the companion Analog Front End (9073). In addition, in the first quarter of fiscal 2002, the Company experienced a temporary yield issue on a new product being introduced that caused gross margins to decline by approximately $600,000. Absent this change, which has now been resolved, the gross margins in the first quarter of fiscal 2002 would have been 36%. Gross margin for the Imaging business segment was 75% for the first quarter of fiscal year 2002, representing a slight increase from the 71% reported in the same quarter of fiscal 2001. This is due to a relatively higher mix of imaging software products as opposed to hardware products. The Company's overall gross margin is subject to change due to various factors, including, among others, competitive product pricing, yields, product mix, wafer, assembly and test costs. The Company expects that average selling prices for its existing products will continue to decline over time and that the average selling prices for each new product will decline significantly over the life of the product. Given the extremely competitive nature of the optical storage and consumer market, the Company believes that gross margins for new products in its optical storage market and consumer market will be lower than historical levels and, as a result, gross margins in general will decline in the future. Research and Development Expenses. Research and development costs are --------------------------------- expensed as incurred. Research and development expenses of $13.1 million for the quarter ended September 30, 2001 remained fairly consistent decreasing $0.4 million, or 3%, from the $13.5 million recorded in the comparable period of the previous fiscal year. Research and development expenses were up sequentially from the fourth quarter of fiscal 2001 due to the initial licensing of ARM and the acquisition of Accel. Research and development expenses increased as a percentage of net revenues for the current fiscal period over the comparable period in the prior year due primarily to the decrease in the Company's net revenues in the current period compared to the comparable period of fiscal 2001. The Company will continue to invest substantial resources in research and development of new products in the Company's target markets: optical storage and digital imaging. Selling, General and Administrative Expenses. Selling, general and --------------------------------------------- administrative (SG&A) expenses decreased by 24% to $7.4 million for the three months ended September 30, 2001 from $9.7 million in the comparable period of the prior year. The decrease is a result of lower sales expenses as a result of lower revenues in the first quarter of fiscal 2002 compared to the same period of 2001. SG&A expenses increased as a percentage of net revenues for the current fiscal period over the comparable period in the prior year due primarily to a decrease in the Company's net revenues in the current year. Amortization of Intangibles. Amortization of intangible assets was $3.4 ---------------------------- million for the three months ended September 30, 2001, a decrease of $0.3 million or 7% from the $3.7 million recorded in the same period of the prior fiscal year. The slight decrease for the quarter ended September 30, 2001 compared to the same period in the prior year is a result of the completion of amortization of certain intangible assets as they became fully amortized. Other Non-operating Income. During the first quarter of fiscal 2002, --------------------------- other non-operating income decreased to $2.1 million from $2.5 million recorded during the same quarter of fiscal 2001. The amount was higher in the prior year primarily due to interest received in conjunction with an income tax refund. This was offset partially by an increase in foreign currency translation gains recognized during the first quarter of fiscal 2002 compared to the same period of the prior year. Income Taxes. For the first quarter of fiscal 2002, tax expense was ------------- recorded based on actual taxes incurred. Management does not yet believe it is more likely than not that sufficient future taxable income will be generated to realize all of the Company's deferred tax assets. Accordingly, a full valuation allowance exists against all net deferred tax assets for fiscal 2001 and the first quarter of fiscal 2002. 15 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 September 30, 2001 consisted of approximately $126.9 million in cash, cash equivalents and short-term investments. Oak also has approximately $7.8 million in lines of letters of credit with Taiwanese financial institutions, all of which were available at September 30, 2001. Oak's working capital decreased by $2.2 million to $127.5 million as of September 30, 2001 from $129.7 million as of June 30, 2001. The decrease was primarily attributable to a decrease in inventory of approximately $2.1 million. Oak's short-term investments were principally invested in investment grade, interest-bearing securities. Oak's cash provided by operating activities decreased to $4.0 million for the quarter ended September 30, 2001 compared to $5.8 million for the same period of fiscal 2001. Cash provided by operating activities for the first quarter of fiscal 2002 was primarily a result of net changes in operating assets and liabilities which includes decreases in inventories, prepaid expenses, other current assets and other assets totaling $3.3 million as well as a decrease in accounts receivable of $1.7. This was offset by a loss of $6.3 million less the add back of depreciation and amortization of $5.0 million recorded during the period. Oak's investing activities during the quarter ended September 30, 2001 used cash of $3.8 million compared to $4.4 million during the same period of the prior year. Cash used in investing activities during the current period resulted primarily from the purchase of Accel, net of cash acquired, of $3.2 million and the purchases of property and equipment of $0.6 million. Oak's financing activities during the quarter ended September 30, 2001 provided cash of $2.1 million compared to $5.3 million during the same period of the prior year. The cash provided by financing activities during the quarter ended September 30, 2001 was a result of issuances of common stock through the exercise of employee stock options and the employee stock purchase plan. 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 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 the Annual Report on Form 10-K for the fiscal year ended June 30, 2001 filed with the Securities and Exchange Commission. Outlook - ------- The statements contained in this outlook section and within certain sections of management's discussion and analysis are forward-looking based on current expectations and management's estimates. Actual results may differ materially from those set forth in these forward-looking statements. In addition to the risk factors discussed in the "Factors That May Affect Future Results" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the Company's 2001 Annual Report on Form 10-K for the fiscal year ended June 30, 2001 filed with the Securities and Exchange Commission, the following factors may also affect the Company's operating results for fiscal 2002: 16 o In spite of a continued weak economic environment, the Company expects to achieve seasonal growth in the December quarter and anticipates revenues for the quarter will increase by approximately 5-10 percent compared with the first fiscal quarter of 2002, reported today. o Gross margin is expected to improve modestly for the December quarter. o For the December quarter, the Company expects to report a sequential improvement in the pro forma bottom line. o Given the current uncertainties in the industry, the Company will refrain from commenting on quarterly expectations beyond the current quarter; however, the Company expects to post year over year revenue growth and be profitable on a pro forma basis for the second half of fiscal 2002. The Company's procedure for publishing and updating this outlook is as follows. Following the publication of the outlook in its quarterly earnings release and this Quarterly Report on Form 10-Q, Oak will continue its current practice of having corporate representatives meet during the quarter with investors, the media, investment analysts and others to discuss the published outlook and publicly disclosed material related to the outlook. This outlook will not be updated during the quarter unless Oak Technology publishes a notice stating otherwise. 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 --------------------------------------------------------------------- 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; 17 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 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 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 and continue to this day. 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 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 ----------------------------------------------------------------- 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 18 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 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 ---------------------------------------------------------------- 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 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 19 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 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 ---------------------------------------------------------------------- Rights, Which May Affect Its Ability to Compete. 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. 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 20 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 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 ("the '272 patent"). Oak is also defending Sharp Corporation and Minolta-QMS, Inc., companies that are also alleged to infringe the '272 patent. Oak is defending Samsung, Sharp and Minolta-QMS against this allegation of infringement pursuant to its indemnification obligation under an earlier license agreement between these named companies 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 ----------------------------------------------------------------------- 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 21 products of others or where infringement arises based on modifications made by the customer to Oak's products Pitney Bowes has initiated a lawsuit against several Oak's customers, alleging that theirs use of Oak's RET technology infringed Pitney Bowes U.S. Patent No. 4,386,272. Oak is defending these customers against this allegation of infringement pursuant to its indemnification obligation under an earlier license agreements between the named customers 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 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 ------------------------------------------------------------------ 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. 22 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 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 23 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. 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, including the indemnification of several Oak customers. 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 ------------------------------------------------------------------ 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 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: 24 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 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 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 ------------------------------------------------------------------- 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. 25 ITEM 3. 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 September 30, 2001, Oak had foreign currency forward exchange contracts to exchange Yen for approximately $1.5 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 September 30, 2001, 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 an other than temporary 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 September 30, 2001, 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. 26 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company and various of its current and former officers and directors are parties to a consolidated class action lawsuit filed on behalf of all persons who purchased or acquired the Company's common stock (excluding the defendants and parties related to them) for the period July 27, 1995 through May 22, 1996. This state court proceeding, designated IN RE OAK TECHNOLOGY SECURITIES LITIGATION, Master File No. CV758510 was filed in Santa Clara County Superior Court in Santa Clara, California. The lawsuit originally named as defendants several of the Company's venture capital fund investors, two of its investment bankers and two securities analysts. The plaintiffs alleged violations of California securities laws and statutory deceit provisions as well as breaches of fiduciary duty and abuse of control. The plaintiffs sought unspecified monetary damages. After several rounds of demurrers, the court dismissed all claims except the California Corporations Code Sections 25400/25500 cause of action against the Company, four officers and the Company's investment bankers and securities analysts. On July 16, 1998, the court provisionally certified a national class of all persons who purchased the Company's stock during the class period. The class was provisionally certified with the order held in abeyance pending resolution of the question of whether a nationwide class may bring a California Corporations Code Sections 25400/25500 claim. This issue was resolved in favor of allowing such nationwide class actions by the California Supreme Court, Case No. 5058723, on January 4, 1999, in the DIAMOND MULTIMEDIA SECURITIES LITIGATION appeal by the California Supreme Court. On August 5, 2000 the court granted Company's motion for summary judgment and entered judgment in favor of the Company. The plaintiffs have appealed the court's decision which in currently under review by the Sixth District Court of Appeal. Based on its current information, the Company believes this suit to be without merit and will continue to 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. 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 27 based on UMC's breach of the settlement agreement arising out of the ITC action. 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. In a related action to the lawsuit that was commenced by the Company against UMC, 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. The Company filed its answer on January 8, 1998, denying all the allegations. The Company believes UMC's counterclaims and Mediatek's claims to be without merit. On June 11, 1998, the cases were consolidated for all purposes and stayed under 28 U.S.C. Section 1659, based on the judge's conclusion that the civil action involves the same issues 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 the ITC investigation and the decision of the Federal Circuit Court of Appeals on May 2, 2001 affirming the ITC's determination. (Described below.) On May 10, 1999, the ITC issued an Initial Determination terminating the investigation as to UMC, finding that UMC's activities were licensed. On May 17, 1999, the Company filed a petition for review of the Initial Determination. On September 27, 1999, the ITC affirmed that there were no unfair trade practices committed by MediaTek under Section 337of the Tariff Act, 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. 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 Commission's determination that the Company'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. 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 filed 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. XLI customers's Sharp Corporation, and Minolta-QMS, Inc. are also subject to Pitney Bowes allegation of infringement of the '272 patent, and have formally requested the Company to defend and indemnify them pursuant to the terms of their agreements. 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. 28 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K The Company filed a report on Form 8-K on July 24, 2001 to report that Oak Technology, Inc. had publicly announced that it had reconstituted the Company's Board of Directors. Oak President and CEO Young K. Sohn became Board Chairman. In addition, David J. Rynne and K.C. Murphy joined the Board, and previous Board Chairman David Tsang and Board member Ta-Lin Hsu have left the Board to pursue other interests in start-up ventures and venture capital. 29 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. OAK TECHNOLOGY, INC. -------------------- (Registrant) Date: November 14, 2001 /s/ JOHN S. EDMUNDS -------------------------- John S. Edmunds Senior Vice President of Finance and Chief Financial Officer (Principal Financial and Accounting Officer) 30 -----END PRIVACY-ENHANCED MESSAGE-----