Oak Technology, Inc.

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Oak Technology, Inc.

139 Kifer Court
Sunnyvale, California 94086
(408) 737-0888
Fax: (408) 737-3838
Web site: http://www.oaktech.com

Public Company
Incorporated : 1987
Sales : $248 million (1996)
Employees : 380
Stock Exchanges: NASDAQ
SICs : 3674 Semiconductors, Computer Logic Modules, & Related Devices; 8731 Engineering Laboratories & Computer Hardware Research and Development

Born in Xian, China, at the height of World War II, Oak Technology, Inc. founder David Tsang moved with his family to Japan in his teens where he attended Tokyos Chiba University for a year before relocating permanently to the United States at age 19. After completing his college career at Brigham Young University he moved to California in 1968 and took an entry-level engineering job at Hewlett-Packard (HP). After earning his masters degree in electrical engineering at the University of Santa Clara, Tsang grew disenchanted with HPs corporate politics and in 1974 founded Microcomputer Systems with other disaffected HP colleagues. In 1979 he left Microcomputer Systems to found another technology startup, Data Technology Corporation (DTC), which made high-density floppy disks and controllers for hard disk drives for the burgeoning U.S. computer industry. (The controller is the set of semiconductors or chips that issues the basic instructions that control a computers hard drive, where all the users data is stored. In early microcomputers, the hard disk drive controller was a separate card or plug-in component that was attached to the computers main system board.)

After Tsangs departure, Microcomputer Systems sued him and another former employee, Lloyd Ebisu, for allegedly taking Microcomputers trade secrets with them to DTC. In 1982 a California superior court agreed with Microcomputer, awarding it $1.5 million for the damage Tsang and Ebisu had caused it. In the meantime, in 1981, Tsangs new outfit, DTC, in collaboration with Shugart Associates (which eventually became Seagate Technology) invented the SASI interfacethe forerunner of the interconnectivity standard SCSI (Small Computer Systems Interface, or scuzzy). SASI and SCSI made it possible for manufacturers to install the controllers for computer peripherals like printers and CD-ROM drives inside the peripherals themselves rather than on a separate board or card, greatly reducing the complexity of adding new peripherals to a PC. In the SCSI world, computer users could connect a new printer directly to their computer and know that the two devices were preconfigured in the factory to communicate with each other.

Building a Reputation: 1987-89

After DTC went public in 1987, Tsang and his DTC colleagues struggled over the companys future direction. Unable to make his vision prevail, Tsang again decided to strike out on his own. His newest venture, Oak Technology, would manufacture logic chips and graphics controllers (which process raw graphics data for display as images on computer terminals) for the rapidly maturing personal computer industry. With Tsangs Pacific Rim background, Oak focused initially on Taiwans rapidly growing peripheral add-in or expansion board industry, opening a branch office and subsidiary in Taipei and eventually launching a Japanese subsidiary, Oak Technologies KK. Tsangs intent, however, was for Oak to design, develop, and market but not manufacture its components. Instead, fabless Oak would form flexible relationships with independent silicon foundries in Taiwan, Japan, and Korea who would supply it with the silicon wafers it would then fashion into semiconductor chips.

By 1988, Oak had unveiled a successful graphics controller for the super VGA enhanced computer video graphics market as well as a line of low-power integrated circuits for the IBM PS/2 personal computer. Tsang also spied a market in the growing laptop computer market and by 1989 had introduced a space-saving five-chip chip set christened OakHorizon that included the core system-control logic, clocking circuitry, peripheral con trailers, and power management for laptop computers. Oak also unveiled a ready-to-run computer chip design package for PC peripheral board makers that included all the chips and supporting software peripheral manufacturers needed to reach volume production levels for printers, scanners, and other peripheral devices. Tsangs Pacific Rim focus was soon winning Oak major customers like Mitsumi Electric, Hitachi, Creative Technology, and NEC, virtually all based in Asian countries. As one industry analyst would later note, This is a relationship game, and Tsang has good relationships in the Far East.

A slew of products followed in the ensuing years that established Oak as a premier if low-profile producer of the largely invisible parts that made home computers compute. In 1989, Oak entered the video data compression market by buying up the manufacturing and marketing rights to the video compression and expansion processor business of integrated-circuit maker Advanced Micro Devices (AMD). As the PC grew in processing power, it became possible to display memory-hungry full-motion video images on the PCs terminal, a boon for the graphics industry as well as the home user with a video camera. Video compression/decompression technology enabled PCS to process video images without having to store gigabytes of raw video data in the limited storage space that even the largest PCS contained. As Tsang moved Oak into more diverse and profitable computer components, Oaks first and only video compression product until 1995 would remain the OTI-95C71 Video Compression/Expansion Processor, which it sold as the image-processing engine to manufacturers of fax machines, copiers, and printers.

Swimming Upstream: 1990-93

By the early 1990s Oak had established itself as a successful if little noticed vendor of the video controller and accelerator products and core logic circuits that controlled personal computers display performance and basic internal functioning. Tsang meanwhile continued to search out new component niches and ensure that Oaks engineers were always developing the products that the next stage of computer performance would demand. In 1990, Oak introduced the OTI-067, a new chip set/graphics controller that improved the resolution (or image sharpness) of VGA PC monitors to 1,024 by 768 pixels without requiring more memory. In April 1991, it announced an agreement with microcontroller-maker Zilog Inc. to jointly develop and cross-license a set of controllers for the small disk drives used in laptop computers. By September Oak had introduced its OakNote hard disk controller, a three-chip integrated circuit that improved power conservation, video control, and system logic for laptop computers in as small a package as was then technically possible. And by November 1991 Oaks partnership with Zilog had spawned the Z86C99, an integrated disk drive controller on a single chip and Oaks sales had grown to $51 million.

In an industry now crowded with competitors and awash in cheaply priced chip sets, Oak had to struggle to maintain its margins but in July 1991 finally surrendered to the distressed market conditions by announcing layoffs. To ensure its continued growth and avoid an overdependence on specific product groups, in 1991 Tsang led Oak into the CD-ROM controllers marketthe basic chip sets that told CD-ROM drives how to interact with a PCs system board. Though Oaks entree into CD-ROM controllers was not initially as large as its earlier commitment to hard disk drive controllers, within five years CD-ROM controllers would grow to account for more than 90 percent of Oaks total revenues.

In early 1992 Oaks OTI-087 new graphics controller was cited by Electronic Design magazine for outperforming its competitors VGA video chips, and Oak began shipping the first chip sets for PCS using AMDs new 33-Megahertz 386-generation microprocessor and Cyrixs new 486 microprocessor. In the fall of 1992 Oak and Japans biggest computer maker, NEC, announced a licensing agreement that allowed NEC to make and market Oaks OTI-018 Spitfire video/graphics accelerator as part of its own product offerings. Then in June 1993, Oak unveiled the OTI-107, a video chip that greatly simplified the process of configuring video add-on cards to play videos on PCS. Oaks bread and butter, the graphics controller market, however, was beginning to evaporate as competitors chewed away at Oaks market share. In 1992 Oaks sales fell to $45 million and then dropped again to only $30 million in 1993.

Company Perspectives:

Oak Technology, Inc. designs, develops, and markets high-performance multimedia semiconductors and related software to original equipment manufacturers worldwide who serve the multimedia PC, digital video consumer electronics, and digital office equipment markets. Our technological expertise spans five core multimedia-enabling technologies: Optical Storage, MPEG Imaging, Video/Graphics, Audio/ Communications, and Digital Imaging.

Oaks solutions typically consist of hardware, firmware, and software to provide a complete, integrated solution for our customers. Whenever possible, we seek to integrate complementary multimedia technologies to create high-performance, low-cost products that address the target market needs.

Enter the CD-ROM Controller: 1994

Tsangs decision to steer Oak into the CD-ROM controller business came to Oaks rescue in 1994. In late 1993, it introduced its first major CD-ROM controller product, the OTI-011, which was designed to move the PC peripherals industry a step toward the new PC connectivity ideal: plug-and-play (PnP). The goal of PnP, which was spearheaded by Microsofts development of a PnP operating system to be named Windows95, was a computer that would enable the user to simply plug in a new printer or video card and allow the computers operating system to automatically identify it and load the appropriate drivers. With PnP, computer users would no longer have to worry about configuring jumper settings or other installation nightmares. Although PnP would remain more an ideal than a reality for several years, Oak ensured that its controllers and chips were compatible with the PnP standards established by the computer industry. For example, by the mid-1990s the ISA standard, the onetime standard for PCs peripheral expansion slots had been all but replaced by a newer, faster standard, PCI (Peripheral Component Interconnect). In 1995 Oak consequently revamped its Spitfire graphics accelerator to support the new PCI format.

Similarly, the emergence of the IDE (Integrated Drive Electronics) interface standard had eliminated the need for separate controller cards for each device installed on a computer because IDE allowed all the necessary electronic control circuitry to be located on the drive itself. Here, too, Oak stayed ahead of the curve by releasing the MOZART OTI-601, the first PC audio controller to incorporate the IDE interface.

Oaks entrance into the CD-ROM controller business was a huge success. By July 1994 it had sold over two million controllers for two- and four-speed CD-ROM drives, and 1.2 million in Japan alone. Now a major supplier of CD-ROM controller products (with close to 60 percent of the market) as well as compression/imaging chips, video/graphics controllers, and PC audio chips, Oaks sales climbed back to $42.6 million in 1994 before vaulting to $111 million in 1995. With the IDE interface established and plug-and-play CD-ROM drives on the horizon, Oak anticipated an explosion in CD-ROM sales and added a new semiconductor foundry partner in Korea to help it absorb the expected leap in controller orders.

In October 1994, Oak released the OTI-201, a new sound and video compression/decompression controller based on the new multimedia MPEG (Motion Pictures Expert Group) standard. MPEG-based videos were most commonly used for public PC-based information kiosks and corporate training videos. The OTI-201 was the industrys first MPEG decoder designed specifically for multimedia PCS and enabled peripheral manufacturers to offer high-performance MPEG-format graphics and video on a single add-on expansion board. With CD-ROM controllers expected to eventually become a cheap commodity product, Tsang viewed the OTI-201 as another way for Oak to expand its customer base and maintain its heady growth. With Oaks experience producing graphics chips and computer connectivity products, Tsang planned even newer generations of PC video display controllers as well as chips for 3D graphics, recordable CD-ROMs, TV set-top boxes, CD video players, and PC-based video production and teleconferencing.

Riding the Multimedia Wave: 1995

By January 1995 the company that Investors Business Daily had once described as a behind the scenes supplier of minor computer parts had evolved itself into the worlds leading producer of CD-ROM controller chips, which now generated the lions share of its annual revenues. CD-ROM sales in 1995 were three times what they had been in 1993, spurred by the rapid evolution in CD-ROM drive speeds. Two-speed drives that were considered cutting edge a year or so before had quickly been superseded by quad-speed and then six-speed driveswith each generation rendering the preceding generation obsolete almost overnight. In early 1995, Oak formed a 3-D graphics business unit, and to raise the capital Tsang needed to sustain Oaks growth, he took the company public in February, raising $48 million and then another $81 million in a secondary stock offering in May. When we cant keep up with demand, Tsang told Fortune magazine, that is when we will start losing customers.

By the end of the fiscal year in June, Oak had announced sixfold profit growth to $21 million, purchased new silicon wafer capacity from its Pacific Rim suppliers, and unveiled a new MPEG board product named ProMOTION to help peripheral manufacturers develop full-motion video playback systems for the PC market. Throughout 1995, Oaks stock continued to climb in price. On the heels of its glowing earnings reports and estimates, Tsang and his executive staff issued upbeat reports on the companys prospects to the media and investment community. Exceptional demand for our CD-ROM controller chips fueled our record results, COO Don Bryson announced in July. We continue to benefit as the PC industry shifts from double speed to quad speed [CD-ROM] drives.

In August Oak announced that it would introduce a new controller, the OTI-910, in 1996 for a new generation of high-density multimedia CD-ROMs that would use eight-speed or faster drives capable of playing traditional CD-ROM games, music CDS, or full-length movie videos. A month later Tsang announced that demand for Oaks CD-Rom controllers would be very strong and that he planned to double Oaks capacity within a year. At the same time Bryson was optimistically predicting that Oaks new line of MPEG video and graphics controllers would soon reduce Oaks dependence on CD-ROM controllers from 80 to 50 percent of total sales.

In October Oak announced an agreement with United Microelectronics Corp. to form United Integrated Circuits Corp, a semiconductor manufacturing facility in Taiwan to support Oaks anticipated need for greater capacity. More importantly, it announced its first acquisition, the $10.5 million purchase of Massachusetts-based Pixel Magic, a privately held producer of compression and image-processing technology. PixelMagics products and technology are an excellent complement to Oaks existing imaging products, Tsang told reporters. This acquisition will allow Oak to accelerate its penetration of the emerging digital office equipment market and significantly broaden the set of solutions we can offer to office equipment vendors.

Bursting the Bubble: 1996

As 1996 began, Oaks good news showed no signs of waning. In January it won a new customer when Taiwans biggest computer maker, Acer, adopted Oaks video controller for its line of karaoke CD players. Then PC video camera maker Logitech agreed to work with Oak to develop inexpensive video conferencing products for the desktop PC market. And a week later, 12 Asian electronics firms formally adopted Oaks new VideoCD Design System for their CD-based karaoke and video playback machines. In February Oaks year-old stock reached $30 a share, and in March Oak announced that its new graphics controllers would support Microsofts Direct3D and ActiveMovie game and video playback formats.

During a conference call with securities analysts in April, however, Tsang and Bryson unexpectedly announced that Oaks fourth quarter revenues would only be $55 to $60 million rather than the $94 originally expected. In May, the hint of bad news became the real thing when Oak announced that its actual fourth quarter revenues would be only $20 millionnot even half the lowered estimate it had given a month before.

Within a day, investors sold off 9.6 million shares of Oak stock, slashing its share price by 25 percent to $12 before the market closed. Tsang blamed the earnings surprise on poor CD-ROM controller sales caused by the overall slowdown in the PC industry. Oaks customersthe worlds CD-ROM drive makershad overestimated the number of controllers they would need and thus were left with a huge backlog that current CD-ROM drive orders would not absorb any time soon.

Tsangs explanations did not mollify all of Oaks investors, however, and in June an insider-trading class-action lawsuit was filed against Oak and its officers for willfully inflating Oaks prospects in order to drive up the companys stock price. The suit claimed that beginning in mid-1995, Tsang, Bryson, and eight other Oak executives had deliberately begun issuing optimistic statements about Oaks products and financial estimates in order to cash in their shares at a premium when the companys stock rose on the good news. Between July 1995 and May 1996, these Oak insiders had allegedly sold more than four million shares for a net gain of $104 million before the stocks price collapse in May. The suit specifically charged that, contrary to Oaks rosy press releases, Tsang and his colleagues had known that Oaks CD-ROM controllers could not handle the six- and eight-speed drives consumers now wanted; that its next-generation multimedia CD-ROM controller, the OTI-910, was obsolete within months of its release because it could only support six-speed drives; that its new graphics controller, the OTI-64107, was overpriced and technically flawed; that Oak had encouraged its customers to overbuy by offering lenient payment terms; and that Oaks customers were returning products, buying from competitors, or taking over manufacture of controllers themselves. Oak denied the charges and prepared for a long legal siege, which was only compounded in the summer when four more insider-trading suits were filed in federal court.

Recovering: 1996

As its stock and Wall Street profile hit rock bottom in the summer of 1996, Oak tried to weather the storm, opening a software design center in Boca Raton, Florida, to develop mini-applications, firmware, and device drivers for its product lines. It also announced the launch of a mixed signal design center in Austin, Texas, to develop technologies for integrating analog and digital formats in mixed-signal applications, such as DVD content displayed through a television. It also unleashed a torrent of new products to demonstrate that, investors allegations to the contrary, its technological edge was very much intact. It unveiled a decoder chip for the latest MPEG format, MPEG-1; a digital audio accelerator supporting the latest PC audio performance specifications (including support for digital simultaneous voice over data modems); and a graphics accelerator that supported Intels new multimedia (MMX) processor.

In July Oak also announced a licensing deal with PC audio software maker In Vision to package that companys multimedia sound-creation software with Oaks audio controllers, giving PC peripheral manufacturers a complete single-chip audio product. A month later it partnered with Krypton Isolation, a California-based manufacturer of integrated circuits for the telecommunications industry, to develop a state-of-the-art digital signal coder/decoder (or codec) for the computer modem market. In October it unveiled its fifth-generation CD-ROM controller, which was capable of supporting 20-speed CD-ROM drives, as well as a new controller for recordable/rewritable CD-ROM drives.

It also reached an agreement with modem maker PCtel to package its modem with Oaks latest digital audio accelerator, the OTI-611 TelAudiaSD. Subsidiary Pixel Magic released the first fully programmable Imaging Digital Signal Processor (IDSP) for manufacturers of ink jet and laser printers, fax machines, digital copiers, and scanners, and in November Oak unveiled a graphics accelerator for the new stripped-down network PCS being marketed by Microsoft and Intel. Finally, at the fall COMDEX computer show, Tsang introduced Oaks Interactive DVD Browser, an open-architecture software program for handling the decoding and playback of audio data on the new DVD mediaa kind of super CD-ROM capable of storing seven times the data of a standard CD.

Guarded Optimism: 1997

Although Oaks stock continued to languish throughout 1997, it appeared to have demonstrated that its engineers were quite capable of obeying Tsangs mandate to diversify Oaks product line into new niches with promising demand. Where sales of CD-ROM controllers had comprised an unsettling 93 percent of Oaks total revenues in early 1996, by the end of March 1997 that figure had fallen to 86 percent. In January, Don Bryson, one of the three principle Oak executives alleged to have misled investors with rosy forecasts, resigned as Oaks COO and was reassigned to special projects. In March, Oak announced what it claimed was the fastest CD-ROM controller yetthe OTI-912a chip capable of supporting the 16-speed CD-ROM drives now entering the mainstream.

By the end of the March 1997 fiscal quarter, however, Oak was still reporting disappointing resultsa 43 percent drop in revenues from 1996 and substantially fewer orders for its CD-ROM controllers. Tsang again attributed this to the inventory correction that stemmed from drive manufacturers overbuying in 1996, and at least one industry analyst suggested that despite the report the question of whether Oak would survive its insider-trading scandal was now moot. Between the spring and fall of 1997, Oak continued to announce new product releases. In April, it began market-sampling a new audio chip that supported Intel Corporations new all-digital PC audio guidelines. In June it launched a single-chip DVD-ROM decoder controller, christened Troika, for video and audio data compression in PCS and DVD players and a week later unveiled the WARP5, a 3-D graphics accelerator chip for the consumer electronics industry. Oak was positioning itself to exploit the shift from CD-ROMs to DVDs, whenever it occurred. In October 1997 it released a new copy-protection version of the Troika DVD decoder chip that promised to allay media industry concerns that DVD technology would make it too easy for hightech pirates to copy movies and music. Oaks 1998 first-quarter earnings report at last seemed to confirm that it had rebounded from its stock scandal. Net sales had increased 129 percent over the first quarter of 1997, and sales of its recordable/rewritable CD-ROM decoders were growing. Nevertheless, the effect of the still pending insider-trading lawsuits on Oaks future remained unclear.

Principal Subsidiaries

Pixel Magic, Inc.; Oak Technology K.K. (Japan); Oak Technology, Taiwan.

Further Reading

California Superior Court Judge Barton Phelps Awards at Least $ 1.5 Million, New York Times, April 30, 1982.

Cataldo, Anthony, Oak Technology Backs MMCD Format, Electronic News, August 28, 1995, p. 60.

MacLellan, Andrew, Oak Offers Feature Rich PCI Graphics Controller, Electronic News, November 6, 1995, p. 84.

_____, Oak Offers $10.5M for Pixel Magic, Electronic News, November 13, 1995, p. 72.

_____, Oak Unveils 3D Controller; Leverages Intel Architecture,Electronic News, July 15, 1996, p. 104.

The New America, Investors Business Daily, October 6, 1995, p. A5.

Oak and Philips Have MPEG Devices, Electronic News, November7, 1994.

Oak Opens Mixed Signal Design Center, Electronic News, July 15, 1996, p. 116.

Oak Spins MPEG Board Developer Kit, Electronic News, June 26, 1995, p. 22.

Oak Tech Sees 4Q Letdown, Electronic News, May 27, 1996, p. 17.

Schonfeld, Erick, A Chip Off the Old CD-ROM, Fortune, September 18, 1995, p. 245.

Scouras, Ismini, Several Report Rough Sledding, EBN, April 28, 1997.

Shareholder Suit Filed Against Oak over Trading, Electronic News, June 24, 1996, p. 54.

Wong, Gerrye, Silicon Valley Pioneer (profile of David Tsang),AsianWeek, March 8, 1996, p. 9.

Paul S. Bodine