TWST: Would you provide a brief overview of Oak Technology?

Mr. Edmunds: We're really participating in two markets right now ' semiconductor for optical storage devices, and imaging. Traditionally, Oak was a semiconductor company supporting different media environments, first as a graphics chip company and then later as a supplier of semiconductors for CD-ROM. At one time in the mid-1990s we had a dominant position, about an 80% market share in semiconductors for CD- ROM. The company since that time became involved in about six different businesses, then had trouble for several years sustaining performance when the market shifted. About two years ago Oak entered a turnaround phase. The Board of Directors brought in a new CEO, Young Sohn, from Quantum, who had been President of their $8 billion hard-disk drive division. Young basically looked at the six different businesses and decided to get out of three of them right away, because it was clear Oak wasn't going to be able to win in those markets. In one of the remaining businesses, in the broadband area, we had good technology but there was already too much competition in that space. So we sold that business this past January for approximately $25 million. That left us with two businesses we thought on which we could focus and be successful. One was our traditional business, which is actually now semiconductors for CD- RW, and the other is in the imaging space. We historically had semiconductors for imaging, in particular compression, image-resolution and imaging DSP chips, and we did an acquisition last summer to add some software capability to these semiconductor assets. So we're in two market spaces: imaging, and semiconductors for CD-RW. The majority of our short-term growth is going to come from semiconductors for CD-RW. We know the world is in the process of shifting from analog to digital. Part of that move has to do with shifting from using magnetic portable media, like floppy disk drives or cassette tapes and to the use of optical storage instead.

TWST: Do you think the shift from analog to digital will one day just be unanimous, complete?

Mr. Edmunds: Yes. We think the majority of the portable storage media will shift to optical storage. Acer, for instance, right now is shipping a laptop that only allows for a CD-RW drive ' there's no floppy available for it. Their marketing theme is, 'throw your floppies away.' So people are shifting PC and laptop configurations. We think that's already happening in the music environment as well. For example, look at the old boom boxes that kids used to carry around with cassette tapes. In the future they'll be carrying smaller boom boxes with CD-RW drives in them.

TWST: I know many people just dislike those floppy disks to begin with, so they probably won't have any problem whatsoever throwing them away.

Mr. Edmunds: The additional storage space is, I think, 640 megabytes for a little less than $1. It's quite a bit more capacity. If you want to record anything with any complex graphic like a PowerPoint presentation or something with pictures in it, you're going to need that additional storage capacity.


Mr. Sohn had the foresight to just do away with businesses that weren't really profitable.

Mr. Edmunds: Yes. The company had some successes and they had a lot of cash in the bank and they had engineers who wanted to experiment and try different things. All along the way Oak kept funding R&D, so we did develop some good technologies along the way, but we didn't have the discipline to stop projects that really weren't going to give us much of an economic opportunity.

TWST: How do you think the R&D expenditures will change in amount and emphasis in the next couple of years?

Mr. Edmunds: Actually we have a fairly good complement of engineers now. We added 140 software engineers last summer in the imaging side. So I think, if anything, we'll add people with different sets of skills and talent. We may add some more analog capability as we move along in the audio and DVD-RW sides. We may add some different types of imaging technology capability, whether it is color science or something else. But they'll be different subsets of engineering talent that would be complementing our own existing work force ' not a heck of a lot of people, though.

TWST: How many people do you have working for Oak Technology right now?

Mr. Edmunds: We have roughly 520. And we'll probably add on the order of 50 or so people a year for the next two to three years.

TWST: What do you consider to be the greatest opportunity for Oak Technology in the next few years? Would it just be to continue along the lines of converting from analog to digital?

Mr. Edmunds: Supporting the wave of opportunity we see right now and looking beyond that to a second iAppliance demand wave. The first wave is being driven by PCs right now, and that has pretty explosive growth potential. IDC is forecasting 30 million units being shipped in calendar year 2000. They're forecasting 43 million in calendar 2001, 55 million in 2002, and 75 million units in 2003. We see that as the first wave of CD-RW opportunity. We think there's another, larger wave coming behind that in appliances, things like a Sony Discman that suddenly becomes a Sony RW Recordable Discman. Or a digital camera with a CD-read-write disk in it.

TWST: What do you consider your competitive advantages to be?

Mr. Edmunds: I think on the CD-RW side it's in the ability to get to market quickly with a reliable write platform. It's very difficult to write and be able to write to various grades of media, or be able to compensate for defects in the media. But the whole algorithm around the recording process and error correction is fairly complex. We've been able to get to market quickly with something that's stable and that the customer is going to rely on. We've also provided a greater depth of integration than anyone else in the space. Our current product offering in two chips eliminates approximately five other components and provides about a 30% cost reduction, from the components alone ' not to mention the performance enhancement of having all of that located in just two chips.

TWST: Do you have markets all over the world?

Mr. Edmunds: Yes, we do. We sell primarily to OEM manufacturers. And one of our strengths is that we have design wins in six of the top seven manufacturers. We sell to them wherever they're located.

TWST: What would you say are the major concerns or challenges that Oak Technology faces for the next couple of years?

Mr. Edmunds: The biggest challenge to us, because we're a Silicon Valley company, is that we need to attract and retain good talent. Also to provide a set of challenging opportunities and lead a group of people in a way that is meaningful and attractive for them to stay for the long term.

TWST: Do you have any incentive programs in order to attract and keep the people that you're looking for?

Mr. Edmunds: Yes. We offer stock options to employees and we are just re-initiating a bonus program, after coming out of this turnaround phase. We have a number of other benefit programs that we provide to employees. But what's most meaningful to people is that they're able to work on projects that have a successful implementation in the marketplace. To the extent we're succeeding in delivering value to our customers, then employees feel good about working in a fast-paced company like Oak.

TWST: What would you say the specific goals would be for Oak Technology with regard to market position and growth?

Mr. Edmunds: In terms of the design wins we already have, we really have great market position already in the CD-RW space. So we want to maintain that position as our OEMs move up through different generations of product. Last year, the sweet spot in the marketplace was thought to be 4X recording speeds. This year people expect it to be in 8X recording speeds. Next year they expect it to be 16X. So we want to stay ahead of that technology curve and maintain our incumbency with those top OEM manufacturers. The name of the game for us is making sure we've got OEMs that are more than satisfied with their partnership with Oak.

TWST: What do you think the rate of gain in sales and earnings might be for Oak Technology? I think you touched on this earlier.

Mr. Edmunds: Yes. We're looking to achieve a large market share, in excess of 50%, and to grow as the market grows over the next couple of years We're operating in markets that are expected to grow in excess of 30%, and we have a very good market position on the CD-RW side. I'd also say that we have a very good position in the imaging space today as a component supplier of both compression and image resolution chips, as well as PDL languages and Host drivers. The question on the imaging side is whether we can transform from being a component supplier to supplying more of a total solution-based capability to the OE

Ms. We have great market presence already in that space as a component supplier with people like Canon, Xerox and HP.

TWST: Which would you say would provide the largest opportunity for growth? Would that be for CD-read-write or for imaging?

Mr. Edmunds: I'd say in the near-term it's going to be in the CD-RW space. That space looks to be taking off, driven largely by people downloading music from the Internet. And the sheer demand in that space right now from the PC manufacturers, who are bundling CD-RW in PCs ' almost every consumer PC that goes out today includes a CD-RW drive.

TWST: Is the downloading of music on the Internet known as MP-3?

Mr. Edmunds: MP-3 is one of the formats that music can be recorded in, and that's just one of the vehicles. Of course, MP-3 as a company itself operates a Website that enables people to download music. There's great controversy in that space over some companies that enable people to do that and at the same time infringe copyrights. We don't subscribe to infringing copyrights, and we're active in initiatives to help record labels, as well as some of our software partners, with encryption capability through the use of the semiconductor controller chip in the drives.

TWST: Yes, I understand record companies are concerned that this will just take away from their business.

Mr. Edmunds: Right. We actually think that this whole Internet distribution method is here to stay and that people are going to use the Internet to shop for and receive music electronically. It's kind of like the horses are already out of the barn and now we're trying to figure out how to build a corral for them. That's really the case within that industry. We're working along with the record label associations, and other industry initiatives around encryption and security architectures that involve both the media and our silicon capability.

TWST: I understand that it's not just record companies who are concerned, it's also dealers of rare records, who are afraid that MP-3 might just do away altogether with record collecting. That's another concern.

Mr. Edmunds: Yes. You have to think of it as a different distribution methodology. It's just a different way to do the same thing. Just like Dell Computer created the phenomenon for ordering PCs directly rather than going to a computer store.

TWST: Do you have any thoughts or comments about Oak Technology's current stock price at the moment?

Mr. Edmunds: Well, it's all a point of view, I suppose. We think we have great potential. But certainly, we have to deliver earnings in the marketplace. I believe we're on our tenth quarter in a row of reporting losses. Our goal is to be profitable in the near future and be able to provide the fundamental justification for people's faith in our potential. Sure, we're quite pleased with the growth in the stock price, but we know we've got our work cut out for us to provide the kind of growth in earnings to support the faith of our stockholders.

TWST: Do you spend a lot of your time personally with analysts, or would that be the CEO?

Mr. Edmunds: I'd say we both do. I talk quite a bit with analysts, and we both visit analysts. Young was in Minneapolis just last week visiting with some people.

TWST: In summing up ' what two or three reasons would you give potential long-term investors for investing in Oak Technology?

Mr. Edmunds: I think if investors believe the demand for CD-RW capability is going to be there, and that is actually being fueled primarily by downloading music from the Internet right now, it is not a big leap to see that trend may be followed with demand for sheer storage capability. For instance, just replacing floppies will drive growth even in the corporate space as well. If investors believe that demand for CD- read-write technology is going to be there, then certainly investing in Oak looks to be a very sound opportunity for the future, given our positioning in the market as a supplier to six out of the top-seven CD- RW manufacturers. We've had good experience in this space before, and we intend to make the most of this opportunity to grab the brass ring once again.

TWST: Is there anything that I may have missed or overlooked that you would want to discuss or highlight?

Mr. Edwards: Well, one thing we really haven't talked about is that we also recognize that there will be a convergence in the market space between CD-RW formats and DVD formats. We're currently working on a controller that will drive both CD-RW and DVD-read technologies and we hope to provide, eventually, DVD-recordable capability. So we also recognize that CD-RW formats are important today, but that DVD will be very important in the future. We'll be supporting both formats down the road. We intend to leverage our position in CD-RW to also be dominant in DVD in the future.

TWST: When you say DVD, do you mean DVD as opposed to VHS, or is that something different?

Mr. Edmunds: DVD is a format in optical storage that provides greater storage capacity, and on the order of seven-eight times as much storage capacity as CD-RW. So DVD is typically used for video recording. Most people thought that the market would go to DVD right away, so they bypassed development for CD-RW. Nobody really anticipated the downloading music from the Internet, and that's really given CD-RW an opportunity, because the technology is here today. We happen to have that technology, and we're looking to leverage it in the space today. We also recognize that if we can create a strong position in the market through CD-RW, that's a very good position from which to leverage into DVD recordable. And that's where we're headed. We think we can do that by providing a combo chip that'll handle both technologies. We'll go through a phase where, to use an analogy, you'll need both your 8-track and your cassette-player capability, and we'll have a controller chip that'll drive either. We want to use that capability to become dominant in the DVD-recordable space as well.

TWST: Thank you.

JOHN EDMUNDS CFO Oak Technology, Inc. 139 Kifer Court Sunnyvale, CA 94086 (408) 737-0888 (408) 737-3938 - FAX

Each Executive who is the featured subject of a TWST Interview is offered the opportunity to include an Investors Brief or other highlight material to be provided and sponsored by and for the company.

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