-----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, M4k9mehrsM5aOAlTiDhaZlf3uh/cFsNKHOmt199YKu5mJB9KE7wCGckB655oQ0cS p8M9/raYXJSGVHO48ZQuZQ== 0000912057-96-016579.txt : 19960809 0000912057-96-016579.hdr.sgml : 19960809 ACCESSION NUMBER: 0000912057-96-016579 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960808 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ZORAN CORP \DE\ CENTRAL INDEX KEY: 0001003022 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 942794449 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-27246 FILM NUMBER: 96605481 BUSINESS ADDRESS: STREET 1: 2041 MISSION COLLEGE BLVD CITY: SANTA CLARA STATE: CA ZIP: 95054 BUSINESS PHONE: 4089861314 MAIL ADDRESS: STREET 1: 2041 MISSION COLLEGE BLVD CITY: SANTA CLARA STATE: CA ZIP: 95054 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------ FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1996 or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------ ------ Commission File Number: 0-27246 ZORAN CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 94-2794449 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2041 MISSION COLLEGE BOULEVARD, SANTA CLARA, CALIFORNIA 95054 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (408) 986-1314 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 --- --- The number of outstanding shares of the registrant's Common Stock, $.001 par value, as of July 31, 1996 was 7,000,804. ZORAN CORPORATION INDEX PAGE NO. PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets June 30, 1996 and December 31, 1995 3 Consolidated Income Statements Three and Six Months Ended June 30, 1996 and 1995 4 Consolidated Statements of Cash Flows Six Months Ended June 30, 1996 and 1995 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 14 Item 6. Exhibits and Reports on Form 8-K 14 SIGNATURES 15 2 ZORAN CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED) JUNE 30, DECEMBER 31, 1996 1995 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 2,859 $ 20,521 Short-term investments 16,577 - Accounts receivable, net 10,555 4,479 Inventory 1,887 2,255 Prepaid expenses and other current assets 839 439 ------------ ------------ Total current assets 32,717 27,694 Property and equipment, net 2,011 1,391 ------------ ------------ Total assets $ 34,728 $ 29,085 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 3,314 $ 3,414 Accrued expenses and other liabilities 5,030 4,444 Current portion of long-term debt 372 372 ------------ ------------ Total current liabilities 8,716 8,230 ------------ ------------ Long-term debt 436 601 ------------ ------------ Stockholders' equity: Common Stock, $0.001 par value; 20,000,000 shares authorized; 6,940,494 and 6,538,530 shares issued and outstanding 7 7 Additional paid-in capital 76,327 72,567 Accumulated deficit (50,758) (52,320) ------------ ------------ Total stockholders' equity 25,576 20,254 ------------ ------------ Total liabilities and stockholders' equity $ 34,728 $ 29,085 ------------ ------------ ------------ ------------ The accompanying notes are an integral part of these consolidated financial statements. 3 ZORAN CORPORATION CONSOLIDATED INCOME STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1996 1995 1996 1995 ------------------------- ------------------------ Revenues: Product sales $ 8,721 $ 3,662 $ 15,102 $ 7,077 Development and licensing 581 350 805 910 ------------------------- ------------------------ Total revenues 9,302 4,012 15,907 7,987 ------------------------- ------------------------ Costs and expenses: Cost of product sales 5,290 1,903 8,715 3,658 Research and development 1,127 870 2,113 1,901 Selling, general and administrative 2,156 1,126 3,843 2,216 ------------------------- ------------------------ Total costs and expenses 8,573 3,899 14,671 7,775 ------------------------- ------------------------ Operating income 729 113 1,236 212 Interest expense (43) (88) (73) (197) Interest and other income, net 329 10 592 27 ------------------------- ------------------------ Income before income taxes 1,015 35 1,755 42 Provision for income taxes 111 5 193 6 ------------------------- ------------------------ Net income $ 904 $ 30 $ 1,562 $ 36 ------------------------- ------------------------ ------------------------- ------------------------ Net income per share $ 0.11 $ 0.01 $ 0.19 $ 0.01 ------------------------- ------------------------ ------------------------- ------------------------ Weighted average common shares and equivalents 8,280 6,400 8,301 6,407 ------------------------- ------------------------ ------------------------- ------------------------
The accompanying notes are an integral part of these consolidated financial statements. 4 ZORAN CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1996 1995 ---------- ---------- Cash flows from operating activities: Net income $ 1,562 $ 36 Adjustments: Depreciation and amortization 417 376 Changes in assets and liabilities: Accounts receivable (6,076) (275) Inventory 368 (13) Prepaid expenses and other current assets (400) (56) Accounts payable (100) (715) Accrued expenses and other liabilities 586 436 ---------- ---------- Net cash used in operating activities (3,643) (211) ---------- ---------- Cash flows from investing activities: Purchases of short-term investments, net (16,577) - Expenditures for property and equipment (1,017) (101) ---------- ---------- Net cash used in investing activities (17,594) (101) ---------- ---------- Cash flows from financing activities: Proceeds (repayment) of debt, net (165) 383 Proceeds from issuance of Common Stock, net 3,740 2 ---------- ---------- Net cash provided by financing activities 3,575 385 ---------- ---------- Net increase (decrease) in cash and cash equivalents (17,662) 73 Cash and cash equivalents at beginning of period 20,521 1,054 ---------- ---------- Cash and cash equivalents at end of period $ 2,859 $ 1,127 ---------- ---------- ---------- ---------- The accompanying notes are an integral part of these consolidated financial statements. 5 ZORAN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary to present fairly the financial information included therein. While the Company believes that the disclosures are adequate to make the information not misleading, it is suggested that these financial statements be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 1995. Results for the interim periods presented are not necessarily indicative of the results to be expected for the full year. 2. BALANCE SHEET COMPONENTS June 30, December 31, 1996 1995 ---------- ----------- (in thousands) Inventories: Work-in-process $ 1,153 $ 942 Finished goods 734 1,313 ---------- ---------- $ 1,887 $ 2,255 ---------- ---------- 3. STOCKHOLDERS' EQUITY Stockholders' equity as of June 30, 1996 reflects the exercise of the underwriters' over-allotment option in January 1996, which was related to the December 1995 initial public stock offering. This exercise resulted in the sale of 307,500 additional shares of Common Stock for net proceeds of approximately $3.5 million. 4. INCOME TAXES The provision for income taxes reflects the estimated annualized effective tax rate applied to earnings for the interim period. The effective tax rate differs from the U.S. statutory rate due to utilization of net operating losses, State of Israel tax benefits on foreign earnings, foreign withholding taxes and an alternative minimum tax liability. 5. NET INCOME PER SHARE Net income per share is computed using the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares consist of shares issuable upon exercise of stock options and warrants (using the treasury stock method). Pursuant to the requirements of the Securities and Exchange Commission, Common Stock, Preferred Stock and common equivalent shares issued during the twelve months prior to the initial public offering are included in the computation for all periods presented. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO THE COMPANY'S FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CURRENTLY ANTICIPATED DEPENDING UPON A VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED BELOW UNDER THE SUB-HEADING, "FUTURE PERFORMANCE AND RISK FACTORS" AND DISCUSSED MORE FULLY IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1995. OVERVIEW From the Company's inception in 1981 through 1991, the Company derived the substantial majority of its revenue from digital filter processors ("DFPs") and vector signal processors ("VSPs") used principally in military, industrial and medical applications. In 1989, the Company repositioned its business to develop and market integrated circuits designed to compress video and audio data for commercial and consumer applications in evolving multimedia markets. At that time, the Company discontinued development of DFP and VSP products, and in mid-1994, the Company advised its customers that it was discontinuing production of these products. "End-of-life" sales of DFP and VSP products contributed substantially to revenues and operating income during the first quarter of 1995, while sales of these products declined during the balance of 1995 and have not been significant in 1996. DFP and VSP products are not expected to contribute significant revenues in future periods. The Company's current lines of multimedia compression products include JPEG products used in video editing and filmless digital cameras, MPEG products used in video playback and Dolby AC-3 audio products used in movie and home theater systems and DVD players which the Company believes will be introduced by manufacturers later this year. Historically, average selling prices ("ASPs") in the semiconductor industry in general, and for the Company's products in particular, have decreased over the life of a particular product. To date, the Company has not experienced a recognizable pattern of declines in the ASPs of its multimedia products. Although ASPs have fluctuated substantially from period to period, these fluctuations have been driven principally by changes in customer mix (original equipment manufacturer ("OEM") sales versus sales to distributors) and the transition from low-volume "test" sales to high-volume production sales rather than by factors related to product life cycles. The Company believes that, as its multimedia product lines mature and competitive markets evolve, it is likely to experience declines in the ASPs of its multimedia products, although the timing and amount of such future changes cannot be predicted with any certainty. There can be no assurance that costs will decrease at the same rate as such declines in ASP's, or at all. The Company sells its products, either directly or through distributors or independent sales representatives, to OEMs worldwide. Sales prices to distributors are generally lower than selling prices for direct sales, as distributors are responsible for certain sales and marketing expenses, customer support and training. Lower gross margins on sales to distributors are partially offset by reduced selling and marketing expenses related to such sales. Sales in Japan are primarily made through Fujifilm Microdevices Co., Ltd. ("Fujifilm"), the Company's strategic partner and distributor in Japan. Fujifilm provides more sales and marketing support than Zoran's other distributors. Zoran has historically generated a significant percentage of its total revenues from development contracts, primarily with key customers. These development contracts have provided the Company with partial funding for the development of certain of its products. Payments received by the Company under these development contracts are recorded as development revenue. The Company classifies all development costs, including costs related to these development contracts, as research and development expenses. The Company retains ownership of the intellectual property developed by it under these development contracts. 7 The Company is a party to certain research and development agreements with the Office of the Chief Scientist in Israel's Ministry of Trade and Industry Department (the "Chief Scientist") and the Israel-United States Binational Industrial Research and Development Foundation ("BIRDF"), which fund up to 50% of incurred project costs for approved products up to specified contract maximums. These agreements require the Company to use its best efforts to achieve specified results and require the Company to pay royalties at rates of 2 1/2% to 5% of resulting product sales, and up to 30% of resulting license revenues, up to a maximum of 100% to 150% of total funding received. Reported research and development expenses are net of these grants, which fluctuate from period to period. The Company conducts research and development and certain sales and marketing and administrative operations in Israel through its wholly-owned Israeli subsidiary. As a result, certain expenses are incurred in Israeli shekels. Until May 1995, substantially all of the Company's product sales were made from the Company's U.S. facility. In May 1995, the Company restructured its manufacturing and sales organizations and began selling a portion of its products directly from its facility in Israel. To date, substantially all of the Company's product sales have been denominated in U.S. dollars and most costs of product sales have been incurred in U.S. dollars. The Company expects that most of its sales and costs of sales will continue to be denominated and incurred in U.S. dollars for the foreseeable future. The Company has not experienced material losses or gains as a result of currency exchange rate fluctuations and has not engaged in hedging transactions to reduce is exposure to such fluctuations. The Company intends to actively monitor its foreign exchange exposure and to take appropriate action to reduce its foreign exchange risk, if such risk becomes material. RESULTS OF OPERATIONS REVENUES Total revenues for the quarter and six months ended June 30, 1996 were $9.3 million and $15.9 million, respectively, increases of 132% and 99%, respectively, compared to the same periods in 1995. This growth was due to 138% and 113% increases in product sales for the quarter and six months, respectively, compared to last year. The increase in product sales resulted from continued growth in unit sales of the Company's Dolby AC-3 digital audio decoders for home audio equipment and DVD players and its JPEG video compression devices for video editing and digital filmless cameras. Sales to Fujifilm, the Company's strategic partner, customer and distributor in Japan, accounted for 46% and 32% of the Company's product sales in the quarter and six months ended June 30, 1996, respectively, compared to 0% and 3%, respectively, in the comparable 1995 periods. The Company's next two largest customers accounted for an aggregate of 26% and 39% of the Company's product sales in the quarter and six months ended June 30, 1996, respectively, compared to 42% and 28%, respectively, in the comparable 1995 periods. Sales of discontinued DFP and VSP military and industrial products were insignificant in the current six months compared to sales of $1.4 million for these products during the first six months of 1995, primarily in the first quarter. Development and licensing revenue for the quarter ended June 30, 1996 increased compared to the same quarter last year due to license revenue associated with a discontinued product and decreased during the current six months compared to last year due to the completion of several development projects in prior periods. While Zoran intends to continue to enter into development contracts with certain strategic partners, it expects development revenue to fluctuate in future periods and to continue to represent a relatively minor portion of total revenues. 8 PRODUCT GROSS PROFIT Product gross margin was 39% and 42% during the current quarter and six months, respectively, compared to 46% in the first quarter of 1996 and 48% for the quarter and six months ended June 30, 1995. The margin rate decreases were primarily due to higher volume sales of relatively lower priced, lower margin Dolby AC-3 products sold to Fujifilm, the Company's strategic partner, customer and distributor in Japan. Zoran's product gross margin is dependent on product mix and on the percentage of products sold directly to Zoran's OEM customers versus indirectly through its marketing partners who purchase the Company's products at lower prices but absorb most of the associated marketing and sales support expenses. Product gross margin during the first six months of last year was positively impacted by significant sales of high-margin, "end-of-life" DFP and VSP products, primarily in the first quarter. The Company expects product and customer mix to continue to fluctuate in future quarters. RESEARCH AND DEVELOPMENT Research and development ("R&D") expenses of $1.1 million and $2.1 million for the quarter and six months ended June 30, 1996, respectively, were approximately 30% and 11% above the comparable periods of 1995. As a result of higher revenues, R&D expenses as a percentage of total revenues decreased substantially compared to the same periods last year. The Company continues to believe that significant investments in R&D are required for it to remain competitive, and anticipates that such expenses in terms of absolute dollars will increase in future periods, although such expenses as a percentage of total revenues may fluctuate. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative ("SG&A") expenses increased to $2.2 million for the current quarter from $1.1 million for the second quarter of 1995 and increased to $3.8 million for the six months ended June 30, 1996 from $2.2 million for the comparable six-month period last year. SG&A expenses, however, decreased as a percentage of total revenues in each comparable period. The increase in absolute dollars for the current periods was due primarily to increased administrative expenses associated Zoran's status as a publicly-traded company, increased sales and marketing expenses to support increased sales levels and to increased royalties and commissions related to higher product sales. The Company expects that SG&A expenses will continue to increase in order to support the growth of the Company. INTEREST AND OTHER INCOME (EXPENSE), NET Net interest and other income and expense resulted in net other income of $286,000 and $519,000 for the quarter and six months ended June 30, 1996, respectively, compared to net other expenses in the comparable periods of 1995. Interest expense decreased due to the use of proceeds from the December 1995 initial public stock offering ("IPO") to repay short-term debt. Interest income increased due to the investment of the IPO proceeds, including proceeds from the January 1996 exercise of the underwriters' over-allotment option. PROVISION FOR INCOME TAXES The provision for income taxes increased to $111,000 and $193,000 for the current quarter and six months, respectively, from $5,000 and $6,000 for the comparable periods last year. The Company's estimated effective tax rate of 11% for the current year reflects alternative minimum tax on its domestic earnings and foreign withholding taxes on intercompany royalties. 9 LIQUIDITY AND CAPITAL RESOURCES Net proceeds from the Company's December 1995 IPO and the exercise of certain warrants in connection with the IPO totaled $17.5 million. The Company also received net proceeds of $3.5 million in January 1996 upon the exercise of the underwriters' over-allotment option. At June 30, 1996, the Company had $19.4 million of cash, cash equivalents and short-term investments. The Company's operating activities used cash of $3.6 million in the six months ended June 30, 1996. Cash used in operating activities reflected changes in working capital, partially offset by net income and depreciation and amortization. The principal change in working capital during the six month period was an increase in accounts receivable of $6.1 million due primarily to a significant portion of quarterly sales being shipped late in the quarter and delayed payments from a significant customer. Accounts receivable from this customer represented 16% of total accounts receivable at June 30, 1996. The Company expects to receive payment in full from this customer before September 30, 1996, but there can be no assurance that expected amounts will be received. During the six month period, the Company's capital expenditures were $1.0 million and it repaid long-term debt of $165,000. The Company believes that its current balances of cash, cash equivalents and short-term investments and anticipated cash flow from operations, will satisfy the Company's anticipated working capital and capital equipment requirements through 1996. FUTURE PERFORMANCE AND RISK FACTORS THE COMPANY'S FUTURE BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES, INCLUDING THOSE DESCRIBED BELOW. PRODUCT CONCENTRATION; EVOLVING MARKETS. To date, only a limited number of commercial and consumer products that incorporate the Company's integrated circuits are in volume production. Current applications for the Company's products include professional and consumer video editing systems, PC-based video CD systems, stand-alone video CD systems, digital audio systems and filmless digital cameras. During 1994 and 1995, the Company derived a majority of its product revenues from the sale of integrated circuits for video editing applications. The Company expects that video editing applications will continue to account for a significant portion of its revenues for the near future, although sales of audio products are expected to account for an increased percentage of product sales in 1996. Over the longer term, the Company's ability to generate increased revenues will be dependent on the expansion of sales of its products for use in other existing applications, as well as the development and acceptance of new applications for the Company's technologies and products. The potential size of the markets for new applications and the timing of their development and acceptance is uncertain. The Company's future success will depend upon whether manufacturers select the Company's integrated circuits for incorporation into their products, and upon the successful marketing of these products by the manufacturers. There can be no assurance that demand for existing applications will be sustained, that new markets will develop or that manufacturers developing products for any of these markets will design the Company's integrated circuits into their products or successfully market them. The failure of existing and new markets to develop or to be receptive to the Company's products would have a material adverse effect on the Company's business, operating results and financial condition. 10 The emergence of markets for the Company's integrated circuits will be affected by a variety of factors beyond the Company's control. In particular, the Company's products are designed to conform with certain current industry standards. There can be no assurance that manufacturers will continue to follow these standards or that competing standards will not emerge which will be preferred by manufacturers. The emergence of markets for the Company's products is also dependent in part upon third-party content providers developing and marketing content for end user systems, such as video and audio playback systems, in a format compatible with the Company's products. There can be no assurance that these or other factors beyond the Company's control will not adversely affect the development of markets for the Company's products. RELIANCE ON INDEPENDENT FOUNDRIES AND CONTRACTORS. The Company does not operate any manufacturing facilities, and from time to time shortages of foundry capacity develop for certain process technologies in the semiconductor industry. The Company currently relies on independent foundries to manufacture substantially all of its products. The Company's independent foundries fabricate products for other companies and may also produce products of their own design. The Company does not have a long-term supply contract with two of its principal foundries and, therefore, neither of these suppliers is obligated to supply products to the Company for any specific period, in any specific quantity or at any specified price, except as may be provided in a particular purchase order. The Company's reliance on independent foundries involves a number of risks, including the inability to obtain adequate capacity, the unavailability of or interruption in access to certain process technologies, reduced control over delivery schedules, quality assurance, manufacturing yields and cost, and potential misappropriation of the Company's intellectual property. The loss of any of the Company's foundries as a supplier, the inability of the Company in a period of increased demand for its products to expand supply or the Company's inability to obtain timely and adequate deliveries from its current or future suppliers could reduce or delay shipments of the Company's products. Any of these developments could damage relationships with the Company's current and prospective customers and have a material adverse effect on the Company's business, operating results or financial condition. All of the Company's semiconductor products are currently being assembled by one of two independent contractors and tested by those contractors or other independent contractors. The Company's reliance on independent assembly and testing houses limits its control over delivery schedules, quality assurance and product cost. Disruptions in the provision of services by the Company's assembly or testing houses or other circumstances that would require the Company to seek alternative sources of assembly or testing could lead to supply constraints or delays in the delivery of the Company's products. These constraints or delays could damage relationships with current and prospective customers and have a material adverse effect on the Company's business, operating results or financial condition. NEW PRODUCT DEVELOPMENT AND TIMELY INTRODUCTION OF NEW AND ENHANCED PRODUCTS. The markets for the Company's products are characterized by rapidly changing technologies, evolving industry standards, frequent new product introductions and short product life cycles. The Company expects to increase its expenses relating to product development, and its future success will depend to a substantial degree upon its ability to develop and introduce, on a timely and cost-effective basis, new and enhanced products that meet changing customer requirements and industry standards. There can be no assurance that the Company will successfully develop, introduce or manage the transition to new products. Future delays in the introduction or shipment of new or enhanced products, the inability of such products to gain market acceptance or problems associated with new product transitions could adversely affect the Company's business, operating results and financial condition. 11 COMPETITION; PRICING PRESSURES. The Company's existing and potential competitors include many large domestic and international companies that have substantially greater financial, manufacturing, technical, marketing, distribution and other resources, broader product lines and longer standing relationships with customers than the Company. The markets in which the Company competes are intensely competitive and are characterized by rapid technological change, declining ASPs and rapid product obsolescence. CUSTOMER CONCENTRATION; CHANGE IN CUSTOMER MIX. The Company's largest customers have accounted for a substantial percentage of its revenues, and sales to these large customers have varied materially from year to year. There can be no assurance that the Company will be able to retain its key customers or that such customers will not cancel purchase orders to reschedule or decrease their level of purchases. In addition, sales to these key customers may fluctuate significantly from quarter to quarter. Any development that would result in a substantial decrease or delay in sales to one or more key customers, including actions by competitors or technological changes, could have a material adverse effect on the Company's business, operating results or financial condition. In addition, any development that would affect the collectibility of account balances from one or more key customers could have a material adverse effect on the Company's business, operating results or financial condition. POTENTIAL FLUCTUATIONS IN OPERATING RESULTS. The Company's quarterly operating results have varied significantly due to a number of factors, including the timing of new product introductions by the Company and its competitors, market acceptance of new and enhanced versions of the Company's products and products of its customers, the timing of large customer orders, the availability of development funding and the timing of development revenue, changes in the mix of products sold, the mix of distribution channels employed and competitive pricing pressures. The Company expects that its operating results will fluctuate in the future as a result of these factors and a variety of other factors, including the availability of adequate foundry capacity, fluctuations in manufacturing yields, the emergence of new industry standards, product obsolescence, changes in pricing policies by the Company, its competitors or its suppliers, the cyclical nature of the semiconductor industry, the evolving and unpredictable nature of the markets for products incorporating the Company's integrated circuits and the amount of research and development expenses associated with new product introductions. The Company's operating results could also be adversely affected by economic conditions generally or in various geographic areas where the Company or its customers do business, other conditions affecting the timing of customer orders, a downturn in the markets for its customer's products, particularly the consumer electronics market, or order cancellations or reschedulings. These factors are difficult or impossible to forecast, and these or other factors could materially affect the Company's quarterly or annual operating results. The Company places orders to purchase its products from independent foundries several months in advance of the scheduled delivery date, often in advance of receiving non-cancelable orders from its customers. If anticipated shipments or development revenue in any quarter are canceled or do not occur as quickly as expected, expense and inventory levels could be disproportionately high. A significant portion of the Company's expenses is relatively fixed, and the timing of increases in expenses is based in large part on the Company's forecast of future revenues. As a result, if revenues do not meet the Company's expectations it may be unable to quickly adjust expenses to levels appropriate to actual revenues, which could have a material adverse effect on the Company's business, operating results or financial condition. To date, the Company's operating results have not been materially affected by seasonal factors. However, as markets for consumer products incorporating the Company's integrated circuits mature, the Company expects that sales will tend to be stronger during the last several months of the calendar year than at other times due to increased demand for consumer products during the holiday season. As a result of the foregoing, the Company's operating results and stock price may be subject to significant volatility, particularly on a quarterly basis. Any shortfall in revenues or net income from levels expected by securities analysts could have an immediate and significant adverse effect on the trading price of the Company's Common Stock. 12 MANAGEMENT OF GROWTH. The Company has recently experienced rapid growth and expansion which has placed, and will continue to place, a significant strain on its administrative, operational and financial resources and has resulted, and will continue to result, in a continuing increase in the level of responsibility for both existing and new management personnel. The Company anticipates that future growth, if any, will require it to recruit and hire a substantial number of new engineering, managerial, sales and marketing personnel. The Company's ability to manage its growth successfully will also require the Company to continue to expand and improve its administrative, operational, management and financial systems and controls. Many of the Company's key operations, including research and development and a significant portion of its sales and administrative operations, are located in Israel, while a majority of its sales and marketing and certain of its administrative personnel, including its President and Chief Executive Officer, are based in the United States. The geographic separation of these operations is likely to place additional strain on the Company's resources and its ability to effectively manage its growth. If the Company's management is unable to manage growth effectively, the Company's business, operating results or financial condition could be materially and adversely affected. DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a significant degree upon the continuing contributions of its senior management, particularly Levy Gerzberg, a co-founder of the Company and its President and Chief Executive Officer. The loss of Dr. Gerzberg or other key management personnel could delay product development cycles or otherwise have a material adverse effect on the Company's business, operating results or financial condition. There can be no assurance that the Company will be able to retain the services of Dr. Gerzberg or any of its other key employees. The Company believes that its future success will also depend in large part on its ability to attract and retain highly-skilled engineering, managerial, sales and marketing personnel, both in the United States and in Israel. Competition for such personnel is intense, and there can be no assurance that the Company will be successful in attracting, integrating and retaining such personnel. Failure to attract and retain key personnel could have a material adverse effect on the Company's business, operating results or financial condition. RELIANCE ON INTERNATIONAL SALES AND OPERATIONS; RELIANCE ON OPERATIONS IN ISRAEL. The Company anticipates that international sales will continue to represent a significant portion of total revenues. In addition, substantially all of the Company's products are manufactured, assembled and tested outside of the United States by independent foundries and subcontractors. The Company is subject to the risks of doing business internationally, including unexpected changes in regulatory requirements, fluctuations in exchange rates, imposition of tariffs and other barriers and restrictions and the burdens of complying with a variety of foreign laws. The Company is also subject to general geopolitical risks, such as political and economic instability and changes in diplomatic and trade relationships, in connection with its international operations. The Company's principal research and development facilities and a substantial portion of its sales operations are located in the State of Israel. Therefore, the Company is directly affected by the political, economic and military conditions to which that country is subject. In addition, many of the Company's expenses in Israel are paid in Israeli shekels, thereby subjecting the Company to the risk of foreign currency fluctuations and to economic pressures resulting from Israel's generally high rate of inflation. There can be no assurance that such factors will not have a material adverse effect of the Company's business, operating results or financial condition. VOLATILITY OF STOCK PRICE. The market price of the Company's Common Stock has fluctuated significantly since the IPO and is subject to material fluctuations in the future in response to announcements concerning the Company or its competitors or customers, quarterly variations in operating results, announcements of technological innovations, the introduction of new products or changes in product pricing policies by the Company or its competitors, proprietary rights or other litigation, changes in analysts' earnings estimates, general conditions in the semiconductor industry, developments in the financial markets and other factors. In addition, the stock market has, from time to time, experienced extreme price and volume fluctuations that have particularly affected the market prices for technology companies and which have been unrelated to the operating performance of the affected companies. Broad market fluctuations of this type may adversely affect the future market price of the Common Stock. 13 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders The Company's 1996 Annual Meeting of Stockholders was held on June 6, 1996. At the meeting the following six persons nominated by management were elected to serve as directors of the Company: Shares ----------------------- Nominee Voted For Withheld ------------------ --------- -------- Levy Gerzberg 5,791,448 5,005 Uzia Galil 5,791,448 5,005 Arie Kahana 5,791,448 5,005 James D. Meindl 5,791,448 5,005 Arthur B. Stabenow 5,791,448 5,005 Philip M. Young 5,623,923 172,530 The following additional items were voted upon at the meeting: 1. A proposal to amend the Company's 1995 Employee Stock Purchase Plan to increase the maximum number of shares purchasable by an individual participant in any calendar year was approved by a vote of: 5,743,076 shares for; 18,617 shares against; 14,339 shares abstaining; and 20,421 broker non-votes. 2. A proposal to ratify the appointment of Price Waterhouse LLP as the independent auditors of the Company for the year ended December 31, 1996 was approved by a vote of: 5,787,774 shares for; 4,135 shares against; 4,544 shares abstaining; and 0 broker non-votes. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.1 Summary of Discussion Between Zoran (Microelectronics Ltd.) (Registrant's subsidiary) and Matam of April 23, 1996 regarding Lease Agreement dated October 1, 1992 between Zoran Microelectronics Ltd. and Matam-Haifa Scientific Industries Center Ltd. 10.2 Memorandum of Understanding Between Zoran Micro-Electronics Ltd.and IBM Israel Ltd., dated April 23, 1996, regarding Lease Agreement dated October 1, 1992 between Zoran Microelectronics Ltd and Matam-Haifa Scientific Industries Center Ltd. 11.1 Statement re: Computation of Net Income Per Share 27 Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K were filed during the three months ended June 30, 1996. 14 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. ZORAN CORPORATION Date: August 5, 1996 /s/ Levy Gerzberg --------------------------------- Levy Gerzberg President Chief Executive Officer Date: August 5, 1996 /s/ Ami Kraft --------------------------------- Ami Kraft Vice President, Finance Chief Financial Officer 15 EX-10.1 2 EXHIBIT 10.1 Ref. GLUSMAN/ZORAN2/5/8/96 [TRANSLATED FROM THE HEBREW] 23rd April 1996 SUMMARY OF DISCUSSION BETWEEN ZORAN AND MATAM OF 23/4/96 -------------------------------------------------------- Participated: Zoran - Meir Tzadik, Ami Kraft, Raab Hamutel Matam - Zvika Ligati, Oded Biran Matam and Zoran agreed that Zoran shall move from the premises in building 8/1 within the context of the existing tenancy agreement between them dated 1st October 1992 (hereinafter referred to as "the existing agreement") to exchanged premises in building no. 30 (hereinafter referred to as "the exchanged premises"), and it was also agreed that Zoran shall rent an area in a new building which Matam shall construct (hereinafter referred to as "the premises in the new building"), and all pursuant to the principles set forth below: 1. The exchanged premises are of an area of 1,646 square metres comprised of 1,342 square metres on the 5th floor and 304 square metres on the ground floor. The exchanged premises on the 5th floor shall be delivered to Zoran in accordance with the finishing plan agreed upon with IBM and PST which is in the course of execution. Changes to the plan shall be effected with Zoran's funding. 2. The tenancy term in building 30 shall commence on the date of actual delivery of the exchanged premises on the 5th floor and the premises on the ground floor and shall end on 15th May 1999 or on the actual delivery date of the premises in the new building - whichever is the later. The planned delivery dates of the premises: on the 5th floor - 31st May 1996; on the ground floor - within three months of the date on which Matam receives interior finishing plans signed by Zoran and approved by PST. Matam shall enable Zoran to effect agreed changes in the finishing plan (two laboratories) on the 5th floor as from 15th May 1996. 3. Zoran undertakes to appear on the delivery date to accept the 5th floor, which constitutes part of the exchanged premises, within seven days of Matam's notice thereof. Zoran undertakes to vacate the premises in building 8/1 and to return possession of this area to Matam within 14 days of the delivery of the 5th floor in building 30 as aforesaid. This vacation day, according to Zoran's notice, has been agreed with IBM. 4. It has been agreed between IBM and Zoran, with Matam's consent, that the payment of the rent from May 1996 and thereafter shall be as detailed below: (a) IBM shall pay the rent of the exchanged premises until 30th June 1996 and shall pay for the upper floor in building 8/1 from 1st July 1996. (b) Zoran shall pay rent for the upper floor in building 8/1 until 30th June 1996 and for the exchanged premises commencing on 1st July 1996. 5. In the tenancy term from June to December 1996, Matam shall give Zoran a monthly reduction of $ 7,500 in the rent that shall be due from it and a further discount of $ 1.41 per square metre per month in building 30, which shall be deducted from the rent as particularised in clause 8 [sic]. 6. Further to the matters agreed upon between IBM, Zoran and Matam - Zoran shall, in respect of its part of executing finishing works in the area of the exchanged premises, bear an amount of $ 30,000 against the submission of an invoice which shall be charged and paid at the following stages: (a) US$ 15,000 within 30 days of the signing of this document; (b) US$ 15,000 within 30 days of delivery of the premises. 7. PST's expenses in respect of the architect's services, that were provided for the puropses of planning the area of the premises in an amount of up to $ 31,666, shall be paid by Zoran to Matam within 30 days of the signing of this summary. 2 The demand shall be supported by receipts and/or invoices attesting to the said expenses. 8. Matam intends constructing a new building of an area of approx. 5,000 square metres. The size of the area shall be determined by Matam having regard to Zoran's requirements. The building shall be constructed in accordance with the technical specification that shall be agreed upon between the parties, but not less than the specification of buildings 23 and 30 which Matam has constructed. The location of the new building shall be determined by Matam within the Matam Park, including West Matam, with Zoran's consent - and Zoran shall not object to the location on unreasonable grounds. The planned delivery date of the premises to Zoran in the new building is: 15th May 1999. 9. Zoran shall rent an area of approx. 2,500 square metres in the new building for a tenancy term of seven years. Zoran shall have the right to give notice by 15th May 1997 of a reduction or increase in the area of the premises in the new building by 500 square metres. In such a case, Matam shall have the right to change the area of the new building in accordance with its discretion. Matam shall, if necessary, permit Zoran to rent out part of the area which it shall rent in the new building to a sub-tenant, provided that such a sub-tenancy is approved by Matam. It shall be agreed in consultation with the parties by 15th May 1998 which additional areas in the building, apart from the area which Zoran shall rent as aforesaid in this clause, shall be rented to other tenants for a term of up to three years to enable Zoran to expand in the future. 10. The monthly rent per square metre in the exchanged premises and in the new building shall be $ 12.74 plus VAT and linked to the base index of February 1996 as follows: 3 (a) The rent for 1,330 square metres shall be linked to the dollar together with the CPI index until 15th May 2003. (b) All the area of the premises in excess of 1,330 square metres shall be linked to the Israeli consumer price index with the base exchange rate being NIS 3.11 to the US dollar. (c) The rent for the 1,330 square metres mentioned in clause (a) above from 16th May 2003 shall be identical to the average of the rent for the area of the premises in excess of 1,330 square metres, pursuant to the matters set forth in clause (b) above, and the rent in NIS in the month of May 2003 calculated pursuant to clause 10(a). (d) On 1st April 1997, Zoran shall pay a lump sum supplementary rent of US$ 19,000. (e) For the tenancy term from 1st January 1997 to 15th May 1999, Zoran shall pay a monthly supplementary rent supplement in the sum of 63.95 cents per metre of premises. 11. The management and maintenance of the common areas in building 30 (including the dining room on the ground floor in building 30) shall be regulated in accordance with "appendix "I" - addendum to tenancy agreements in building 30" annexed hereto. 12. The parties shall use their best endeavours, within 60 days of the signing of this discussion summary, to sign a new agreement based on this discussion summary and the existing agreement and the parties' understandings with regard to matters that are not dealt with within the context of this summary. With regard to 1,330 square metres until 15th 2003, the new agreement shall only be based on the existing agreement and this discussion summary. For the avoidance of doubt, if for any reason whatsoever the new building will not be constructed, Zoran shall rent an area of 1,330 square metres until 15th May 2003 at Matam, the premises wherein shall be with a specification of the standard of building 30. 4 Zoran shall increase its collateral and shall, on the date of the signing of this document, pay Matam a deposit of US$ 49,000. Zoran can use the monies of this deposit as follows: (a) On 1st April 1997 - against the payment of rent as provided in clause 9(d). (b) The balance of the deposit - against the payment of rent on 1st April 1998 and thereafter. 13. The renting of the replacement area in building 30 is subject to PST and IBM signing discussion summaries on this subject that have been sent to them. The construction and renting of the areas in the new building are subject to the approval of the board of directors of Matam and [..... sic]. Recorder: Oded Biran We confirm our consent to the discussion summary. (Signed and Stamped) - ------------------------------ Zoran Ltd We confirm our consent to the discussion summary. (Signed) - ------------------------------ Matam 5 EX-10.2 3 EXHIBIT 10.2 [TRANSLATED FROM THE HEBREW] MEMORANDUM OF UNDERSTANDING BETWEEN: ZORAN MICRO-ELECTRONICS LTD (hereinafter referred to as "Zoran") AND: IBM ISRAEL LTD (hereinafter referred to as "IBM") 1. BACKGROUND 1.1 IBM was in negotiations with PST to rent by way of a sub-tenancy an area of 1,646 square metres situated in building 30 at Matam which is divided in the following manner: 1,342 square metres on the 5th floor of the building (hereinafter referred to as "F5); 304 square metres on the ground floor in building 30 (hereinafter referred to as "GF"). (For the purposes of this memorandum of understanding, F5 and GF are hereinafter referred to as "building 30".) 1.2 Zoran presently rents the 5th floor of building 8/1 in Matam. This building cupied on its other floors by IBM's offices. 1.3 The parties wish to exchange the rented areas such that Zoran shall rent building 30 directly from Matam and IBM shall rent the 5th floor in building 8/1 directly from Matam as well. 1.4 Matam is prepared to allow the exchange of the premises subject to the terms and conditions that shall be determined between it and each of the parties separately and subject to the consents which the parties shall reach inter se. 6 2. DELIVERY Zoran shall deliver the 5th floor in building 8/1 to IBM within 14 days of the date on which it shall receive possession of F5 (hereinafter referred to as "the delivery date"). Zoran shall give notice to IBM of the estimated delivery date immediately upon receiving Matam's notice of the delivery date of F5 to it (hereinafter referred to as "the notice"). 3. PAYMENTS 3.1 IBM shall pay the rent for building 30 until 30th June 1996 or until the delivery of F5 by Matam and the acceptance thereof by Zoran, whichever is the later, and Zoran shall pay the rent for the 5th floor in building 8/1 until 30th June 1996 or until building 30 is received by Zoran, whichever is the later. 3.2 In addition to the rent particularised above, IBM shall pay Zoran an amount in NIS equal to US$ 140,000 (one hundred and forty thousand US dollars) for improvements in the premises which Zoran executed on the 5th floor in building 8/1. IBM shall also pay Zoran a supplementary amount to a maximum of $ 160,000 if the cost of the communications on the 5th floor in building 8/1 shall cost IBM less than $ 30,000. The supplement shall be the difference between $ 30,000 and the actual cost, if the cost shall be less than $ 30,000. 3.3 IBM shall also pay Zoran an amount of $ 102,000 (one hundred and two thousand dollars) for furniture which Zoran shall sell it, less the depreciated value of the chairs which shall remain owned by Zoran and which it shall take with it. Zoran shall furnish IBM with a list of the equipment which it is selling IBM in the said agreed amount by 7th May 1996. 7 4. PAYMENT TERMS IBM shall effect the payments particularised in clause 3 upon the terms and conditions and at the times set forth below: 4.1 The payments prescribed in sub-clauses 3.2 and 3.3 shall be paid within 30 days from the date of the tax invoice that shall be submitted to IBM by Zoran and after Zoran has received F5. 4.2 The payments prescribed in sub-clause 3.1 shall be paid to Matam at the times prescribed in the agreements between IBM and them. 5. FINISHING WORKS IN F5 5.1 Within the context of the agreement between IBM and Matam, IBM undertook to execute, through Matam, finishing works in accordance with the specification annexed to this agreement as appendix "B". 5.2 Zoran shall contribute to the finishing works expenses and shall pay Matam on account of such works an amount in NIS equal to $ 30,000 (thirty thousand US dollars) upon such terms and conditions and at such times as shall be determined with Matam. 5.3 Matam shall bear any additional payment for the purposes of executing the finishing works in F5. 5.4 Zoran shall bear the expenses of the finishing works in GF. 6. SUSPENSORY CONDITIONS 6.1 Zoran shall not be under a duty to delivery the 5th floor in building 8/1 to IBM prior to F5 being delivered to it. 6.2 It is hereby expressly agreed that Zoran shall not be required to pay more than rent in respect of one property, that is to say: Zoran shall not be required to bear the payment of rent for F5 and the 5th floor in building 8/1. Insofar as Zoran shall be required to pay rent for F5, IBM shall bear the payment of the rent for the 5th floor in building 8/1 to Matam. 8 6.3 This memorandum of understanding shall come into effect subject to Matam, PST and Zoran signing their consents to the discussion summaries and the changes required in the various tenancy agreements so that they shall accord with the consents particularised in this agreement or insofar as the parties shall agree upon changes to the terms and conditions of this memorandum of understanding deriving from the discussion summaries and agreements with Matam and PST. 7. DOLLAR A payment in this agreement relating to a US dollar shall be effected in shekels according to the representative rate of exchange of the shekel compared to the dollar at its rate on the date of actual payment, provided that the payment is effected prior to 11:00 hours on a day on which there are transactions in foreign currency. In any other case, the rate published on the business day immediately thereafter shall apply. IN WITNESS WHEREOF WE HAVE SET OUR HANDS THIS 23RD DAY OF APRIL 1996 (Signed) (Signed) - ------------------------------ ------------------------------ Zoran Micro-Electronics Ltd IBM Israel Ltd 9 EX-11.1 4 EXHIBIT 11.1 EXHIBIT 11.1 ZORAN CORPORATION COMPUTATION OF NET INCOME PER SHARE (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------- ------------------------- 1996 1995 1996 1995 ------------------------- ------------------------- Weighted average common shares outstanding 6,899 175 6,874 170 Convertible Preferred Stock (1) - 2,027 - 2,027 Dilutive effect of stock options and warrants based on the treasury stock method (1) 1,381 515 1,427 527 Cheap stock (1) - 3,683 - 3,683 ------------------------- ------------------------- Weighted average common shares and equivalents 8,280 6,400 8,301 6,407 ------------------------- ------------------------- ------------------------- ------------------------- Net income $ 904 $ 30 $ 1,562 $ 36 ------------------------- ------------------------- ------------------------- ------------------------- Net income per share $ 0.11 $ 0.01 $ 0.19 $ 0.01 ------------------------- ------------------------ ------------------------- -------------------------
(1) Pursuant to the requirements of the Securities and Exchange Commission, Common Stock, Preferred Stock and common equivalent shares issued during the twelve months prior to the initial public offering are included in the computation for all periods presented. EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED INCOME STATEMENTS, THE CONSOLIDATED BALANCE SHEETS AND THE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 2,859 16,577 10,855 300 1,887 32,717 5,948 3,937 34,728 8,716 0 0 0 7 25,569 34,728 15,102 15,907 8,715 8,715 5,956 0 73 1,755 193 1,562 0 0 0 1,562 0.19 0.19
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