-----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, Jrn/udrqi5KqM6s7LhELt3OQh9wi7VlVr59ZR8zQfDKezPC6sXa1EKA25RF+mrdC O5ksUNSn/Bi1p3BLVTv15Q== 0000912057-99-006132.txt : 19991117 0000912057-99-006132.hdr.sgml : 19991117 ACCESSION NUMBER: 0000912057-99-006132 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: SEC FILE NUMBER: 000-27246 FILM NUMBER: 99755618 BUSINESS ADDRESS: STREET 1: 3112 SCOTT BOULEVARD STREET 2: SUITE 255 CITY: SANTA CLARA STATE: CA ZIP: 95054 BUSINESS PHONE: 4089194111 MAIL ADDRESS: STREET 1: 3112 SCOTT BOULEVARD STREET 2: SUITE 255 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 September 30, 1999 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.) 3112 SCOTT BOULEVARD, SANTA CLARA, CALIFORNIA 95054 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (408) 919-4111 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 October 31, 1999 was 10,853,063. ZORAN CORPORATION INDEX
PAGE NO. PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets September 30, 1999 and December 31, 1998 3 Condensed Consolidated Statements of Operations Three and Nine Months Ended September 30, 1999 and 1998 4 Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 1999 and 1998 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk 15 PART II. OTHER INFORMATION Item 4. Submission of Matters to a vote of Security Holders 16 Item 6. Exhibits and Reports on Form 8-K 17 SIGNATURES 18
2 ZORAN CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
September 30, December 31, 1999 1998 ---- ---- ASSETS Current assets: Cash & cash equivalents $ 4,857 $ 8,221 Short-term investments 13,591 10,954 Accounts receivable, net 19,533 15,558 Inventory 9,434 7,063 Prepaid expenses and other current assets 2,164 2,018 --------------------- --------------------- Total current assets 49,579 43,814 Property and equipment, net 4,573 5,356 --------------------- --------------------- $ 54,152 $ 49,170 ===================== ===================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 3,684 $ 6,530 Accrued expenses and other liabilities 8,506 6,454 --------------------- --------------------- Total current liabilities 12,190 12,984 Stockholders' equity: Common Stock, $0.001 par value; 20,000,000 shares authorized; 10,834,296 and 10,213,394 shares issued and outstanding 10 10 Additional paid-in capital 81,590 79,635 Warrants 717 717 Unrealized gain on securities available for sale 483 - Accumulated deficit (40,838) (44,176) --------------------- --------------------- Total stockholders' equity 41,962 36,186 --------------------- --------------------- $ 54,152 $ 49,170 ===================== =====================
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 ZORAN CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
Three Months Ended Nine Months Ended September 30, September 30, --------------------------- ------------------------- 1999 1998 1999 1998 ------------- ------------- ------------ ------------ Revenues: Product sales $ 14,519 $ 8,986 $ 34,728 $ 22,230 Software, licensing and development 1,577 2,860 6,891 7,859 ------------- ------------- ------------ ------------ Total revenues 16,096 11,846 41,619 30,089 Costs and expenses: Cost of product sales 7,720 5,153 18,497 12,750 Research and development 2,430 3,476 9,945 9,654 Selling, general and administrative 3,683 2,877 10,232 8,311 ------------- ------------- ------------ ------------ Total costs and expenses 13,833 11,506 38,674 30,715 Operating income (loss) 2,263 340 2,945 (626) Interest and other income, net 249 176 1,226 696 ------------- ------------- ------------ ------------ Income before income taxes 2,512 516 4,171 70 Provision for income taxes 502 103 833 14 ------------- ------------- ------------ ------------ Net income $ 2,010 $ 413 $ 3,338 $ 56 ============= ============= ============ ============ Basic net income per share $ 0.19 $ 0.04 $ 0.32 $ 0.01 ============= ============= ============ ============ Diluted net income per share $ 0.17 $ 0.04 $ 0.28 $ 0.01 ============= ============= ============ ============ Shares used to compute basic net income per share 10,681 10,064 10,578 9,988 ============= ============= ============ ============ Shares used to compute diluted net income per share 12,083 10,941 11,865 10,970 ============= ============= ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 ZORAN CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) NINE MONTHS ENDED
SEPTEMBER 30, ------------------------------------------- 1999 1998 -------------------- -------------------- Cash flows from operating activities: Net income $ 3,338 $ 56 Adjustments to reconcile net income to net cash used by operations: Depreciation, amortization and other 1,520 1,564 Changes in current assets and liabilities: Accounts receivable (4,337) 3,152 Inventory (2,371) (2,688) Prepaid expenses and other current assets (146) 394 Accounts payable (2,846) (3,127) Accrued expenses and other liabilities 1,762 (4,463) -------------------- -------------------- Net cash used in operating activities (3,080) (5,112) -------------------- -------------------- Cash flows from investing activities: Capital expenditures for property and equipment (1,085) (1,339) (Purchases)/Sales of short-term investments, net (1,154) 1,913 -------------------- -------------------- Net cash (used in) provided by investing activities (2,239) 574 Cash flows from financing activities: Proceeds from issuance of Common Stock, net 1,955 492 -------------------- -------------------- Net cash provided by financing activities 1,955 492 -------------------- -------------------- Net decrease in cash and cash equivalents (3,364) (4,046) Cash and cash equivalents at beginning of period 8,221 9,903 -------------------- -------------------- Cash and cash equivalents at end of period $ 4,857 $ 5,857 ==================== ====================
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 ZORAN CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited condensed 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, 1998. Results for the interim periods presented are not necessarily indicative of the results to be expected for the full year. 2. BALANCE SHEET COMPONENTS
SEPTEMBER 30, DECEMBER 31, 1999 1998 -------------------- -------------------- INVENTORY: Work-in-process $ 3,037 $ 1,781 Finished goods 6,397 5,282 -------------------- -------------------- $ 9,434 $ 7,063 ==================== ====================
3. INCOME TAXES The provision for or benefit from income taxes reflects the estimated annualized effective tax rate applied to earnings for the interim periods. The effective tax rate differs from the U.S. statutory rate due to utilization of net operating losses and State of Israel tax benefits on foreign earnings. The provision includes primarily taxes on income in excess of net operating loss carryover limitations and foreign withholding taxes. 4. EARNINGS PER SHARE A reconciliation of the numerators and the denominators of the basic and diluted per share computation is as follows:
Three Months Ended September 30, 1999 1998 ---------------------------------------- ---------------------------------------- Income Shares Per Share (Loss) Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ------------ -------------- ------------ ------------ -------------- ------------ Basic EPS: Net income available to common stockholders $ 2,010 10,681 $ 0.19 $ 413 10,064 $ 0.04 ============ ============ Effects of Dilutive Securities: Stock Options 1,395 877 Warrants 7 - ------------ -------------- ------------ ----------- Diluted EPS: Income available to common stockholders $ 2,010 12,083 $ 0.17 $ 413 10,941 $ 0.04 ============ ============== ============ ============ ============ ============ --------------------------------------------------------------------------------- Nine Months Ended September 30, 1999 1998 ---------------------------------------- ---------------------------------------- Income Shares Per Share (Loss) Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ------------ -------------- ------------ ------------ -------------- ------------ Basic EPS: Net income available to common stockholders $ 3,338 10,578 $ 0.32 $ 56 9,988 $ 0.01 ============ =========== Effects of Dilutive Securities: Stock Options 1,287 963 Warrants - 19 ------------ -------------- ----------- ----------- Diluted EPS: Income available to common stockholders $ 3,338 11,865 $ 0.28 $ 56 10,970 $ 0.01 ============ ============== ============ =========== ============ ============
6 5. RECENTLY ISSUED ACCOUNTING STANDARD In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes a new model for accounting for derivatives and hedging activities and supercedes and amends a number of existing accounting standards. SFAS 133 requires that all derivatives be recognized on the balance sheet at their fair market value, and the corresponding derivative gains or losses be either reported on the statement of operations or as a deferred item depending on the type of hedge relationship that exists with respect to such derivative. In July 1999, the Financial Accounting' Standards Board issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities -Deferral of the Effective Date of SFAS 133 ("SFAS 137"). SFAS 137 defers the effective date of SFAS 133 to fiscal quarters and years beginning after June 15, 2000. Adopting the provisions of SFAS 133 is not expected to have a material effect on the Company's consolidated financial statements. 6. SALE OF CERTAIN ASSETS In June, 1999 the Company sold to MGI Software of Canada ("MGI") the intellectual property related to Zoran's SoftDVD product line and transferred to MGI certain related software development and support resources in exchange for cash, MGI common stock, and future royalties. The Company's results for the second quarter of 1999 include a $732,000 gain realized from this transaction which is reported as part of Interest and other income or expense. In connection with this transaction, the Company also recorded a charge that reduced software, licensing and development revenues for the quarter by $517,000 for possible issues related to receivables associated with the SoftDVD product line. When viewed in total, the net impact of the MGI transaction on the Company's results was effectively a net gain of $215,000, or $0.01 per share, on a diluted basis after tax. 7 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, 1998. OVERVIEW From our inception in 1981 through 1991, we derived the substantial majority of our revenue from digital filter processors and vector signal processors used principally in military, industrial and medical applications. In 1989, we repositioned our business to develop and market data compression products for the evolving multimedia markets and discontinued development of digital filter processor and vector signal processor products. In 1994, we discontinued production of these products, which are not expected to contribute significant revenues in future periods. Our current lines of multimedia compression products include MPEG 2 and Dolby Digital-based products used in DVD players, Dolby Digital-based audio products used in movie and home theater systems, and JPEG-based products used in filmless digital cameras and video editing systems. In December 1996, we expanded our compression based product offerings through the acquisition of CompCore Multimedia, a provider of software-based compression products and a designer of cores for video and audio decoder integrated circuits. We derive most of our revenues from the sale of our integrated circuit products. Historically, average selling prices in the semiconductor industry in general, and for our products in particular, have decreased over the life of a particular product. Although average selling prices for our hardware products have fluctuated substantially from period to period, these fluctuations have been driven principally by changes in our customer mix of original equipment manufacturer sales versus sales to distributors and the transition from low-volume to high-volume production sales rather than by factors related to product life cycles. During 1997 and 1998, we reduced our average selling prices on certain products in order to better penetrate the consumer market. We believe that, as our product lines continue to mature and competitive markets evolve, we are likely to experience further declines in the average selling prices of our products, although we cannot predict the timing and amount of such future changes with any certainty. Our costs may not decrease at the same rate as average selling prices decline or at all. Our cost of product sales consists primarily of fabrication costs, assembly and test costs, and the cost of materials and overhead from operations. Our product gross margin is dependent on product mix and on the percentage of products sold directly to our original equipment manufacturer customers versus indirectly through our marketing partners who purchase our products at lower prices but absorb most of the associated marketing and sales support expenses. We expect product and customer mix to continue to fluctuate in future periods, causing further fluctuations in margins. We also derive revenue from licensing our software. Licensing revenue includes one-time license fees and royalties based on the number of units distributed by the licensee. We sell our products, either directly or through distributors or independent sales representatives, to original equipment manufacturers worldwide. Sales prices to distributors are generally lower than prices for direct sales, as distributors are responsible for certain sales and marketing expenses, maintenance of inventories, customer support and training. Lower gross margins on sales to distributors are partially offset by reduced selling and marketing expenses related to such sales. Product sales in Japan are primarily made through Fujifilm, our strategic partner and distributor in Japan. Fujifilm provides more sales and marketing support than our other distributors. 8 We have historically generated a significant percentage of our total revenues from development contracts, primarily with key customers. These development contracts have provided us with partial funding for the development of some of our products. These development contracts provide for license and milestone payments which are recorded as development revenue. We classify all development costs, including costs related to these development contracts, as research and development expenses. We retain ownership of the intellectual property developed by us under these development contracts. While we intend to continue to enter into development contracts with certain strategic partners, we expect development revenue to decrease as a percentage of total revenues. Our research and development expenses consist of salaries and related costs of employees engaged in ongoing research, design and development activities and costs of engineering materials and supplies. We believe that significant investments in research and development are required for us to remain competitive and we expect to continue to devote significant resources to product development, although such expenses as a percentage of total revenues may fluctuate. We are a party to certain research and development agreements with the Chief Scientist in Israel's Ministry of Industry and Trade and the Israel-United States Binational Industrial Research and Development Foundation, which fund up to 50% of incurred project costs for approved products up to specified contract maximums. These agreements require us to use our best efforts to achieve specified results and require us to pay royalties at rates of 3% 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. Our selling, general and administrative expenses consist primarily of employee-related expenses, royalties, sales commissions, product promotion and other professional services. We expect that selling, general and administrative expenses will continue to increase to support our anticipated growth. We conduct a substantial portion of our research and development and certain sales and marketing and administrative operations in Israel through our wholly-owned Israeli subsidiary. As a result, certain expenses are incurred in Israeli shekels. To date, substantially all of our product sales and our development and licensing revenue have been denominated in U.S. dollars and most costs of product sales have been incurred in U.S. dollars. We expect that most of our sales and costs of sales will continue to be denominated and incurred in U.S. dollars for the foreseeable future. We have not experienced material losses or gains as a result of currency exchange rate fluctuations and have not engaged in hedging transactions to reduce our exposure to such fluctuations. We intend to actively monitor our foreign exchange exposure and to take appropriate action to reduce our foreign exchange risk, if such risk becomes material. In June 1999 we sold to MGI Software of Canada the intellectual property related to our SoftDVD product line and transferred to MGI certain related software development and support resources in exchange for cash, MGI common stock and future royalties. Our results for the second quarter of 1999 include a $732,000 gain realized from this transaction which is reported as part of interest and other income or expense. In connection with this transaction, we also recorded a charge that reduced software, licensing and development revenue for the quarter by $517,000 for possible issues related to receivables associated with the SoftDVD product line. The net impact of the MGI transaction on our results was a gain of $215,000 or after tax, $0.01 per share on a diluted basis. This gain does not reflect the potential future economic benefit that may be derived from this transaction and realized in future periods in the form of royalties. We do not currently expect, however, that these royalties will have a material impact on quarterly revenues for the foreseeable future. In addition, the shares of MGI stock received by us as part of this transaction are subject to future appreciation or depreciation. We believe that our software revenues will decline significantly as a result of the sale of the SoftDVD product line. RESULTS OF OPERATIONS REVENUES Total revenues were $16.1 million and $41.6 million for the three and nine month periods ended September 30, 1999, compared to $11.8 million and $30.1 million for the same periods of the prior fiscal 9 year, representing an increase of 35.9% and 38.3% for the respective periods. For the three and nine month periods ended September 30, 1999, product revenues were $14.5 million and $34.7 million, compared to $9.0 million and $22.2 million for the same periods in 1998, increases of 61.6% and 56.2%, respectively. The increase in product sales resulted primarily from increased unit sales of DVD and Super VCD products. Software, licensing and development revenues were $1.6 million and $6.9 million for the three and nine month periods ended September 30, 1999, compared to $2.9 million and $7.9 million for the same periods of the prior fiscal year, representing a decrease of 44.9% and 12.3% for the respective periods. This decrease was due principally to our sale of the SoftDVD product line in June 1999. PRODUCT GROSS MARGIN Product gross margins were 46.8% and 46.7% of product revenues for the three and nine month periods ended September 30, 1999, compared to 42.7% and 42.6% for the same periods of the prior fiscal year, an increase of 4.1 percentage points each. The increase was due to a product sales mix that included an increased percentage of higher-margin products, a greater percentage of products sold directly to OEM customers and lower manufacturing costs as a function of increased product shipments. RESEARCH AND DEVELOPMENT Research and development ("R&D") expenses were $2.4 million and $9.9 million for the three and nine month periods ended September 30, 1999, compared to $3.5 million and $9.7 million for the same periods of the prior fiscal year. The decrease in quarter over quarter expenses is the result of transferring to MGI certain software development and support resources. The increase in year over year expenses is a result of the timing and recognition of project funding from external sources, timing of major project expenses, such as tape-outs, and costs associated with some internal restructuring in the quarter ended June 30, 1999. As a percentage of revenues, R&D expenses decreased to 15.1% and 23.9% for the three and nine month periods ended September 30, 1999, compared to 29.3% and 32.1% for the same periods of the prior fiscal year. The decrease in R&D expenses as a percentage of revenues for the current quarter compared to the same period in 1998 was due to increased revenues in 1999 and the reduction of engineering expense associated with the transfer of certain software development and support resources to MGI. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative ("SG&A") expenses were $3.7 million and $10.2 million for the three and nine month periods ended September 30, 1999, compared to $2.9 million and $8.3 million for the same periods of the prior fiscal year. The increase in expenses was primarily due to increased efforts in the development of the China market and greater commission expense related to increased sales volume. As a percentage of revenues, SG&A expenses were 22.9% and 24.6% for the three and nine month periods ended September 30, 1999, compared to 24.3% and 27.6% for the same periods of the prior fiscal year. The decrease as a percent of revenues, period to period, was due to the increase in revenues in 1999. INTEREST AND OTHER INCOME, NET Net interest and other income for the three and nine month periods ended September 30, 1999 was $249,000 and $1,226,000, respectively, an increase of 41.5% and 76.1% compared to the same periods in 1998. The increase year over year was primarily the result of the $732,000 gain realized from the sale of the Company's SoftDVD product line to MGI. PROVISION FOR INCOME TAXES The Company's estimated effective tax rate remained at 20% for the current quarter, the same as last year's effective tax rate. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1999, the Company had $4.9 million of cash and cash equivalents, $13.6 million of short-term investments and $37.4 million of working capital. Cash used in operations for the first nine months 10 of 1999 was $3.4 million, compared to $4.0 million for the same period in 1998. Cash used primarily reflects changes in inventory, accounts receivable and accrued liabilities. The Company's capital expenditures for the nine months ended September 30, 1999 totaled $1.1 million. The Company had no bank debt at September 30, 1999 or at December 31, 1998. 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 expenditure requirements through at least the next 12 months. Nonetheless, our future capital requirements may vary materially from those now planned and will depend on many factors including, but not limited to: - the levels at which we maintain inventory and accounts receivable; - the market acceptance of our products; - the levels of promotion and advertising required to launch our products or to enter markets and attain a competitive position in the marketplace; - our business, product, capital expenditure and research and development plans and technology roadmap; - volume pricing concessions; - capital improvements to new and existing facilities; - technological advances; - the response of competitors to our products; and - our relationships with our suppliers and customers. In addition, we may require an increase in the level of working capital to accommodate planned growth, hiring and infrastructure needs. Additional capital may also be required for consummation of any acquisitions of businesses, products or technologies. MARKET RISK DISCLOSURE We are exposed to financial market risks including changes in interest rates and foreign currency exchange rates. The fair value of our investment portfolio or related income would not be significantly impacted by either a 10% increase or decrease in interest rates due mainly to the short term nature of the major portion of our investment portfolio. A majority of our revenue and capital spending is transacted in U.S. dollars, although some of these transactions are denominated in Israeli Shekels. We have not engaged in hedging transactions to reduce our exposure to fluctuations that may arise from changes in foreign exchange rates. Based on our overall currency rate exposure at September 30, 1999 a near-term 10% appreciation or depreciation would have an immaterial affect on our financial condition. 11 YEAR 2000 READINESS Many companies face potentially serious consequences due to the inability of many older software applications and operational programs to properly recognize calendar dates beginning in the year 2000. The risk for us exists in three areas: - systems used by us to run our business; - embedded software and software products sold to our customers; and - the year 2000 readiness of our key suppliers and customers. The Company has conducted a comprehensive inventory and evaluation of the systems used in running its business. These systems include the Company's information technology, or IT, systems as well as equipment and facilities. To date, the Company has not identified any potential Year 2000 issues that would have a material impact on its operations. The Company believes that it has essentially completed this portion of its plan. Since the Company did not identify any significant non-compliance problems there are currently no contingency plans in place for Year 2000 issues. However, the Company may still find it necessary to create contingency plans in order to address unidentified Year 2000 compliance problems that may yet arise. The Company expects it would complete any necessary contingency planning prior to the end of the year. The Company believes that its current products are Year 2000 compliant. This is based on the fact that none of the products process or store date information. Zoran is in the process of contacting each of its critical suppliers to determine that the suppliers' operations and the products and services they provide are Year 2000 compliant. To date, the Company has received responses from 100% of its identified critical suppliers. None of these suppliers have indicated that they will not be Year 2000 ready by the appropriate timeframe. The Company is contacting its key customers in order to ascertain their Year 2000 compliance status. Failure of the Company's customers to be Year 2000 ready may result in lost sales and reduced revenue or diminish the ability of customers to pay on a timely basis. The Company expects to complete contacting all of its key customers by the end of November 1999. The Company has not incurred material costs in connection with its investigation to date. Based on its investigation to date, the Company does not anticipate incurring costs that would materially impact the Company's operating results or financial condition. However, the investigation is ongoing and no assurances can be given that unidentified non-compliance issues will not be discovered or that their remediation will not have a material impact on the Company's operations or financial condition. Failure to ensure that the Company has fully identified and addressed the Year 2000 problem could result in the Company or any of its key vendors being unable for a period of time to conduct critical business activities, which include but are not restricted to, shipping product to customers, invoicing customers and paying vendors. 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. Current applications for the Company's products and intellectual property include professional and consumer video editing systems, filmless digital cameras, standalone and PC-based DVD players, Super VCD players, digital speakers and audio systems. During 1994 and 1995, the Company derived a majority of its product revenues from the sale of integrated circuits for video editing applications, and video editing applications continued to account for the largest percentage of the Company's product sales from 1996 through 1998. However, in the first nine months of 1999 the Company derived a majority of its product revenues from the sale of integrated circuits for DVD and Super VCD applications. The Company expects that sales of its devices for DVD and Super VCD applications, video capture and editing applications, and digital audio applications will continue to account for a significant portion of its revenues for the near future. 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 12 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 and embedded software 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. 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 either TSMC or Motorola Inc., its principal suppliers, and, therefore, neither TSMC nor Motorola 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. At present, all of the Company's semiconductor products are assembled by one of three independent contractors, ASAT, Inc., Anam Industrial, and Advanced Semiconductor Engineering, Inc. ("ASE") 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 13 problems associated with new product transitions could adversely affect the Company's business, operating results and financial condition. 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; CHANGES 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 or 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 adversely affect the collectability 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. FLUCTUATIONS IN OPERATING RESULTS; NET OPERATING LOSS CARRYFORWARDS. 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, 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 software 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 are 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. Increasingly, the Company's operating results have been affected by seasonal factors. As markets for consumer products incorporating the Company's products have matured, the Company's sales have been 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. MANAGEMENT OF GROWTH. 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 expand and improve its administrative, operational, management and financial systems and controls. Many of the Company's key operations, including the major portion of its research and development operations and a significant portion of 14 its sales and administrative operations, are located in Israel, while a majority of its sales and marketing and certain of its research and development and administrative personnel, including its President and Chief Executive Officer and other officers, are based in the United States. The geographic separation of these operations places 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. The loss of 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 any of its 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 semiconductor 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. A substantial portion of the Company's research and development and 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 Company's initial public offering 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 semiconductor companies or technology companies generally 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has an investment portfolio of securities that are classified as "available-for-sale". These securities are subject to interest rate risk and will fall in value if market interest rates increase. The Company attempts to limit this exposure by investing primarily in short-term securities. From time to time, the Company makes certain capital equipment or other purchases denominated in foreign currencies. As a result, cash flows and earnings are exposed to fluctuations in interest rates and foreign currency exchange rates. The Company attempts to limit these exposures through operational strategies and generally has not hedged currency exposures. 15 PART II. OTHER INFORMATION Item 4. Submission of Matters to a vote of Security Holders The Company's 1999 Annual Meeting of Stockholders was held on July 16, 1999. 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 7,813,712 41,219 Uzia Galil 7,813,712 41,219 George T. Haber 7,813,712 41,219 James D. Meindl 7,813,712 41,219 Arthur B Stabenow 7,813,712 41,219 Philip M. Young 7,813,712 41,219
The following additional items were voted upon at the meeting: 1. A proposal to amend the Company's 1993 Stock Option Plan to increase the number of shares of Common Stock reserved for issuance thereunder by 350,000 shares was approved by a vote of 7,647,658 shares for; 187,623 shares against; 19,650 shares abstaining. 2. A proposal to amend the Company's 1995 Employee Stock Purchase Plan to increase the number of shares of Common Stock reserved for issuance thereunder by 100,000 shares was approved by a vote of 7,704,662 shares for; 132,719 shares against; 17,550 shares abstaining. 3. A proposal to ratify the appointment of PricewaterhouseCoopers LLP as the independent accountants of the Company for the fiscal year ending December 31, 1999 was approved by a vote of 7,832,800 shares for; 15,601 shares against; 6,530 shares abstaining. 16 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27 Financial Data Schedule. (b) Reports on Form 8-K No reports on Form 8-K were filed during the nine months ended September 30, 1999. 17 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: October 14, 1999 /s/ Levy Gerzberg ----------------------------------- Levy Gerzberg President Chief Executive Officer /s/ Karl Schneider Karl Schneider ----------------------------------- Vice President of Finance Chief Financial Officer 18 EX-27 2 EXHIBIT 27
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 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 4,857 13,591 19,533 0 9,434 49,579 11,282 6,709 54,152 12,190 0 0 0 10 41,952 54,152 34,728 41,619 18,497 18,497 9,945 0 0 4,171 833 3,338 0 0 0 3,338 0.32 0.28
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