-----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, KuGY8r7f+uCQ7XmWz+5SVUI22J4Bxr492Scy5ok5qM4tgbJIglM1sQEui7i+5d/W OPin7LMhk2AO1JjLzmcGRg== 0000891618-97-001515.txt : 19970401 0000891618-97-001515.hdr.sgml : 19970401 ACCESSION NUMBER: 0000891618-97-001515 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ZILOG INC CENTRAL INDEX KEY: 0000319450 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 133092996 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-13748 FILM NUMBER: 97569420 BUSINESS ADDRESS: STREET 1: 210 E HACIENDA AVE CITY: CAMPBELL STATE: CA ZIP: 95008-6600 BUSINESS PHONE: 4083708000 MAIL ADDRESS: STREET 1: 210 EAST HACIENDA AVE CITY: CAMPELL STATE: CA ZIP: 95008-6600 10-K405 1 FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD --------- TO --------- COMMISSION FILE NUMBER: 0-18738 ZILOG, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 13-3092996 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 210 EAST HACIENDA AVENUE, CAMPBELL, CA 95008 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (408) 370-8000 ------------------------ Securities registered pursuant to Section 12(b) of the Act: COMMON STOCK, NO PAR VALUE NEW YORK STOCK EXCHANGE (TITLE OF CLASS) (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes [X] The aggregate market value of voting stock held by nonaffiliates of the Registrant was approximately $342,587,578 as of February 21, 1997, based upon the closing sale price for the Registrant's common stock reported for such date on the New York Stock Exchange. Shares of common stock held by each officer and director and related entities have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. At February 21, 1997, 20,150,466 shares of the Registrant's common stock were issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE The Registrant is incorporating by reference into Parts II (Items 7 and 8) and IV (Item 14) of this Form 10-K certain portions of the Registrant's 1996 Annual Report to Shareholders. The Registrant is incorporating by reference into Part III (Items 10, 11 and 12) of this Form 10-K certain portions of the Registrant's definitive proxy statement dated April 4, 1997 with respect to the Registrant's 1997 Annual Meeting of Shareholders. ================================================================================ 2 TABLE OF CONTENTS PART I Item 1. Business Item 2. Properties Item 3. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Item 6. Selected Consolidated Financial Data Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures PART III Item 10. Directors and Executive Officers of the Registrant Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management Item 13. Certain Relationships and Related Transactions PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Private Securities Litigation Reform Act Safe Harbor Statement: When used in this Report, the words "estimate," "project," "intend," and "expect" and similar expressions are intended to identify forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially. For a discussion of certain of such risks, see "Business -- Factors That May Affect Future Results." Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release updates or revisions to these statements. Zilog is a registered trademark of Zilog, Inc. Superintegration is a trademark of Zilog, Inc. Pentium is a registered trademark of Intel Corporation Motorola is a registered trademark of Motorola, Inc. 3 PART I ITEM 1. BUSINESS EXECUTIVE SUMMARY Zilog designs, develops, manufactures and markets application specific standard integrated circuit products "ASSPs" for the datacommunications, consumer product controller and intelligent peripheral controller markets. ASSPs are very large scale integrated circuits which are designed for a particular market application rather than a single customer. The Company utilizes its proprietary Superintegration(TM) design technology to combine cores and cells from the Company's extensive library of proprietary, customer familiar microprocessor, microcontroller, digital signal processor, memory and logic circuits to meet the design, cost and time to market requirements of its customers. Zilog has selected the datacommunications, consumer product controller and intelligent peripheral controller markets because of its knowledge, experience, customer relationships and proprietary core and cell designs in these areas. Zilog's ASSPs address large markets. The Company works closely with industry leaders in its selected markets to design innovative products. Through its customer relationships, Zilog is better able to establish and maintain technological leadership, attract additional customers in the same market and create industry standards. The Company believes that it is well-positioned to take advantage of the trends in its target market areas, which include the networking of computers and peripherals, the increase in the complexity and sophistication of consumer electronic products and the migration of intelligence from the computer to its peripherals. The Company currently offers over more than 700 product line items, (independent of ROM codes) sold in a wide selection of package, speed grade and other options. The Company's customers include DSC Communication, General Instrument, Hewlett-Packard, Hitachi, Lucent, Microsoft, Motorola, Northern Telecom, NMB, Samsung, Seagate, Sony, Texas Instruments, VeriFone and Zenith. In two of the past three years, no single customer represented more than 8.5% of Zilog's net sales. During the period ending December 31, 1996, Lucent represented 12.8% of sales or approximately $38,000,000. The Company expects that in 1997 no one customer will represent more than 10% of sales. Zilog's strategy is to use its Superintegration library of proprietary core and cell designs, which are optimized for particular applications in the Company's target markets, to introduce new products on a timely basis. These cores and cells are compatible with one another in Zilog's standard manufacturing process. Zilog is therefore able to efficiently combine proven cores and cells to rapidly deliver new products to its customers. Because Zilog's core and cell library includes industry standard products, original equipment manufacturers ("OEMs") who have designed their systems using one or more of Zilog's products can be migrated to Superintegration solutions without loss of software compatibility. If an end-use application requirement is not satisfied by an existing Zilog product, the Superintegration design system permits Zilog to compose new integrated circuits by interconnecting fully characterized high transistor count cores and cells or by creating new cells, thereby increasing performance and improving reliability over prior solutions. The Company believes that the efficiency of its Superintegration design process, coupled with Zilog's strategy of learning the requirements of an application to create an industry standard product, will enable it to continue to develop significant new products. By establishing partnerships with technology leaders and important customers in the market, Zilog can often learn the technology of the application and differentiate its products from those of its competitors. Consistent with its strategy in its three target markets, Zilog introduced 40 and 40 and 48 major new products in 1994, 1995 and 1996 respectively. In 1996, the Company introduced 3 products for the datacommunications market, 37 products for the consumer product controller market and 8 products for the intelligent peripheral controller market. Unless the context otherwise requires, the terms "Zilog" and the "Company" are used throughout this Report to refer to both the Company and its subsidiaries. The Company's principal executive offices are located at 210 East Hacienda Avenue, Campbell, California 95008, and the Company's telephone number is (408) 370-8000. 1 4 FACTORS THAT MAY AFFECT FUTURE RESULTS A number of uncertainties exist that may affect the Company's future operating results, including the following: Factors Affecting Operating Results The Company's business has been profitable for the past eight years. However, the Company's operating results are affected by a wide variety of factors which could adversely affect profitability. Historically, selling prices of the Company's products have decreased over their respective product lives and selling prices may decline in the future which could adversely affect the Company's operating results. In addition, the Company's operating results are subject to a number of variables which could have a material adverse effect on the Company, including but not limited to, the Company's ability to introduce new products and technologies on a timely basis, changes in product mix or fluctuations in manufacturing yields which affect the Company's gross margins, market acceptance of the Company's and customers' products, the level of orders which are received and can be shipped in a quarter, customer order patterns and seasonality, increases in freight costs and whether the Company's customers buy from a distributor or directly from the Company. The Company's future operating results will depend in part on economic conditions in the United States and the worldwide markets that it serves. The Company's delivery times lengthened throughout 1995. In 1996, delivery times returned to more normal levels. The Company believes that an important competitive factor will be its ability to continue to successfully increase production capacity to meet customer demand and shorten delivery times. A prolonged failure of the Company to increase production capacity or obtain wafers from outside suppliers as needed could adversely affect the Company's operating results. During the fourth quarter of 1994, and throughout 1995, the Company experienced difficulty in obtaining requested capacity from its outside foundry suppliers. Should the Company be unable to obtain additional foundry capacity, the Company's ability to achieve continued revenue growth may be restricted. Shortage of product could also result in the loss of customers. During September 1995, the Company began commercial production from its new facility in Nampa, Idaho. Production from this facility increased in accordance with plan in 1996. Presently the Company has excess capacity. Certain of the Company's products are incorporated into disk drives, printers, keyboards and modems. As a result, a slowdown in the demand for personal computers and related peripherals could adversely affect the Company's operating results. A significant portion of the Company sales are to the consumer electronics markets for use in products such as television sets, infrared remote controls and telephone answering machines. The consumer electronics markets are volatile and rapid changes in customer preferences for electronics products could adversely impact the Company's results. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." Dependence On New Products And Technologies The Company's operating results will depend to a significant extent on its ability to continue to introduce new products. The success of new product introductions is dependent on several factors, including proper new product selection, timely completion and introduction of new product designs, development of support tools and collateral literature that make complex new products easy for engineers to understand and use, and market acceptance of customers' end products. There can be no assurance that any new products will receive or maintain substantial market acceptance. The Company's future success is also dependent upon its ability to develop and implement new design and process technologies. Semiconductor design and process methodologies are subject to rapid technological change, requiring large expenditures for research and development. Most new products are extremely complex in design and many use the Company's new 0.65 micron CMOS process. Manufacture of large complex die involves a significant technological risk. If the Company is not able to complete new product designs in time to meet market requirements and achieve volume production of new products at acceptable yields using the new manufacturing processes, its operating results will be adversely affected. See "Business -- Manufacturing." Production Yields And Need To Increase Capacity The manufacture of semiconductor products is highly complex and sensitive to a wide variety of factors, including the level of contaminants in the manufacturing environment, impurities in the materials used and 2 5 the performance of personnel and equipment. As is typical in the semiconductor industry, the Company has from time to time experienced lower than anticipated production yields. The Company increased its production capacity in 1995 and 1996, and must successfully further increase capacity in 1997 to support anticipated sales volumes and maintain delivery times. The Company has used outside wafer foundries to supply a portion of its manufacturing needs, and the Company expects to continue to rely on one or more outside wafer foundries for a portion of its manufacturing needs. In the fourth quarter of 1994 and throughout 1995, the Company experienced difficulty in obtaining the capacity of wafers it requested from its outside foundry suppliers. No assurance can be given that the Company or its outside wafer foundries will not experience production yield problems in the future which could result in an adverse effect on the Company's results of operations. The Company constructed and equipped a new wafer fabrication facility which commenced commercial production in September 1995. Production increased in accordance with plan in 1996. The failure of the Company to further increase production capacity, including through the successful and efficient ramping of its new facility or to obtain wafers from outside suppliers as needed, could adversely affect the Company's operating results. The Company also uses outside contract assemblers for packaging a portion of its production. Shortages in contract assembly capacity could adversely impact the Company's financial results. See "Manufacturing." New Wafer Fabrication Facility -- Additional Fixed Costs The Company completed the construction of a new wafer fabrication facility adjacent to its existing wafer production facilities in Nampa, Idaho in June 1995 and commercial production began in September 1995. The facility doubled the Company's wafer production capacity and significantly increased the Company's annual depreciation expense. Further capacity expansion is available in the new wafer fabrication facility. If the Company's sales do not increase commensurate with the increase in capacity, the Company's costs of sales as a percentage of sales will increase and the Company's results of operations would be adversely affected. In addition, the failure of the Company to achieve sufficient production yields in the new facility could adversely affect its results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Competition The semiconductor industry is intensely competitive and is characterized by price erosion, rapid technological change and foreign competition in many markets. The industry consists of major domestic and international semiconductor companies, many of which have substantially greater financial and other resources than the Company with which to pursue engineering, manufacturing, marketing and distribution of their products. Emerging companies are also increasing their participation in the semiconductor market. The ability of the Company to compete successfully in the rapidly evolving area of high performance integrated circuit technology depends on factors both within and outside of its control, including but not limited to, success in designing and manufacturing new products that implement new technologies, protection of Company products by effective utilization of intellectual property laws, product quality, reliability, ease of use, price, diversity of product line, efficiency of production, the pace at which customers incorporate the Company's integrated circuits into their products, success of competitor's products and general economic conditions. See "Competition." Manufacturing Operations In The Philippines The Company's two primary assembly and test facilities, Zilog Philippines Inc. ("ZPI") and Zilog Electronics Philippines, Inc. ("ZEPI"), are located in Manila and Carmona, the Philippines. The Company has a significant capital investment at these two plants. The Company's reliance on personnel and assets located at ZPI and ZEPI and its maintenance of inventories at ZPI entails certain political and economic risks, including political instability and expropriation, currency controls and exchange fluctuations, as well as changes in tax laws, tariff and freight rates. The Company has not experienced any significant interruptions in its business operations in the Philippines to date. Political stability in the Philippines appears to have increased markedly during the past three years, but no assurances of continued stability can be given. Should such interruptions in business occur, Zilog has inventory in the United States to enable the Company to ship most products during a temporary interruption of service. For more lengthy losses of production or inability to 3 6 export product from the Philippines, the Company has qualified contract assemblers in other locations in the Far East. Additionally, the Company has excess test capacity at its Nampa, Idaho manufacturing facility and its Campbell, California engineering facility. The Company believes that these contingency plans would allow continued supply of product for short term disruptions. Nonetheless, the Company's operations could be adversely affected, particularly if operations or air transportation from the Philippines are disrupted for a substantial period of time. See "Business -- Manufacturing." Intellectual Property Claims As is typical in the semiconductor industry, from time to time, the Company has been notified that it may be infringing certain patents and other intellectual property rights of others. The Company is currently engaged in discussions with two others. In the event the Company determines that such discussions may lead to meritorious claims, the Company may seek a license. Based on industry practice, the Company believes that in most cases any necessary licenses or other rights could be obtained on commercially reasonable terms. However, no assurance can be given that licenses could be obtained on acceptable terms or that litigation will not occur. The failure to obtain necessary licenses or other rights or the advent of litigation arising out of such claims could have a material adverse effect on the Company's operations. See "Patents and Licenses." The Semiconductor Industry The semiconductor industry has been characterized by cyclicality. The industry has experienced significant economic downturns at various times in the last three decades, characterized by diminished product demand, accelerated erosion of average selling prices and production over-capacity. During 1995, the semiconductor industry in general, including the Company, experienced a period of increased demand. During 1996, the industry experienced a slowdown from the phenomenal growth that it had in 1995. The Company experienced this slowdown during the last two quarters of 1996. There is no assurance for how long this period will last. The Company may experience substantial period-to-period fluctuations in future operating results due to general industry conditions or events occurring in the general economy. Foreign Trade And Currency Exchange Approximately 56% of the Company's net sales in 1996 were to foreign customers. In addition, the Company purchases a substantial portion of its raw materials and equipment from foreign suppliers. Both manufacturing and sales of the Company's products may be adversely affected by political or economic conditions abroad. Protectionist trade legislation in either the United States or foreign countries such as a change in the current tariff structures, export compliance laws or other trade policies could adversely affect the Company's ability to manufacture or to sell in foreign markets. In countries in which the Company is doing business, currency exchange fluctuations could adversely affect the Company's net sales or costs. Environmental Regulation The Company is subject to a variety of government regulations related to the discharge or disposal of toxic, volatile or otherwise hazardous chemicals used in its manufacturing process. Although the Company believes that it has all permits necessary to conduct its business, the failure to comply with present or future regulations could result in fines being imposed on the Company, suspension of production or cessation of operations. Such regulations could require the Company to acquire significant equipment or to incur substantial other expenses to comply with environmental regulations. Any failure by the Company to control the use of, or adequately restrict the discharge of, hazardous substances could subject it to future liabilities. See "Environmental." Dependence On Key Employees The Company's future success is heavily dependent upon its ability to hire and retain qualified technical and management personnel. The competition for such personnel is intense and their loss as employees or managers could have a material adverse effect on the Company. 4 7 Possible Volatility Of Stock Price The Company believes factors such as announcements of new products by the Company or its competitors, quarterly fluctuations in the Company's financial results or other semiconductor companies' financial results, general conditions in the semiconductor industry and conditions in the financial markets could cause the price of the Common Stock to fluctuate substantially. In addition, the stock market has experienced extreme price and volume fluctuations, which have particularly affected the market prices for many high technology companies and which have often been unrelated to the operating performance of the specific companies. The Company's failure to meet or exceed published earnings estimates, changes in earnings estimates or recommendations by securities analysts could have a material adverse effect upon the Company's stock price. Ownership By Existing Shareholder As of February 21, 1997, Warburg, Pincus Capital Company, L.P. ("Warburg") owned approximately 27% of the outstanding shares of the Company's voting Common Stock. While Warburg does not have majority control of the Company, it is the largest shareholder and has significant influence with respect to election of directors and approval or disapproval of fundamental corporate decisions. BACKGROUND The semiconductor logic market has three major sectors: - -------------------------------------------------------------------------------- APPLICATION CUSTOMER SPECIFIC STANDARD SPECIFIC INTEGRATED LOGIC PRODUCTS STANDARD PRODUCTS CIRCUITS (ASSPs) (CUSICs or ASICs)
- -------------------------------------------------------------------------------- Standard logic products, such as the Intel Pentium and Motorola 680X0 microprocessor families, are neither application nor customer specific. They are intended to be utilized by a large group of systems designers for a broad range of applications. Because these products target broad markets, they usually contain more functions than are actually required and therefore may not be cost effective for certain specific applications. In contrast, ASICs are typically designed to meet the particular requirements of, and are usually proprietary to, one specific customer. Because the volume requirements for ASICs are substantially smaller than those for standard logic products, manufacturers may have difficulty in recovering their development costs and in achieving manufacturing efficiencies. A third market segment has developed for integrated circuits which have a high degree of integration and are designed for a particular application, but are not proprietary to a single customer. These ASSP products typically address larger aggregate markets and generally have higher production volumes than ASICs. As a result, the development and manufacturing costs associated with ASSPs can be recovered over larger production volumes resulting in lower device prices to systems manufacturers. Examples of ASSP applications include modems, spread spectrum telephones, wireless communications, interactive television, multimedia applications, keyboards, pointing devices, facsimile machines and local area networks. Electronic systems designers, driven by competitive market forces, are seeking semiconductor products with more intelligence, functionality and control which can be used to reduce system costs and improve performance. These needs have resulted in a growing market opportunity for ASSP manufacturers. 5 8 The diagram shown below represents the electronic functions which may exist as one or more integrated circuits in the implementation of a subsystem for almost any electronic product including those for datacommunications, computer peripheral controller or consumer product controller applications. [DIAGRAM] Electronic system manufacturers combine one or more of these elements to fit a specific application to satisfy the design requirement. The microprocessor or microcontroller provides the intelligence which controls the subsystem. The signal path logic provides functions specific to the end application. The signal path logic may be implemented in many applications by a class of integrated circuits known as a digital signal processor. The input/output circuitry may also be application specific or an industry standard component. The memory element, if not included on the microcontroller, is usually a standard product and is used to store program instructions and data. Historically, these elements of system design have been executed through multiple integrated circuits assembled on a printed circuit board. The requirements for reduced cost and improved system performance have created a market opportunity for semiconductor manufacturers to integrate some or all of these elements into a single ASSP chip or chip set. The Company believes that the ability to provide closer integration of the microprocessor and input/output function with the signal path logic will provide a competitive advantage in the ASSP market. The Company believes there are four primary factors that are required for an ASSP manufacturer to be competitive. First, the ASSP manufacturer must have an in-depth understanding of the technology of the OEM market application. The ASSP manufacturer's product is much more likely to be designed into the new OEM system if the ASSP provides significant performance and cost advantages over alternative solutions. By understanding the technology of the OEM application, the ASSP manufacturer is able to incorporate these advantages and win the business at the system design stage. Second, the ASSP manufacturer must possess the engineering expertise and manufacturing capability to meet the time to market demands of the designers of new OEM systems. Third, the ASSP supplier who offers "software compatible" solutions to the end market will have a distinct competitive advantage. The OEM's software investment frequently is larger than new product hardware costs. The OEM favors an ASSP manufacturer's product which preserves its software investment. Finally, the ASSP manufacturer must be a cost effective producer since the success of his customer's end products is frequently dependent upon achieving certain market price points. MARKETS AND PRODUCTS The Company pursues a strategy of introducing new products to market specific applications in its three principal target markets, datacommunications, consumer product controllers and intelligent peripheral controllers. The Company believes these segments offer significant growth opportunities. During 1994, 1995 and 1996 Zilog introduced 40, 40 and 48 major new products, respectively. The Company's products are available in a wide variety of package types, speed grades and other options. Using the assistance of Zilog's technical sales specialists, who often have knowledge and experience in the customer's end-use application, customers can select the specific integrated circuit to fulfill the requirements of their application. Most of the Company's new products are created through the use of Zilog's Superintegration library of cores and cells. The Company's core library includes microprocessors and certain peripheral circuits which 6 9 may be sold as stand-alone devices or combined in Superintegration products. The cell library includes logic and memory circuits which are usually combined in Superintegration products. If an end-use application requirement is not satisfied by an existing Zilog product, the Superintegration design system permits Zilog to compose new integrated circuits by interconnecting fully characterized high transistor count cores and cells or by designing new cells, thereby increasing performance and improving reliability. Using the latest industry standard design tools, Zilog can supply customers with integrated circuits that meet end product application needs in a timely and cost effective manner. The Company believes that the efficiency of its Superintegration design process, coupled with Zilog's strategy of learning the requirements of an application to create an industry standard product, will enable it to continue to develop significant new products. For the year ended December 31, 1996, the Z80182 product accounted for approximately 18 percent of the Company's gross revenues. The Company does not believe that any product will account for more than 10% of the Company's gross revenues in 1997. New Products Introduced In 1996 Of the Company's 48 major new products introduced in 1996, three products were for the datacommunications market, 37 products were for the consumer product controller market and eight products were for the intelligent peripheral controller market. As is typical for new product introductions, full volume production for products introduced in 1996 is not expected to occur until subsequent years. As Zilog introduces new products, the Company also evaluates its existing product portfolio and eliminates those products that no longer meet the Company's criteria for price, volume or profitability. The Company's 48 new products introduced in 1996, included a series of DSP's, advanced digital television controllers, capable of implementing the V-chip technology, a series of infrared remote controllers, a series of advanced keyboard controllers and a series of new wireless processors. 7 10 The following chart sets forth the new products introduced in 1996. - -------------------------------------------------------------------------------- 1996 NEW PRODUCT INTRODUCTIONS - --------------------------------------------------------------------------------
ZILOG PRODUCT PRODUCT DESCRIPTION ------------- ---------------------------------------------------------- Datacommunications Z89C25 DSP/Datacom Z80182H Datacom MPU Z80382 Z80 16 Bit MPU Consumer Product Controllers Z86393 DSP Z86E66 Security Control Z86133 Z8 MCU Z86L08 Z8 MCU Z89338 TV Controller Z86L88 IR Remote Controller Z86L89 IR Remote Controller Z86160 Set Top Box Controller Z86C71 IR Remote Controller Z86C72 IR Remote Controller Z86C73 IR Remote Controller Z86C87 IR Remote Controller Z86C84 Z8 MCU Z89373 DSP Z86C02 Z8 MCU Z86E02 OTP Z16027 Wireless Z89423 DSP Z89223 DSP Z89273 DSP Z86L04 Z8 MCU Z86251 StarSight Database Processor Z90210 TV Controller Z87001 Wireless Z86130 TV Controller Z86131 TV Controller Z89238 TV Controller Z89155 DTAD Controller Z87L10 Wireless Z87L00 Wireless Z86L02 Z8 MCU Z86L43 Z8 MCU Z90219 TV Ice Chip Z98021 Wireless Z86L87 IR Remote Controller Z86743 OTP of Z86243 Z86E05 Z8 Intelligent Peripheral Controllers Z16017 PCMCIA Interface Z86217 Keyboard Controller Z16067 PCMCIA Interface Z86K13 Keyboard Controller Z86K14 Keyboard Controller Z86K16 Keyboard Controller Z86K17 Keyboard Controller
- -------------------------------------------------------------------------------- 8 11 Datacommunications The datacommunications market is growing in response to the need to connect computer systems at distant locations and to share peripherals such as printers and facsimile machines. By networking its computers and peripherals, it is possible to share information files, distribute computer loads more efficiently and facilitate communications between terminals, computers and peripherals, thereby maximizing the benefit from the organization's investment in its installed base of computer equipment. Zilog sells ASSP integrated circuits optimized for use in the following datacommunications applications: ethernet routers, bridges, data switches, modems, terminals, printers, workstations, local area networks and wide area networks. Consumer Product Controllers The increase in the use of electronics in consumer products has created a significant market opportunity for application specific standard products. Sophisticated integrated circuits are increasingly found in consumer products such as spread spectrum cordless telephones, audiovisual equipment, automobiles, telephone answering machines and household appliances. Other consumer product controller applications that use the Company's ASSP integrated circuits are TV controllers, infrared remote controls, internet appliances, battery chargers, garage door openers, home security systems, cable TV systems, VCRs, and automotive controllers. Intelligent Peripheral Controllers An important trend in the development of computer peripheral controllers is the addition of increased local "intelligence" and ease of user implementation such as plug and play and universal serial bus (USB) technology. Routine peripherals management causes interruption of the central processor which slows it in the performance of its basic tasks. Adding intelligence (local processing power) to the peripherals frees the central processor from peripherals micro-management and upgrades the performance of the system as a whole. Because a typical computer installation may have many peripherals, the cost of the peripherals' electronics may exceed that of the central computer. Accordingly, there is a continuous incentive to reduce peripherals' electronics costs by combining the multiple chips for the application into a single chip or chip set. The typical computer system may have up to six or seven peripherals which facilitate the human interface, provide memory functions, or service the communications link with other computers. The most common peripherals are the printer, keyboard, monitor, mouse, hard disk controller, floppy disk controller and modem. The facsimile machine is now becoming a computer adjunct and may soon be a familiar addition to the set. Zilog ASSP integrated circuits are found in each of these applications. TECHNOLOGY Zilog utilizes its proprietary Superintegration design methodology to meet the tight time to market windows important to success in ASSP markets. The Company has developed an extensive library of proprietary cores and cells using industry standard design tools. Many cores and cells in the Zilog Superintegration library are individually "packed" to use silicon area efficiently. The cores and cells in the library are fully characterized and modeled in the Company's design software. Accordingly, the performance of the product formed by the interconnection of the separate elements is predictable. An important benefit of this methodology is that a cost-effective, production-ready ASSP product is generally created in a single design cycle without having to re-layout the design, a result which is often required with alternative design methods to meet manufacturing cost objectives. All of the cores and cells in Zilog's Superintegration library are produced by a subset of the Company's standard manufacturing process. The design rules employed ensure that the need to adjust the library is minimal as manufacturing technology advances to smaller dimensions. Zilog has three design centers with different specialties. The Campbell, California design center specializes in consumer product controllers while the Nampa, Idaho design center focuses primarily on memory cores and cells. The Austin, Texas design center concentrates its efforts mainly on DSP products and 9 12 applications. While cross-fertilization occurs, by concentrating design efforts in these centers, engineers develop valuable expertise in their respective areas. The Company's design technology is fully integrated with its manufacturing technology. At the inception of a new design for Zilog's Superintegration library, engineering personnel write preliminary design specifications that highlight the characteristics of the new product. Before any actual design takes place, the process engineers specify manufacturing parameters within which the designers must remain to ensure that the resulting design can be fabricated as a subset of Zilog's existing master production process. Throughout the design and manufacturing phases, designers and process engineers continue to coordinate their efforts to make certain that maximum efficiencies in new products are achieved. Zilog has developed a proprietary test generation software package called the QTST(TM) ("Quick Turn Standard Test") test system which generates software for the Company's automatic test equipment. Additionally, the Company has developed a series of proprietary software packages known as electronic programmer's manuals ("EPM(TM)") that will automatically generate applications programs to support their respective ASSP products. SALES AND MARKETING Zilog's direct marketing force consists of technical specialists and field applications engineers. The Company's technical specialists are based at corporate headquarters and focus exclusively on either datacommunications, consumer product controller or computer peripheral controller applications. Field application engineers are stationed in Zilog's sales offices around the world and work directly with local customers in close consultation with the technical specialists. Field application engineers typically develop technology expertise in the market segment which is most prominent in their geographic area. The Company sells its products through its direct sales force and through manufacturing representatives and distributors. The Company's worldwide sales headquarters is in Campbell, California. The Company has sales offices located in the metropolitan areas of Boston, Philadelphia, Atlanta, Austin, Minneapolis, Tampa, Cleveland, Chicago, Dallas, Boulder, Portland, Los Angeles, Orange County, San Diego, Toronto, Tokyo, Seoul, Hong Kong, Taipei, Singapore, Kuala Lumpur, Munich, London, Erfurt, Germany, Shenzhen, Beijing and Shanghai, Peoples Republic of China. These sales offices have a direct sales force who call on large accounts and manage the activities of the Company's 29 sales representative organizations. The Company frequently holds technical sales conferences and training sessions for its direct sales and sales representative personnel. The Company also markets and sells its products through four North American distributors and 31 international distributors. As is common in the semiconductor industry, the Company grants price protection and limited rights of return to distributors. Under this policy, distributors are granted a credit for the difference between the price they were originally charged for products in inventory at the time of a price reduction and the reduced price which the Company subsequently charges distributors. From time to time, distributors are also granted credit on an individual basis for Company-approved price reductions on specific transactions to meet competition. The Company also grants distributors limited rights to return products. The Company maintains reserves against which these credits and returns are charged. In 1994, 1995 and 1996, sales to unaffiliated customers located outside of the United States aggregated approximately 56%, 57% and 56%, respectively, of net sales for these years. Total net sales to these international customers in each of these years were approximately $124.7 million, $150.4 million and $166.9 million, respectively. In 1996, the Company shipped to over 950 customers either directly or through distributors. The Company's products are sold to system manufacturers in the computer, communications, industrial control, consumer electronics, military and aerospace industries. During that time, no single customer represented more than 12.8% of Zilog's net sales and no distributor accounted for more than 8.5% of Zilog's net sales. The Company believes that its customer and geographic balance help it to reduce volatility in operating results. 10 13 BACKLOG As of December 31, 1994, 1995 and 1996, the Company's backlog was approximately $49 million, $110 million and $82 million, respectively. The Company includes in its backlog all credit approved purchase orders shippable within the next 12 months. Orders from distributors, which are recognized as revenues when the Company ships the product, are also included as backlog. The Company anticipates that approximately two-thirds of its backlog will be shipped within 90 days. Orders in backlog can be cancelled at the option of the purchaser and therefore should not be used as a measure of future revenues. MANUFACTURING The Company owns a substantial portion of its manufacturing resources and believes this is an important part of its strategy. Direct control over wafer fabrication, assembly and test operations allows Zilog to provide customers with continuity of supply, to shorten the Company's design and production cycles, and to capture the manufacturing margin. The Company increased its production capacity in 1994, 1995 and 1996 and must successfully further increase capacity in 1997 to support anticipated sales volumes. The Company has used outside wafer foundries to supply a portion of its manufacturing needs, and the Company expects to continue to rely on one or more outside wafer foundries for a portion of its manufacturing needs. No assurance can be given that the Company or its outside wafer foundries will not experience production yield problems in the future which would result in an adverse effect on the Company's results of operations. During the fourth quarter of 1994 and throughout 1995, the Company experienced difficulty in obtaining requested capacity from its outside foundry suppliers. Should the Company be unable to obtain additional foundry capacity, the Company's ability to achieve continued revenue growth may be restricted. During September, 1995, the Company began commercial production from its new facility in Nampa, Idaho. Production from this facility increased in accordance with plans in 1996. The Company also uses the services of outside contract assemblers to package some of the Company's production. No assurance can be given that an adequate supply of qualified outside assembly services can be obtained in the future. Shortages in contract assembly capacity could adversely impact the Company's financial results. The Company's delivery times lengthened in late 1994 and 1995, but have shortened to more traditional levels in 1996. The Company believes an important competitive factor will be its ability to successfully increase production capacity to meet customer demand and to maintain traditional delivery times. A prolonged failure of the Company to further increase production capacity or obtain wafers from outside suppliers as needed could adversely affect the Company's operating results. Wafer fabrication and test facilities are located in Nampa, Idaho. High volume assembly and test operations are conducted in two facilities in Manila, the Philippines. Zilog manufactures its products in two buildings on its Idaho campus. These buildings contain fabrication modules equipped to produce NMOS products or CMOS products with sub-micron dimensions. Zilog employs the concept of "concurrent engineering." Designers and process engineers work side by side in the product definition and design stages to manufacture a new product that will yield a quantity of die close to entitlement when the design cycle and fabrication processes are completed. The Company's manufacturing operations are characterized by high utilization of its equipped facilities. The Idaho and Philippines plants operate 24 hours per day, seven days a week. Automated data collection and analysis systems are used to maintain efficient manufacturing line loading and to assure that the production mix is in accord with the sales order forecast. Skilled people are very important to high productivity in semiconductor manufacturing. The Company maintains an extensive personnel training and certification program in its plants and believes that this leads to lower turnover and higher worker involvement. All of Zilog's operations are managed through the use of statistical process control techniques. Manufacture of large complex die involves many technological risks. If the Company is not able to complete new product designs in time to meet market requirements and achieve volume production of the new products at acceptable yields using the new manufacturing processes, its operating results will be adversely affected. Manufacturing of semiconductor products is highly complex and sensitive to a wide variety of factors, including the level of contaminants in the manufacturing environment, impurities in the materials used and 11 14 performance of the personnel or equipment. No assurance can be given that the Company or its outside wafer foundries will not experience manufacturing yield problems in the future. Any such problems would adversely affect the Company's operating results. The raw materials and equipment used in the production of the Company's integrated circuits are available from several suppliers and the Company is not dependent upon any single source of supply. The Company has not experienced any material difficulty in obtaining raw materials or equipment. ENVIRONMENTAL The Company is subject to a variety of governmental regulations related to the discharge or disposal of toxic, volatile or otherwise hazardous chemicals used in the manufacturing process, including the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Superfund Amendment and Reauthorization Act, the Clean Air Act, and the Water Pollution Control Act. The Company believes it has also obtained all necessary environmental permits to conduct its business, which generally relate to the discharge of hazardous wastes. Nevertheless, the failure to comply with present or future regulations could result in fines being imposed on the Company, suspension of production or cessation of operations. Such regulations could require the Company to acquire significant equipment or to incur substantial other expenses to comply with environmental regulations. Any failure by the Company to control the use of, or adequately restrict the discharge of, hazardous substances could subject it to future liabilities. RESEARCH AND DEVELOPMENT The Company believes that the continued introduction of new ASSP products in its target markets and application support tools for these products are essential to its growth. In 1994, 1995 and 1996 Zilog introduced 40, 40 and 48 major new products, respectively. Differences in the complexity of new products may influence the number of new products introduced in any future year. Some of Zilog's research and development is conducted with third parties. The Company cannot guarantee that third party resources will always be available for such service. Zilog employs 132 people in research and development. Expenditures for research and development in 1994, 1995 and 1996 were approximately $23.0, $24.5 and $30.5 million, respectively, representing 10.3%, 9.3% and 10.2%, respectively, of net sales. The Company's future success is dependent in part upon its ability to develop and implement new design and process technologies. Semiconductor design and process methodologies are subject to rapid technological change, requiring large expenditures for research and development. Most new products are extremely complex in design and many use the Company's 0.65 micron CMOS process. Zilog acquires knowledge of the technology requirements of end-user applications through frequent contact between the customer and Zilog sales, marketing and engineering personnel. Utilizing Zilog's knowledge and experience in the relevant application, Zilog engineers design new cores and cells for the Superintegration library that will improve the Company's products. The Company strives to maintain an environment conducive to creativity and to maintain close communications between marketing, design and manufacturing specialists. Zilog's research and development efforts are also focused on improvements to manufacturing process technology. PATENTS AND LICENSES Zilog has 75 U.S. Patents and 27 patent applications pending. The Company has also filed and received one patent outside of the United States. Zilog has 7 foreign patent applications pending. The Company has 76 U.S. mask work registrations on its products. Copyright registrations are held by the Company to protect proprietary software employed in over 100 of its products. Zilog owns more than 40 trademarks or servicemarks. The Company's ability to compete may be enhanced by its ability to protect its proprietary information, including the issuance of patents, copyrights, mask work registrations and trademarks. Only a few of these intellectual property rights have been litigated. While no intellectual property right of the Company has been invalidated or declared unenforceable, there can be no assurance that such rights will be upheld in the future. Accordingly, the Company is of the opinion that in view of the rapid pace of technological change in the 12 15 semiconductor industry, the technical experience and creative skills of its engineers and other personnel will be extremely important in determining the Company's future technological success. Zilog has approximately 86 active licenses for product or technology exchange. The purpose of these licenses has, in general, been to provide second sources for standard products or to convey or receive rights to certain proprietary or patented cores, cells or other technology. As is typical in the semiconductor industry, Zilog has from time to time received, and may in the future receive, communications from third parties asserting patent rights, mask work rights, copyrights or trademark rights covering certain of the Company's products, technologies or information. The Company is currently engaged in discussions with two others, but historically, the Company has, at times, been in such discussions. The Company believes that it will be able to obtain licenses on reasonable terms from any such claimants should licenses from any or all of these parties prove necessary. Nevertheless, there can be no assurance that litigation or other administrative proceedings will not be commenced or accelerated with any such parties in the future, or that any necessary products, processes or technologies can be licensed upon commercially reasonable terms. COMPETITION The semiconductor industry is intensely competitive and is characterized by price erosion, rapid technological change and heightened foreign competition in many markets. The industry consists of major domestic and international semiconductor companies, many of which have substantially greater financial and other resources than the Company with which to pursue engineering, manufacturing, marketing and distribution of their products. Emerging companies are also expected to increase their participation in the semiconductor market. The ability of the Company to compete successfully in the rapidly evolving area of high performance integrated circuit technology depends on elements both within and outside of its control, including, but not limited to, success in designing and manufacturing new products that implement new technologies, protection of Company products by effective utilization of intellectual property laws, product quality, reliability, ease of use and price, diversity of product line, efficiency of production, the pace at which customers incorporate the Company's integrated circuits into their products, customer success in their markets, product delivery times, product introductions by the Company's competitors and general economic conditions. The Company competes with its licensees on certain products. With respect to certain products the Company competes with other ASSP manufacturers which target the same specific market segment. However, no single competitor addresses exactly the same set of products as the Company. The principal competitive factors in the Company's markets include design and end-market applications expertise, product features and performance, including the ability to preserve the customers' software, price, time to market and manufacturing. Zilog believes its competitive strengths include its expertise in the technology of a broad range of applications in the datacommunications, consumer controller, and computer peripheral controller markets its design methodology which includes its Superintegration design system with its extensive library of customer familiar cores and cells, and its manufacturing facilities and capabilities. EMPLOYEES As of December 31, 1996, the Company employed 1,601 full-time persons, including 1,243 in manufacturing, 133 in research and development, 165 in marketing and sales and 63 in finance and administration. Approximately one-half of the Company's employees work at the assembly and test facilities located in Manila, the Philippines. The Company considers its relations with its employees to be good. ITEM 2. PROPERTIES The Company's headquarters and research and development activities are located at 210 East Hacienda Avenue, Campbell, California, in an 80,000 square foot facility leased through 1997. The Company performs wafer fabrication at 77,000 square foot and 128,000 square foot buildings located on a 65 acre site in Nampa, Idaho. The Company owns these Idaho facilities. 13 16 Assembly and test operations are performed at the Company's facilities in Manila, the Philippines which are 54,000 square feet and 34,000 square feet, respectively. The Company owns the larger facility which is on three acres of land leased through 2004 and leases the second Manila facility. This lease expires in July 1998, but has an option for the Company to renew for a term of five years. The Company has leased a 4,000 square foot engineering design center in Austin, Texas. This lease expires in March 1998. In addition, the Company has short-term leases for its sales offices located around the world in the United States, Canada, England, Germany, Korea, Japan, Hong Kong, Singapore, Malaysia, Taiwan and the Peoples Republic of China. The Company believes that its existing facilities are adequate to meet its requirements through 1997. ITEM 3. LEGAL PROCEEDINGS The Company is participating in litigation arising in the ordinary course of business. The Company intends to defend itself vigorously in these matters. The Company believes that it is unlikely that the outcome of these matters will have a material adverse effect on its financial position, results of operations or cash flow. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the Registrant's fiscal year covered by this report. The Company is submitting to its security holders at its annual meeting on May 21, 1997 proposals to elect directors, to confirm Ernst & Young, LLP as auditors for 1997 and to authorize the Board of Directors and Officers to change the state of incorporation of the Company from California to Delaware. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Since May 17, 1995, the Company's Common Stock has traded on the New York Stock Exchange under the symbol "ZLG." Previously, the Company's Common Stock traded on the Nasdaq National Market under the symbol "ZLOG." The following table shows the high and low closing prices for the Common Stock of the Company for the periods indicated, as reported by the Nasdaq National Market and the New York Stock Exchange:
HIGH LOW ----- ----- $ $ Year Ended December 31, 1995: First Quarter............................................ 37 3/4 28 1/4 Second Quarter........................................... 49 5/8 34 5/8 Third Quarter............................................ 53 1/4 38 7/8 Fourth Quarter........................................... 41 1/2 29 3/4 Year Ended December 31, 1996: First Quarter............................................ 38 7/8 30 1/8 Second Quarter........................................... 39 3/4 24 Third Quarter............................................ 26 3/4 15 1/2 Fourth Quarter........................................... 29 1/4 18 1/4 Year Ended December 31, 1997: First Quarter (through March 7, 1997).................... 27 5/8 23 1/2
As of December 31, 1996, there were approximately 1,142 shareholders of record of the Company's Common Stock. The Company has not paid cash dividends on its Common Stock and does not anticipate paying any such dividends in the foreseeable future. In addition, the Company's credit agreement prohibits the payment of dividends on its capital stock (other than dividends payable solely in the Company's stock) without the prior written consent of the bank. The Company intends to retain its earnings, if any, for the development of its business. 14 17 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
YEAR ENDED DECEMBER 31, ---------------------------------------------------- 1992 1993 1994 1995 1996 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF INCOME DATA: Net sales................................... $145,666 $202,727 $223,316 $265,122 $298,425 Costs and expenses: Cost of sales............................. 76,492 105,727 111,288 135,066 175,319 Research and development.................. 16,257 20,833 23,048 24,546 30,548 Selling, general and administrative....... 29,798 37,619 37,790 41,943 47,934 -------- -------- -------- -------- -------- 122,547 164,179 172,126 201,555 253,801 -------- -------- -------- -------- -------- Operating income............................ 23,119 38,548 51,190 63,567 44,624 Other income (expense): Interest income, net...................... 2,123 2,463 2,496 2,676 2,443 Other, net, including license and royalty income and expense..................... (107) 813 860 (360) (911) -------- -------- -------- -------- -------- Income before income taxes.................. 25,135 41,824 54,546 65,883 46,156 Provision for income taxes.................. 9,340 15,057 19,637 23,418 16,155 -------- -------- -------- -------- -------- Net income.................................. $ 15,795 $ 26,767 $ 34,909 $ 42,465 $ 30,001 ======== ======== ======== ======== ======== Net income per share........................ $0.94 $1.43 $1.80 $2.09 $1.47 ======== ======== ======== ======== ======== Number of shares used in computing per share amounts................................... 16,893 18,779 19,380 20,285 20,454 ======== ======== ======== ======== ========
DECEMBER 31, ---------------------------------------------------- 1992 1993 1994 1995 1996 -------- -------- -------- -------- -------- (IN THOUSANDS) BALANCE SHEET DATA: Working capital............................. $ 52,869 $ 88,131 $ 85,173 $102,761 $ 88,567 Total assets................................ 148,404 212,470 286,691 353,430 401,066 Shareholders' equity........................ 108,136 165,580 212,595 278,864 325,280
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is incorporated by reference from pages 11 and 12 of the Company's 1996 Annual Report to Shareholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following financial statements and supplementary information, included in the 1996 Annual Report to Shareholders from pages 13 through 24 is incorporated herein by reference:
ANNUAL REPORT PAGES ------------- Report of Ernst & Young LLP, independent auditors...................... 23 Consolidated balance sheets............................................ 14 Consolidated statements of income...................................... 13 Consolidated statements of shareholders' equity........................ 16 Consolidated statements of cash flows.................................. 15 Notes to consolidated financial statements............................. 17-22 Quarterly information (unaudited)...................................... 24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES Not applicable. 15 18 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information on directors under the heading "Election of Directors" set forth in the 1997 Proxy Statement is incorporated herein by reference. The information on certain executive officers under the heading "Information About Certain of the Company's Executive Officers" set forth in the 1997 Proxy Statement is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information under the headings "Employment Contracts and Termination of Employment and Change-in-Control Arrangements," "Compensation of Directors," "Compensation Committee Interlocks and Insider Participation In Compensation Decisions," "Summary Compensation Table," "Stock Option Grants In Last Fiscal Year Table" and "Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values" set forth in the 1997 Proxy Statement with respect to executive compensation is incorporated herein by reference except the Compensation Committee Report. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information under the heading "Principal Shareholders" set forth in the 1997 Proxy Statement with respect to security ownership of certain beneficial owners and management is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not Applicable. 16 19 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: 1. Consolidated Financial Statements:*
ANNUAL REPORT PAGES ------------- Report of Ernst & Young LLP, independent auditors......................... 23 Consolidated balance sheets............................................... 14 Consolidated statements of income......................................... 13 Consolidated statements of shareholders' equity........................... 16 Consolidated statements of cash flows..................................... 15 Notes to consolidated financial statements................................ 17-22 Quarterly Information (unaudited)......................................... 24
- ------------ * Incorporated herein by reference from the indicated pages of the 1996 Annual Report to Shareholders. 2. Financial Statement Schedules: The Financial Statement Schedule listed below is filed as part of this Report:
FORM 10-K PAGE ------------- Schedule II Valuation and Qualifying Accounts........................... S-1
All other schedules are omitted because they are not applicable or the required information is shown in the Financial Statements or the notes thereto. 3. Exhibits: The exhibits listed under Item 14(c) are filed as part of this Report. (b) Reports on Form 8-K No reports on Form 8-K were filed by the Registrant during the fiscal quarter ended December 31, 1996. (c) Exhibits The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference (as stated therein) as part of this annual report. (d) Financial Statement Schedules See Item 14(a)(2) 17 20 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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. ZILOG, INC. Date: March 27, 1997 By: /s/ EDGAR A. SACK (Edgar A. Sack) (President, Chief Executive Officer and Director) PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE - ------------------------------------------ ------------------------------ /s/ EDGAR A. SACK President, Chief Executive March 27, 1997 (Edgar A. Sack) Officer and Director (Principal Executive Officer) /s/ THOMAS J. CONNORS Director March 27, 1997 (Thomas J. Connors) /s/ WILLIAM H. JANEWAY Director March 27, 1997 (William H. Janeway) /s/ HENRY KRESSEL Director March 27, 1997 (Henry Kressel) /s/ LARRY WANGBERG Director March 27, 1997 (Larry Wangberg) /s/ ROBERT M. WHITE Director March 27, 1997 (Robert M. White) /s/ ROBERT E. COLLINS Vice President, Finance March 27, 1997 (Robert E. Collins) (Principal Financial and Accounting Officer)
18 21 SCHEDULE II ZILOG, INC. VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS) ================================================================================
ADDITIONS BALANCE AT CHARGED TO BEGINNING COSTS AND BALANCE AT DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS(1) END OF PERIOD - ---------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1994: Allowance for doubtful accounts............ $250 $154 $(154) $ 250 ======== ======== ========== ========== YEAR ENDED DECEMBER 31, 1995: Allowance for doubtful accounts............ $250 $314 $(314) $ 250 ======== ======== ========== ========== YEAR ENDED DECEMBER 31, 1996: Allowance for doubtful accounts............ $250 $107 $(107) $ 250 ======== ======== ========== ==========
- ------------ (1) Uncollectible accounts written off, net of recoveries. S-1 22 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ----------- 3.1(i) -- Amended and Restated Articles of Incorporation, as currently in effect 3.3(i) -- Bylaws, as currently in effect 3.4(iv) -- Certificate of Amendment of Articles of Incorporation, filed with the California Secretary of State on February 1, 1993 4.1(i) -- Common and Series A Preferred Stock Purchase Agreement, dated as of June 8, 1989, among Zilog Acquisition Corporation (on behalf of the Company) and certain investors 4.2(i) -- Investor's Rights Agreement, dated as of June 8, 1989, among Zilog Acquisition Corporation (on behalf of the Company) and certain shareholders 10.1(i) -- Contract of Lease, dated March 22, 1979, between Zilog Phillippeans, Inc. and Fruehauf Electronics Phils Corporation 10.2(i) -- Industrial Lease Agreement, dated March 3, 1981, between M.J.H.M. Partnership II and ADDA Corporation, as assigned to Zilog on August 25, 1981, and addenda 1-5 thereto 10.3(ii) -- Form of Credit Agreement, dated as of December 31, 1991, among the Company and The First National Bank of Boston and First Interstate Bank of California and Revolving Notes thereunder 10.4(i) -- Stock Purchase Agreement, dated as of May 15, 1989, between Zilog Acquisition Corporation (on behalf of the Company) and Exxon Corporation 10.5(i) -- Form of Employee Stock Purchase and Shareholder Agreements, dated as of June 8, 1989, between Zilog Acquisition Corporation and certain employees 10.6(i) -- 1989 Zilog Employee Founders' Stock Purchase Plan Administrative Guide *10.7(v) -- 1994 Long-Term Stock Incentive Plan *10.8(i) -- Form of Employee Performance Incentive Plan 10.9 -- 1997 Zilog Employee Performance Incentive Plan Administrative Guide and Executive Bonus Administrative Guide 10.10(i) -- Zilog, Inc. Management Administration Guide *10.11(v) -- Form of Zilog Employee Common Share Option Grant Agreement *10.13 -- Employment Agreement, dated November 6, 1996, between Michael J. Bradshaw and the Company *10.14 -- Employment Agreement, dated February 1, 1997, between Edgar A. Sack and the Company *10.15 -- Employment Agreement, dated effective January 27, 1997 between Alan Secor and the Company 10.16 -- Employment Agreement, dated effective November 6, 1996 between Richard L. Moore and the Company 10.17 -- Employment Agreement, dated effective November 6, 1996 between J. James Magill and the Company 10.18(iv) -- First Amendment dated as of November 30, 1993 and Second Amendment dated as of February 28, 1994 to Credit Agreement, dated as of December 31, 1991, among the Company and The First National Bank of Boston and First Interstate Bank of California 11.1 -- Statement regarding computation of earnings per share 13.1 -- 1996 Annual Report to Shareholders. Except for the portions expressly incorporated by reference, this Annual Report is not deemed to be filed as part of this Annual Report on Form 10-K. 21.1(v) -- Subsidiaries of the Company 23.1 -- Consent of Ernst & Young LLP, independent auditors 27.1 -- Financial Data Schedule
- ------------ * Denotes management contract or compensatory plan. (i) Incorporated by reference from Registration Statement on Form S-1 No. 33-36080. (ii) Incorporated by reference from Registration Statement on Form S-1 No. 33-45157. (iii) Incorporated by reference from Registration Statement on Form S-3 No. 33-57108. (iv) Incorporated by reference from Exhibit 10.21 of the Company's Form 10-K for the year ended December 31, 1993. (v) Incorporated by reference from Exhibit 10.7, 10.11, 10.12, 10.13, 10.14, 10.15 and 21.1, respectively, of the Company's Form 10-K for the year ended December 31, 1994. EX-10.9 2 1997 ZILOG EMPLOYEE PERFORMANCE INCENTIVE PLAN 1 EXHIBIT 10.9 1997 ZILOG EMPLOYEE PERFORMANCE INCENTIVE PLAN ADMINISTRATIVE GUIDE 1.0 Purpose of the Plan The purpose of the Zilog Employee Performance Incentive Plan (hereinafter the "Incentive Plan") is to provide eligible employees of Zilog (hereinafter the "Company") with an increased incentive to meet and exceed the Company profit before interest and taxes and revenue goals. 2.0 Objective of the Administrative Guide The objective of this guide is to detail the specific provisions of the Plan. This guide will serve as the source document to be used in interpretation, administration and implementation of the Incentive Plan. 3.0 Definitions 3.1 An "Eligible Employee" for the purposes of the Incentive Plan is a full-time regular employee on the U.S. payroll of the Company in position Classification Level (CL) 21 and above or a Zilog Philippines employee in Classification Level 25B and above. Non-U.S. sales office employees in CL 21 and above may be eligible upon approval of the Compensation Committee. 3.2 "Profit" for the purposes of this Incentive Plan is book profit after provision for all other costs including the Company 401(k) matching funds and discretionary Company contribution, but excluding any interest and taxes and provision for Awards under this Incentive Plan. 3.3 "Plan Profit" for the purposes of this Incentive Plan is the profit before interest and taxes and any provision for Payout under this Incentive Plan, as stated in the 1997 Step II Business Plan as approved by the Board of Directors of the Company. 3.4 "Operating Return" for the purposes of this Incentive Plan is Profit less Interest divided by Average Capital Employed less Cash. -1- 2 3.5 "Revenue" for the purposes of this Incentive Plan is net revenue as stated in the 1997 Step II Business Plan as approved by the Board of Directors of the Company. 3.6 "Average Capital Employed" for the purposes of this Incentive Plan will be calculated in the same manner as defined in the 1997 Step II Business Plan approved by the Board of Directors of the Company. 3.7 "Award" for the purposes of this Incentive Plan is the incentive amount credited to the eligible employee subject to and in consequence of the provisions of this Incentive Plan. 3.8 "Total Award" for the purposes of this Incentive Plan is the sum of all Awards credited to all eligible employees under the provisions of this Incentive Plan for January 1 through December 31, 1997. 3.9 "Payout" for the purposes of this Incentive Plan is the payment of an Award to the eligible employee subject to and in consequence of the provisions of this Incentive Plan. 3.10 "Annualized Base Salary" for the purposes of this Incentive Plan is the employee's regular salary as of January 1, 1997 (or such later date in 1997 when the employee becomes eligible to participate in the Incentive Plan pursuant to either Section 9.2 or Section 10.0), annualized (excluding any one time bonus or incentive payments under this or any other plan). 3.11 "Employee Classification Factor" for the purposes of this Incentive Plan is a factor dependent upon the employee's exempt Classification Level as of January 1, 1997 (or such later date in 1997 when the employee becomes eligible to participate in the Incentive Plan pursuant to either Section 9.2 or Section 10.0). 3.12 "Company Performance Factor" for the purposes of this Incentive Plan is the sum of the factor determined by the Company's performance against Plan Profit goals, per Exhibit II A, plus the factor determined by the Company's performance against Revenue goals, per Exhibit II B. 3.13 "Individual Employee Performance Factor" for the purposes of this Incentive Plan is a factor dependent upon the Individual Employee Performance Rating as determined by the Compensation Committee. The Individual Employee Performance Rating for members of the Compensation Committee will be approved by the Board of Directors of the Company. 3.14 "Proration Factor" for the purposes of this Incentive Plan is the ratio of the number of weeks an employee is an eligible active participant in EPIP during the term of the Plan divided by 52 weeks. - 2 - 3 3.15 "Zilog Compensation Committee" shall consist of the CEO, the CFO, and the Vice President of Human Resources and Administration. 3.16 "Board Compensation Committee" shall consist of two outside Board members. 4.0 Eligibility and Participation All domestic exempt employees who are not included in any other regular incentive program of the Company are eligible to participate in this Incentive Plan. However, awardees under the "General Managers Award" program are not excepted from participation in the Incentive Plan. Certain employees of Zilog Philippines are also eligible, as noted in 3.1 of this Guide. Non-U.S. sales office employees who are not included in any other regular incentive program of the company are eligible upon approval of the Compensation Committee. 5.0 Contract of Employment Participation in this Incentive Plan shall not constitute a contract of employment. Inclusion in the Incentive Plan shall not convey to any employee a right to continue in the employment of the Company or to continue to be involved in any business in which the Company may engage. 6.0 Base Period and Term of the Incentive Plan The base period and term of this Incentive Plan is the 1997 fiscal year of the Company; Payouts under this Incentive Plan shall occur in 1998, as provided under the terms of this Incentive Plan. An employee shall have no right to accelerate or defer the receipt of any payout under this Incentive Plan. 7.0 Provisions of the Incentive Plan 7.1 The general provisions of the Incentive Plan including the Employee Classification Factors (Exhibit I), the Company and individual Employee Performance Factors (Exhibits II A, II B and III), and the estimated costs of implementation of the Incentive Plan are proposed by the Zilog Compensation Committee and submitted for review and approval by the Compensation Committee of the Board of Directors of the Company prior to the Incentive Plan period (January 1 through December 31, 1997). The recommendations of the Zilog Compensation Committee as to the amount of the Award to each eligible employee and the total costs of the Incentive Plan are submitted for review and approval by the Board of Directors in the first quarter following the end of the Incentive Plan year. - 3 - 4 7.2 Eligible employees shall be grouped in Classification Factor levels in accord with Exhibit I, dependent upon the employee's position Classification Level as of January 1, 1997. 7.3 The amount of the 1997 Award to each eligible employee under the Incentive Plan is the product of the employee's Annualized Base Salary as of January 1, 1997 times the employee's Classification Factor times a Company Performance Factor, per Exhibits II A and II B, times an Individual Employee Performance Factor for 1997 per Exhibit III, times a proration factor. 7.4 "Company Performance Factor" for the purposes of this Incentive Plan is the sum of the factor determined by the Company's performance against Plan Profit Goals, per Exhibit II A, plus the factor determined by the Company's performance against Revenue goals, per Exhibit II B. 7.5 The "Individual Employee Performance Factors" for the purposes of the 1997 Awards are related to the Individual Employee Performance Ratings, per Exhibit III. The Individual Employee Performance Rating is a number between 1.00 (highest) and 4.00 (lowest) which will be determined by the Zilog Compensation Committee at its sole discretion and will be related to but need not be equal to the employee's MBO, (Management By Objectives - see PM 60-27) ratings. 7.6 The Award is payable during the first quarter of 1998. 8.0 Eligibility for Payout To be eligible for the Payout of an Award, the employee must be on the active payroll at the time the payments are made by the Company, with the exception of conditions of retirement, death or disability as defined in Section 9.0. Any eligible employee who is terminated for cause or reduction of force, or who resigns prior to the time of a Payout under this Incentive Plan will not be eligible for a Payout under the terms of this Incentive Plan. 9.0 Promotion, Transfer, Retirement, Termination, Death and Disability 9.1 If an eligible employee is promoted or transferred during 1997 into a non-eligible position, or retires (pursuant to the company's then-current retirement policy), such employee shall be eligible to receive a pro rata Award up to the date of promotion, transfer or retirement. - 4 - 5 9.2 If a non-eligible employee is promoted or transferred during 1997 into an eligible position, such employee shall be eligible to receive a pro rata Award from the date of transfer or promotion. 9.3 If an eligible employee dies during 1997 while an active employee of the Company, such employee's estate shall be eligible to receive a pro rata Award to the date of the employee's death. 9.4 If an eligible employee is disabled during 1997, such employee shall be eligible to receive a pro rata Award for the period of time actively employed and not absent due to disability. 9.5 Payouts of pro rata Awards pursuant to this Section 9 shall be made as provided in Section 7.6 of this Incentive Plan. 9.6 Pro rata Awards shall be based on total length of active covered service during the 1997 term of the Incentive Plan expressed as a percentage of the 1997 fiscal year. 9.7 An employee who resigns or is terminated for cause or reduction in force during 1997 will not be eligible for an Award. 10.0 New Employees Employees hired after January 1, 1997 may be designated eligible under the provisions of Section 4.0. New employees will be considered for an Award on the same pro rata basis as described in Section 9.2 for employees who transfer or are promoted into assignments considered eligible for the Incentive Plan. 11.0 Minimum Profit Requirement for Award Notwithstanding any other provision of this Incentive Plan, no Award will be made for any year in which the Profit does not exceed 20% of the Plan Profit. 12.0 Minimum Business Plan Requirement for Award Notwithstanding any other provision of this Incentive Plan, no Award will be made for any year in which the Business Plan Operating Return is less than 2%. 13.0 Minimum Operating Return Requirement for Dividend Notwithstanding any other provision of this Incentive Plan, no Dividend will be added to a Payout for any year in which Operating Return is less than 2%. - 5 - 6 14.0 Total Award Limitation Notwithstanding any other provision of this Incentive Plan, the Total Award for 1997 may not be more than 7.5% of Profit. If the sum of the Awards exceeds the Total Award, the Zilog Compensation Committee will adjust the Awards such that the total of all Awards does not exceed 7.5% of Profit. 15.0 Disclosure, Compensation Committee Decisions Final The Zilog Compensation Committee will periodically advise employees eligible under this Incentive Plan of progress toward achievement of Plan Profit, using the Zilog Operations Review program as a vehicle. Employees are encouraged to discuss the factors which influence their MBO and Individual Employee Performance Ratings with their supervisor but the decision of the Zilog Compensation Committee as to an Individual Employee Performance Rating is final and is not subject to adjustment. 16.0 Awards Unfunded, Unsecured; Taxable Status Any awards under this Incentive Plan shall be provisional until payout, shall be unfunded and unsecured and shall represent a general obligation of the Company. All payouts shall have appropriate amounts for any federal, state or local income or other taxes withheld from such payouts and the net amount thereof shall be paid to the employee. 17.0 Amendment and Termination of the Plan 17.1 This Incentive Plan applies to fiscal year 1997 only (with Payout in 1998). 17.2 The Incentive Plan may be continued, discontinued or amended by the Board of Directors of the Company for fiscal years 1998 and beyond. Amendments of this Incentive Plan after 1997 will not affect payout of Awards granted under the 1997 Plan. - 6 - 7 EXHIBIT I Zilog 1997 Employee Performance Incentive Plan
Employee Classification Classification Level Factor ----- ------ 37 0.45 33 0.36 31 0.335 29-30 0.24 27 0.18 25-26 0.13 23 0.10 21 0.08
- 7 - 8 EXHIBIT II A ACHIEVEMENT OF 1997 PLAN PROFIT
0% 20% 40% 60% 80% 100% 120% 140% 160% 180% 200% - ------------------------------------------------------------------------------------------------------------------- 1.0 (1.0, 200%) 0.9 0.8 0.7 0.6 0.5 (0.5, 100%) 0.4 0.3 0.2 0.1 0
COMPANY PERFORMANCE FACTOR - 8 - 9 EXHIBIT II B ACHIEVEMENT OF 1997 REVENUE
0% 20% 40% 60% 80% 100% 120% 140% 160% 180% 200% - ------------------------------------------------------------------------------------------------------------------- 1.0 (1.0, 200%) 0.9 0.8 0.7 0.6 0.5 (0.5, 100%) 0.4 0.3 0.2 0.1 0
COMPANY PERFORMANCE FACTOR - 9 - 10 EXHIBIT III 1997 INDIVIDUAL EMPLOYEE PERFORMANCE RATING (BY COMPENSATION COMMITTEE)
4 3.75 3.50 3.25 3 2.75 2.50 2.25 2 1.75 1.50 1.25 1 - --------------------------------------------------------------------------------------------------------------------------------- 2.0 (2.00, 1.00) 1.9 1.8 1.7 1.6 1.5 1.4 1.3 1.2 1.1 1.0 (1.00, 2.25) 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 (0, 3.25)
INDIVIDUAL PERFORMANCE FACTOR -10- 11 1997 ZILOG EMPLOYEE PERFORMANCE INCENTIVE PLAN EXECUTIVE BONUS ADMINISTRATIVE GUIDE 1.0 Purpose of the Plan The purpose of the Zilog Employee Performance Incentive Plan Executive Bonus (hereinafter the "Plan") is to provide eligible employees of Zilog (hereinafter the "Company") with an increased incentive to meet and exceed the Company Profit before interest and taxes and revenue goals. This Plan is a supplement to the Zilog Employee Performance Incentive Plan (EPIP). 2.0 Objective of the Administrative Guide The objective of this guide is to detail the specific provisions of the Plan. This guide will serve as the source document to be used in interpretation, administration and implementation of the Plan. Unless otherwise noted, all terms and conditions of the 1997 Zilog Employee Performance Incentive plan apply equally to the Executive Bonus Plan. 3.0 Eligibility and Participation 3.1 All employees in Classification Level (CL) 29 and above who are not included in the Field Sales Incentive Plan are eligible to participate in this Plan. Certain employees in CL 27 may be eligible upon approval of the Compensation Committee. 4.0 Base Period and Term of the Plan The base period and term of this Plan is the 1997 fiscal year of the Company; Payouts under the Plan shall occur in 1999 and 2000, as provided under the terms of this plan. 5.0 Provisions of the Incentive Plan 5.1 The recommendations of the Zilog Compensation Committee as to the amount of the Executive Bonus award to each eligible employee and the total costs of the Plan are submitted for review and approval by the Board of Directors in the first quarter following the end of the Plan year. 5.2 The amount of the 1997 Executive Bonus award to each eligible employee under the Plan is a percentage of his/her 1997 Employee Performance Incentive Plan Award, as follows: CL 27-30: 100%, CL 31 and above: 80%. -1- 12 5.3 The Executive Bonus award will be payable in two halves during the first quarters of 1999 and 2000, and may be modified per paragraph 5.4 hereafter. 5.4 The award may be enhanced by "dividends" proposed by the Compensation Committee and reviewed and approved by the Board. If so approved, any such "dividend" for 1998 (which would enhance both the 1999 and the 2000 payouts) will be based upon, but will not be greater than, the Company Operating Return for fiscal year 1998; the "dividend" for 1999 (which would enhance the 2000 payout) will be based upon, but will not be greater than, the Company Operating Return for the fiscal year 1999. 5.5 Pro rata payments of Executive Bonus awards shall be made according to the administrative guidelines established in Section 9 of the 1997 EPIP Administrative Guide. Employees who become ineligible to participate in the Plan for reasons specified in paragraph 9.1 of the 1997 EPIP Administrative Guide still receive the Executive Bonus payments provided that they meet the requirements of Section 8.0 of the 1997 EPIP Administrative Guide. 6.0 Total Award Limitation Notwithstanding any other provision of the Plan, the total of the Executive Bonus Awards for 1997 may not exceed 100% of the 1997 EPIP Awards for the Executive Bonus Plan participants in CL 27 through CL 30 plus 80% of the 1997 EPIP Awards for participants in CL 31 and above. 7.0 Amendment and Termination of the Plan 7.1 This Plan applies to fiscal year 1997 only (with payouts in 1999 and 2000). 7.2 The Plan may be continued, discontinued or amended by the Board of Directors of the Company at any time for the remainder of 1997 after written notice of termination is circulated or for fiscal years 1998 and beyond. Amendments of this Incentive Plan after 1997 will not affect payout of Awards granted under the 1997 Plan. - 2 - EX-10.13 3 EMPLOYMENT AGREEMENT DATED 11/6/96- M. J. BRADSHAW 1 EXHIBIT 10.13 EMPLOYMENT AGREEMENT This Agreement supersedes the Employment Agreement between Zilog and Michael J. Bradshaw which extends to December 15, 1996. This Agreement is made by and between Zilog, Inc., a California corporation (hereinafter "Zilog") and Michael J. Bradshaw (hereinafter "Bradshaw"), whereby Zilog and Bradshaw agree that Bradshaw accepts employment as Sr. Vice President, Operations of Zilog, under the following terms and conditions: 1. Term. Zilog and Bradshaw agree that Bradshaw will be Sr. Vice President, Operations of Zilog for a period of twenty four (24) months, commencing on November 6, 1996 and ending November 5, 1998. This Agreement may be extended upon written agreement of Zilog and Bradshaw. 2. Extent of Services. Bradshaw shall devote his entire time, attention and energies to his position as Sr. Vice President, Operations of Zilog and shall not, during the term of this Employment Agreement be engaged in any other business activity whether or not such business activity is pursued for gain, profit or other pecuniary advantage; provided, that Bradshaw may engage in personal investment activities consistent with Zilog's Conflict of Interest Policy. 1 2 3. Compensation. A. Salary. For each month of employment, Zilog will pay, or cause to be paid, to Bradshaw the sum of at least $17,500 as base salary. Such sum will be paid in monthly installments or such other normal periodic payment schedule as Zilog may establish for its executives. Bradshaw's salary will be reviewed periodically in accordance with established salary review procedures and adjustments to his salary, if any, will be based upon such reviews. B. Employee Performance Incentive Plan and Executive Bonus Plan. Bradshaw will be eligible to receive Awards and Payouts in accordance with the terms of the Zilog Employee Performance Incentive Plan (hereinafter "EPIP"), and the EPIP Executive Bonus Plan (hereinafter "Executive Bonus") as such plans may be modified from time to time and as modified by this Agreement. C. Zilog Employee Stock Option Plan. Zilog has provided to Bradshaw stock options under the 1990 Zilog Employee Stock Option Plan (hereinafter "ZSOP") and the 1994 Long Term Incentive Plan (hereinafter "LTIP"), copies of such plans being attached hereto. Vesting will continue in accordance with the plan provisions during the term of this Agreement. 2 3 4. Benefits. As an employee of Zilog, Bradshaw will be entitled to such benefits as Zilog normally provides its employees. In addition, Zilog will provide Bradshaw with Directors and Officers (D & O) insurance in an amount deemed appropriate by the Company. 5. Company Policies. Bradshaw agrees to be bound by all Zilog Company Policies applicable to its employees including but not limited to Business Ethics, Conflict of Interest, Proprietary Information and Antitrust Compliance, and he agrees to sign any such documents as Zilog requests evidencing such agreement. 6. Termination of Employment. Zilog reserves the right to terminate the employment of Bradshaw at any time during the term of this Agreement, for any reason or for no reason, with or without cause, by giving Bradshaw at least thirty (30) days written notice of such termination or compensation in lieu of notice; and Bradshaw may terminate his employment by giving at least thirty (30) days written notice to Zilog. Zilog reserves the right to accelerate any deferred resignation date given it by Bradshaw, and any such acceleration of such date will not alter the character of such termination from voluntary to involuntary. 7. Payment Upon Termination. Notwithstanding any other provisions of this Agreement to the contrary, Zilog's obligations to Bradshaw, if his employment with Zilog is terminated prior to the end of this Agreement, shall be as follows: 3 4 A. If Bradshaw voluntarily resigns his employment for 1) other than Good Reason (as defined in Paragraph 7.B. below) or 2) other than Retirement (as defined in Paragraph 7.C. below) prior to the termination date of this Agreement, he will be entitled to: (1) base salary then due and owing for services previously performed, (2) Payouts under EPIP which become payable to Bradshaw pursuant to the terms of EPIP prior to the effective date of resignation, and (3) Payouts under the Executive Bonus which become payable to Bradshaw pursuant to the terms of the Executive Bonus prior to the effective date of resignation. Upon payment of the foregoing items, Zilog will have no further obligation to Bradshaw. B. If Bradshaw voluntarily resigns his employment for Good Reason, as defined herein, prior to the termination date of this Agreement, he will be entitled to the benefits provided in Paragraph 7.D. below. Good Reason, as used herein, shall mean: (i) assignment to Bradshaw of duties, responsibilities or titles materially inconsistent with his status as Sr. Vice President, Operations of Zilog; 4 5 (ii) a reduction in Bradshaw's base salary other than in connection with a general reduction applicable to the Vice Presidents of Zilog who are members of the Management Committee; (iii) a reduction in form and effect or cessation of any benefit or compensation plan, except EPIP, the Executive Bonus, the Deferred Compensation Plan, or those that may occur for the Zilog employee group in general in accord with a general policy change; (iv) a change in Bradshaw's principal work location from the area of Campbell, California, or Nampa, Idaho, except for required travel on Zilog's business to an extent substantially consistent with Bradshaw's normal business travel obligations and except as might occur in the event of a relocation of the Zilog Corporate Headquarters; (v) any material breach of this Agreement on the part of Zilog not fully remedied by Zilog within sixty (60) days after written notice by Bradshaw of such breach. 5 6 C. If Bradshaw retires as defined in PM60-05 prior to the termination date of this Agreement, he will be entitled to the following at the effective date of retirement: (1) base salary then due and owing for services previously performed, (2) Payouts under EPIP for Awards made prior to the effective date of the retirement, and (3) Payouts under the Executive Bonus for Awards made prior to the effective date of the retirement. EPIP and Executive Bonus Awards may also be granted at Zilog's sole discretion for the year in which the retirement occurs, prorated to the date of the retirement. Payouts for all Awards will be made at the same time and on the same schedule as those for active employees. Upon the payment of the foregoing items, Zilog will have no further obligation to Bradshaw. D. If Zilog terminates Bradshaw's employment during the term of this Agreement other than for Cause or Detrimental Activity as defined in 7.E. below, he will be entitled to receive the following: (1) the then current base salary for the period remaining in this Agreement, (2) Payouts under EPIP for Awards made prior to the effective date of termination of employment which Payouts are payable to Bradshaw pursuant to the terms of EPIP prior to expiration of the term of this Agreement, and (3) Payouts under the 6 7 Executive Bonus for Awards made prior to the effective date of termination of employment which Payouts are payable to Bradshaw pursuant to the terms of the Executive Bonus prior to expiration of the term of this Agreement. Bradshaw will not be eligible for Awards under EPIP or the Executive Bonus made after the date on which his employment at Zilog ceased or for Payouts made on any Awards after the expiration date of this Agreement. Vesting of common stock and stock options granted under ZSOP and LTIP will continue for the period remaining in this Agreement. Upon the payment of the foregoing items, Zilog will have no further obligation to Bradshaw. E. If Zilog terminates Bradshaw during the term of this Agreement for Cause, or for Detrimental Activity as defined herein, Zilog will have no further monetary obligation to Bradshaw other than: (1) any base salary then due and owing for services previously performed, (2) Payouts under EPIP which become payable to Bradshaw pursuant to the terms of EPIP prior to the effective date of termination, and (3) Payouts under the Executive Bonus which become payable to Bradshaw pursuant to the terms of the Executive Bonus prior to the effective date of termination. Cause or Detrimental Activity shall be a willful violation of a major company 7 8 policy, conviction of any criminal or civil law involving moral turpitude, willful misconduct which results in a material reduction in Bradshaw's effectiveness in the performance of his duties, or willful and reckless disregard for the best interests of the Company. F. If Bradshaw ceases to be an employee of Zilog during the term of this Agreement because of total and permanent disability or death, Zilog's obligations to Bradshaw or his beneficiaries will be limited solely to: (1) any base salary then due and owing for services previously performed, (2) Payouts in accordance with the terms of EPIP, (3) Payouts in accordance with the terms of the Executive Bonus, and (4) any benefits including ZSOP and LTIP benefits normally provided by Zilog to its employees due to or on account of total and permanent disability or death. 8. Bradshaw Representations. Bradshaw represents to Zilog that to the best of his knowledge he is under no obligation to any employer or third party which would preclude his full, complete and unfettered discharge of his duties under this Agreement. 8 9 9. Notices. Any notices required to be given hereunder shall be in writing, and if by Zilog shall be addressed to Bradshaw as indicated in Zilog's personnel records or such other address as Bradshaw shall specify in writing and if by Bradshaw to Zilog at: Zilog, Inc. 210 East Hacienda Avenue Campbell, California 95008-6600 Attn: Vice President, Human Resources and Administration Such addresses may be changed by written notice from either Zilog or Bradshaw, to the other. 10. Amendment. This Agreement may be amended only in writing, signed by both parties hereto. 11. Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon Zilog, its successors and assigns. Bradshaw may not assign, transfer, pledge or hypothecate any of his rights or obligations hereunder, Awards or Payouts under EPIP or the Executive Bonus or other compensation to which he may be entitled hereunder. 9 10 12. Waiver of Breach. The waiver by Zilog of a breach of any provisions of this Agreement by Bradshaw shall not operate or be construed as a waiver of any subsequent breach by Bradshaw. 13. Severability. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision hereof. 14. Entire Agreement. This entire Agreement consists of this document, together with the following documents: A. EPIP, attached as Exhibit I; B. Executive Bonus, attached as Exhibit II; C. Zilog Employee Stock Option Plan, attached as Exhibit III; D. Zilog 1994 Long Term Incentive Plan, attached as Exhibit IV; E. Employee Proprietary Rights and Non-Disclosure Agreement, attached as Exhibit V; F. Conflict of Interest Statement, attached as Exhibit VI; G. Statement addressed to "Human Resources," attached as Exhibit VII; H. Policy on Business Ethics, attached as Exhibit VIII; and I. PM60-05, attached as Exhibit IX. 10 11 15. Governing Law. This Employment Agreement shall be governed by the laws of the State of California, without regard to conflict of laws principles. Executed effective November 6, 1996 By: /s/ Michael J. Bradshaw By: /s/ E. A. Sack ------------------------------- ------------------------------- Michael J. Bradshaw E. A. Sack, President and CEO Dated: 11-11-96 Dated: 11-13-96 ---------------------------- ---------------------------- 11 EX-10.14 4 EMPLOYMENT AGREEMENT DATED 2/1/97- EDGAR A. SACK 1 EXHIBIT 10.14 EMPLOYMENT AGREEMENT This Agreement is made by and between Zilog, Inc., a California corporation (hereinafter "Zilog") and Dr. Edgar A. Sack, Jr. (hereinafter "Sack"), whereby Zilog and Sack agree that Sack accepts employment as President, Chief Executive Officer, and Chairman of the Board of Directors of Zilog, under the following terms and conditions: 1. Term. Zilog and Sack agree that Sack will be President, Chief Executive Officer, and Chairman of the Board of Zilog for a period of thirteen (13) months, commencing on February 1, 1997 and ending February 28, 1998. This Agreement may be extended upon written agreement of Zilog and Sack. 2. Extent of Services. Sack shall devote his entire time, attention and energies to his position as President, Chief Executive Officer, and Chairman of the Board of Zilog and shall not, during the term of this Employment Agreement be engaged in any other business activity whether or not such business activity is pursued for gain, profit or other pecuniary advantage; provided, that Sack may engage in personal investment activities consistent with Zilog's Conflict of Interest Policy. 1 2 3. Compensation. A. Salary. For each month of employment, Zilog will pay, or cause to be paid, to Sack the sum of at least $42,166.00 as base salary. Such sum will be paid in monthly installments or such other normal periodic payment schedule as Zilog may establish for its executives. Sack's salary will be reviewed periodically in accordance with established salary review procedures and adjustments to his salary, if any, will be based upon such reviews. B. Employee Performance Incentive Plan and Executive Bonus Plan. Sack will be eligible to receive Awards and Payouts in accordance with the terms of the Zilog Employee Performance Incentive Plan (hereinafter "EPIP"),and the EPIP Executive Bonus Plan (hereinafter "Executive Bonus") as such plans may be modified from time to time and as modified by this Agreement. C. Zilog Employee Stock Option Plan. Zilog has provided to Sack stock options under the 1990 Zilog Employee Stock Option Plan (hereinafter "ZSOP"), and the 1994 Long Term Incentive Plan (hereinafter "LTIP"), copies of such plans being attached hereto. Vesting will continue in accordance with the plan provisions during the term of this Agreement and as modified by this Agreement. 2 3 4. Benefits. As an employee of Zilog, Sack will be entitled to such benefits as Zilog normally provides its employees. 5. Company Policies. Sack agrees to be bound by all Zilog Company Policies applicable to its employees including but not limited to Business Ethics, Conflict of Interest, Proprietary Information and Antitrust Compliance, and he agrees to sign any such documents as Zilog requests evidencing such agreement. 6. Termination of Employment. Zilog reserves the right to terminate the employment of Sack at any time during the term of this Agreement, for any reason or for no reason, with or without cause, by giving Sack at least thirty (30) days written notice of such termination or compensation in lieu of notice; and Sack may terminate his employment by giving at least thirty (30) days written notice to Zilog. Zilog reserves the right to accelerate any deferred resignation date given it by Sack, and any such acceleration of such date will not alter the character of such termination from voluntary to involuntary. 7. Payment Upon Termination. Notwithstanding any other provisions of this Agreement to the contrary, Zilog's obligations to Sack, if his employment with Zilog is terminated prior to the end of this Agreement, shall be as follows: 3 4 A. If Sack voluntarily resigns his employment for 1) other than Good Reason (as defined in Paragraph 7.B. below) or 2) other than retirement (as defined in Paragraph 7.C. below) or 3) other than the sale, merger or change in ownership of Zilog (as defined in Paragraph 7.D. below) prior to the termination date of this Agreement, he will be entitled to: (1) base salary then due and owing for services previously performed, (2) Payouts under EPIP which become payable to Sack pursuant to the terms of EPIP prior to the effective date of resignation, and (3) Payouts under the Executive Bonus which become payable to Sack pursuant to the terms of the Executive Bonus prior to the effective date of resignation. Upon payment of the foregoing items, Zilog will have no further obligation to Sack. B. If Sack voluntarily resigns his employment for Good Reason, as defined herein, prior to the termination date of this Agreement, he will be entitled to the benefits provided in Paragraph 7.E. below. Good Reason, as used herein, shall mean: (i) assignment to Sack of duties, responsibilities or titles materially inconsistent with his status as President, Chief Executive Officer, and Chairman of the Board of Zilog; 4 5 (ii) appointment of a Chairman of the Zilog Board of Directors other than Sack; (iii) a reduction in Sack's base salary other than in connection with a general reduction applicable to the members of the Zilog Management Committee; (iv) a reduction in form and effect or cessation of any benefit or compensation plan, except EPIP, the Executive Bonus, the Deferred Compensation Plan or those that may occur for the Zilog employee group in general in accord with a general policy change; (v) a change in Sack's principal work location from the area of Campbell, California, except for required travel on Zilog's business to an extent substantially consistent with Sack's normal business travel obligations and except as might occur in the event of a relocation of the Zilog Corporate Headquarters; (vi) any material breach of this Agreement on the part of Zilog not fully remedied by Zilog within sixty (60) days after written notice by Sack of such breach. 5 6 C. If Sack retires as defined in PM60-05 prior to the termination date of this Agreement, he will be entitled to the following at the effective date of retirement: (1) base salary then due and owing for services previously performed, (2) Payouts under EPIP for Awards made prior to the effective date of the retirement, and (3) Payouts under the Executive Bonus for Awards made prior to the effective date of the retirement. EPIP and Executive Bonus Awards may also be granted at Zilog's sole discretion for the year in which the retirement occurs, prorated to the date of the retirement. Payouts for all Awards will be made at the same time and on the same schedule as those for active employees. Upon the payment of the foregoing items, Zilog will have no further obligation to Sack. D. If Sack leaves his employment, either voluntarily or involuntarily, as a result of the sale, merger or change in ownership of Zilog prior to the termination date of this Agreement, he will be entitled to receive the following: (1) the then current base salary for the period remaining in this Agreement, (2) Payouts under EPIP for Awards made prior to the effective date of termination of employment, and (3) Payouts under the Executive Bonus for Awards made prior to the effective date of termination of employment. EPIP and Executive Bonus Awards may also be granted at Zilog's sole discretion for the year in which the termination occurs. 6 7 Payouts for all Awards will be made at the same time and on the same schedule as those for active employees. All outstanding unvested stock options granted under ZSOP and LTIP will fully vest effective the last date of Sack's active employment. They will be subject to exercise on the same terms as all other vested options, as provided for under the "Retirement" provisions of the ZSOP and LTIP. Upon payment of the following items, Zilog will have no further obligation to Sack. E. If Zilog terminates Sack's employment during the term of this Agreement for 1) other than Cause or Detrimental Activity (as defined in 7.F. below), or 2) other than sale or change in ownership of Zilog (as defined in Paragraph 7.D. above), he will be entitled to receive the following: (1) the then current base salary for the period remaining in this Agreement, (2) Payouts under EPIP for Awards made prior to the effective date of termination of employment which Payouts are payable to Sack pursuant to the terms of EPIP prior to expiration of the term of this Agreement, and (3) Payouts under the Executive Bonus for Awards made prior to the effective date of termination of employment which Payouts are payable to Sack pursuant to the terms of the Executive Bonus prior to expiration of the term of this Agreement. Sack will not be eligible for Awards under EPIP or the Executive Bonus made after the date on which his 7 8 employment at Zilog ceased or for Payouts made on any Awards after the expiration date of this Agreement. Vesting of common stock and stock options granted under ZSOP and LTIP will continue for the period remaining in this Agreement. Upon the payment of the foregoing items, Zilog will have no further obligation to Sack. F. If Zilog terminates Sack's employment during the term of this Agreement for Cause, or for Detrimental Activity as defined herein, Zilog will have no further monetary obligation to Sack other than (1) any base salary then due and owing for services previously performed, (2) Payouts under EPIP which become payable to Sack pursuant to the terms of EPIP prior to the effective date of termination, and (3) Payouts under the Executive Bonus which become payable to Sack pursuant to the terms of the Executive Bonus prior to the effective date of termination. Cause or Detrimental Activity shall be a willful violation of a major company policy, conviction of any criminal or civil law involving moral turpitude, willful misconduct which results in a material reduction in Sack's effectiveness in the performance of his duties, or willful and reckless disregard for the best interests of the Company. 8 9 G. If Sack ceases to be an employee of Zilog during the term of this Agreement because of total and permanent disability or death, Zilog's obligations to Sack or his beneficiaries will be limited solely to: (1) any base salary then due and owing for services previously performed, (2) Payouts in accordance with the terms of EPIP, (3) Payouts in accordance with the terms of the Executive Bonus, and (4) any benefits including ZSOP and LTIP benefits normally provided by Zilog to its employees due to or on account of total and permanent disability or death. 8. New President and CEO. In the event that Zilog hires a new President and CEO, Sack will retain his position as Chairman of the Board of Directors of Zilog and will also remain an employee of Zilog. If his responsibilities become solely those of Chairman of the Board, Sack's base compensation will be at an amount mutually agreed upon by Sack and the Board but will not be less than 67% of his then current full time base rate. If Sack is terminated from the Board as a result of the sale, merger or change in ownership of Zilog or for any other reason, all outstanding unvested stock options granted under ZSOP and LTIP will fully vest effective the last date of Sack's membership on the Board. They will be subject to exercise on the same terms as all other vested options, as provided for under the "Retirement" provisions of the ZSOP and LTIP. Other provisions of this Agreement shall remain in effect except as modified by this paragraph. 9 10 9. Sack Representations. Sack represents to Zilog that to the best of his knowledge he is under no obligation to any employer or third party which would preclude his full, complete and unfettered discharge of his duties under this Agreement. 10. Notices. Any notices required to be given hereunder shall be in writing, and if by Zilog shall be addressed to Sack as indicated in Zilog's personnel records or such other address as Sack shall specify in writing and if by Sack to Zilog at: Zilog, Inc. 210 East Hacienda Avenue Campbell, California 95008-6600 Attn: Vice President Human Resources and Administration Such addresses may be changed by written notice from either Zilog or Sack, to the other. 11. Amendment. This Agreement may be amended only in writing, signed by both parties hereto. 10 11 12. Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon Zilog, its successors and assigns. Sack may not assign, transfer, pledge or hypothecate any of his rights or obligations hereunder, Awards or Payouts under EPIP or the Executive Bonus or other compensation to which he may be entitled hereunder. 13. Waiver of Breach. The waiver by Zilog of a breach of any provisions of this Agreement by Sack shall not operate or be construed as a waiver of any subsequent breach by Sack. 14. Severability. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision hereof. 15. Entire Agreement. This entire Agreement consists of this document, together with the following documents: A. EPIP, attached as Exhibit I; B. Executive Bonus, attached as Exhibit II; C. Zilog Employee Stock Option Plan, attached as Exhibit III; D. Zilog Employee 1994 Long Term Stock Incentive Plan, attached as Exhibit IV; 11 12 E. Employee Proprietary Rights and Non-Disclosure Agreement, attached as Exhibit V; F. Conflict of Interest Statement, attached as Exhibit VI; G. Statement addressed to "Human Resources," attached as Exhibit VII; H. Policy on Business Ethics, attached as Exhibit VIII; and I. PM60-05, attached as Exhibit IX. 16. Governing Law. This Employment Agreement shall be governed by the laws of the State of California, without regard to conflict of laws principles. Executed effective February 1, 1997 By /s/ Edgar A. Sack By /s/ William H. Janeway ------------------------------ ------------------------------ Edgar A. Sack William H. Janeway Dated: February 12, 1997 Dated: February 3, 1997 -------------------------- -------------------------- 12 EX-10.15 5 EMPLOYMENT AGREEMENT DATED 1/27/97- ALAN SECOR 1 EXHIBIT 10.15 EMPLOYMENT AGREEMENT This Agreement supersedes the Employment Agreement between Zilog and Al Secor which extends to January 14, 1998. This Agreement is made by and between Zilog, Inc., a California corporation (hereinafter "Zilog") and Al Secor (hereinafter "SECOR"), whereby Zilog and Secor agree that Secor accepts employment as Vice President and General Manager, Consumer & Peripherals Business Unit of Zilog, under the following terms and conditions: 1. Term. Zilog and Secor agree that Secor will be Vice President and General Manager, Consumer & Peripherals Business Unit of Zilog for the period commencing on January 27, 1997 and ending November 5, 1998. This Agreement may be extended upon written agreement of Zilog and Secor. 2. Extent of Services. Secor shall devote his entire time, attention and energies to his position as Vice President and General Manager, Consumer & Peripherals Business Unit of Zilog and shall not, during the term of this Employment Agreement be engaged in any other business activity whether or not such business activity is pursued for gain, profit or other pecuniary advantage; provided, that Secor may engage in personal investment activities consistent with Zilog's Conflict of Interest Policy. 1 2 3. Compensation. A. Salary. For each month of employment, Zilog will pay, or cause to be paid, to Secor the sum of at least $16,500 as base salary. Such sum will be paid in monthly installments or such other normal periodic payment schedule as Zilog may establish for its executives. Secor's salary will be reviewed periodically in accordance with established salary review procedures and adjustments to his salary, if any, will be based upon such reviews. B. Employee Performance Incentive Plan and Executive Bonus Plan. Secor will be eligible to receive Awards and Payouts in accordance with the terms of the Zilog Employee Performance Incentive Plan (hereinafter "EPIP"), and the EPIP Executive Bonus Plan (hereinafter "Executive Bonus") as such plans may be modified from time to time and as modified by this Agreement. C. Zilog Employee Stock Option Plan. Zilog has provided to Secor stock options under the 1990 Zilog Employee Stock Option Plan (hereinafter "ZSOP") and the 1994 Long Term Incentive Plan (hereinafter "LTIP"), copies of such plans being attached hereto. Vesting will continue in accordance with the plan provisions during the term of this agreement. 2 3 4 Benefits. As an employee of Zilog, Secor will be entitled to such benefits as Zilog normally provides its employees. 5. Company Policies. Secor agrees to be bound by all Zilog Company Policies applicable to its employees including but not limited to Business Ethics, Conflict of Interest, Proprietary Information and Antitrust Compliance, and he agrees to sign any such documents as Zilog requests evidencing such agreement. 6. Termination of Employment. Zilog reserves the right to terminate the employment of Secor at any time during the term of this Agreement, for any reason or for no reason, with or without cause, by giving Secor at least thirty (30) days written notice of such termination or compensation in lieu of notice; and Secor may terminate his employment by giving at least thirty (30) days written notice to Zilog. Zilog reserves the right to accelerate any deferred resignation date given it by Secor, and any such acceleration of such date will not alter the character of such termination from voluntary to involuntary. 7. Payment Upon Termination. Notwithstanding any other provisions of this Agreement to the contrary, Zilog's obligations to Secor, if his employment with Zilog is terminated prior to the end of this Agreement, shall be as follows: 3 4 A. If Secor voluntarily resigns his employment for 1) other than Good Reason (as defined in Paragraph 7.B. below) or 2) other than Retirement (as defined in Paragraph 7.C. below) prior to the termination date of this Agreement, he will be entitled to: (1) base salary then due and owing for services previously performed, (2) Payouts under EPIP which become payable to Secor pursuant to the terms of EPIP prior to the effective date of resignation, and (3) Payouts under the Executive Bonus which become payable to Secor pursuant to the terms of the Executive Bonus prior to the effective date of resignation. Upon payment of the foregoing items, Zilog will have no further obligation to Secor. B. If Secor voluntarily resigns his employment for Good Reason, as defined herein, prior to the termination date of this Agreement, he will be entitled to the benefits provided in Paragraph 7.D. below. Good Reason, as used herein, shall mean: (i) assignment to Secor of duties, responsibilities or titles materially inconsistent with his status as Vice President and General Manager, Consumer & Peripherals Business Unit of Zilog; 4 5 (ii) a reduction in Secor's base salary other than in connection with a general reduction applicable to the Vice Presidents of Zilog who are members of the Management Committee; (iii) a reduction in form and effect or cessation of any benefit or compensation plan, except EPIP, the Executive Bonus, the Deferred Compensation Plan, or those that may occur for the Zilog employee group in general in accord with a general policy change; (iv) a change in Secor's principal work location from the area of Campbell, California, except for required travel on Zilog's business to an extent substantially consistent with Secor's normal business travel obligations and except as might occur in the event of a relocation of the Zilog Corporate Headquarters; (v) any material breach of this Agreement on the part of Zilog not fully remedied by Zilog within sixty (60) days after written notice by Secor of such breach. 5 6 C. If Secor retires as defined in PM60-05 prior to the termination date of this Agreement, he will be entitled to the following at the effective date of retirement: (1) base salary then due and owing for services previously performed, (2) Payouts under EPIP for Awards made prior to the effective date of the retirement, and (3) Payouts under the Executive Bonus for Awards made prior to the effective date of the retirement. EPIP and Executive Bonus Awards may also be granted at Zilog's sole discretion for the year in which the retirement occurs, prorated to the date of the retirement. Payouts for all Awards will be made at the same time and on the same schedule as those for active employees. Upon the payment of the foregoing items, Zilog will have no further obligation to Secor. D. If Zilog terminates Secor's employment during the term of this Agreement other than for Cause or Detrimental Activity as defined in 7.E. below, he will be entitled to receive the following: (1) the then current base salary for the period remaining in this Agreement, (2) Payouts under EPIP for Awards made prior to the effective date of termination of employment which Payouts are payable to Secor pursuant to the terms of EPIP prior to expiration of the term of this Agreement, and (3) Payouts under the 6 7 Executive Bonus for Awards made prior to the effective date of termination of employment which Payouts are payable to Secor pursuant to the terms of the Executive Bonus prior to expiration of the term of this Agreement. Secor will not be eligible for Awards under EPIP or the Executive Bonus made after the date on which his employment at Zilog ceased or for Payouts made on any Awards after the expiration date of this Agreement. Vesting of common stock and stock options granted under ZSOP and LTIP will continue for the period remaining in this Agreement. Upon the payment of the foregoing items, Zilog will have no further obligation to Secor. E. If Zilog terminates Secor during the term of this Agreement for Cause, or for Detrimental Activity as defined herein, Zilog will have no further monetary obligation to Secor other than: (1) any base salary then due and owing for services previously performed, (2) Payouts under EPIP which become payable to Secor pursuant to the terms of EPIP prior to the effective date of termination, and (3) Payouts under the Executive Bonus which become payable to Secor pursuant to the terms of the Executive Bonus prior to the effective date of termination. Cause or Detrimental Activity shall be a willful violation of a major company policy, conviction 7 8 of any criminal or civil law involving moral turpitude, willful misconduct which results in a material reduction in Secor's effectiveness in the performance of his duties, or willful and reckless disregard for the best interests of the Company. F. If Secor ceases to be an employee of Zilog during the term of this Agreement because of total and permanent disability or death, Zilog's obligations to Secor or his beneficiaries will be limited solely to: (1) any base salary then due and owing for services previously performed, (2) Payouts in accordance with the terms of EPIP, (3) Payouts in accordance with the terms of the Executive Bonus, and (4) any benefits including ZSOP and LTIP benefits normally provided by Zilog to its employees due to or on account of total and permanent disability or death. 8. Secor Representations. Secor represents to Zilog that to the best of his knowledge he is under no obligation to any employer or third party which would preclude his full, complete and unfettered discharge of his duties under this Agreement. 8 9 9. Notices. Any notices required to be given hereunder shall be in writing, and if by Zilog shall be addressed to Secor as indicated in Zilog's personnel records or such other address as Secor shall specify in writing and if by Secor to Zilog at: Zilog, Inc. 210 East Hacienda Avenue Campbell, California 95008-6600 Attn: Vice President Human Resources and Administration Such addresses may be changed by written notice from either Zilog or Secor, to the other. 10. Amendment. This Agreement may be amended only in writing, signed by both parties hereto. 11. Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon Zilog, its successors and assigns. Secor may not assign, transfer, pledge or hypothecate any of his rights or obligations hereunder, Awards or Payouts under EPIP or the Executive Bonus or other compensation to which he may be entitled hereunder. 9 10 12. Waiver of Breach. The waiver by Zilog of a breach of any provisions of this Agreement by Secor shall not operate or be construed as a waiver of any subsequent breach by Secor. 13. Severability. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision hereof. 14. Entire Agreement. This entire Agreement consists of this document, together with the following documents: A. EPIP, attached as Exhibit I; B. Executive Bonus, attached as Exhibit II; C. Zilog Employee Stock Option Plan, attached as Exhibit III; D. Zilog 1994 Long Term Incentive Plan, attached as Exhibit IV; E. Employee Proprietary Rights and Non-Disclosure Agreement, attached as Exhibit V; F. Conflict of Interest Statement, attached as Exhibit VI; G. Statement addressed to "Human Resources," attached as Exhibit VII; H. Policy on Business Ethics, attached as Exhibit VIII; and I. PM60-05, attached as Exhibit IX. 10 11 15. Governing Law. This Employment Agreement shall be governed by the laws of the State of California, without regard to conflict of laws principles. Executed effective 01-27-97 By /s/ Al Secor By /s/ E. A. Sack ------------------------------ ------------------------------ Al Secor E. A. Sack President, CEO, and Chairman of the Board Dated: 2-3-97 Dated: 2-4-97 --------------------------- -------------------------- 11 EX-10.16 6 EMPLOYMENT AGREEMENT DATED 11/6/96 - RICHARD MOORE 1 EXHIBIT 10.16 EMPLOYMENT AGREEMENT This Agreement is made by and between Zilog, Inc., a California corporation (hereinafter "Zilog") and Richard L. Moore (hereinafter "Moore"), whereby Zilog and Moore agree that Moore accepts employment as Sr. Vice President, Technology of Zilog, under the following terms and conditions: 1. Term. Zilog and Moore agree that Moore will be Sr. Vice President, Technology of Zilog for a period of twenty four (24) months, commencing on November 6, 1996 and ending November 5, 1998. This Agreement may be extended upon written agreement of Zilog and Moore. 2. Extent of Services. Moore shall devote his entire time, attention and energies to his position as Sr. Vice President, Technology of Zilog and shall not, during the term of this Employment Agreement be engaged in any other business activity whether or not such business activity is pursued for gain, profit or other pecuniary advantage; provided, that Moore may engage in personal investment activities consistent with Zilog's Conflict of Interest Policy. 1 2 3. Compensation. A. Salary. For each month of employment, Zilog will pay, or cause to be paid, to Moore the sum of at least $16,667 as base salary. Such sum will be paid in monthly installments or such other normal periodic payment schedule as Zilog may establish for its executives. Moore's salary will be reviewed periodically in accordance with established salary review procedures and adjustments to his salary, if any, will be based upon such reviews. B. Employee Performance Incentive Plan and Executive Bonus Plan. Moore will be eligible to receive Awards and Payouts in accordance with the terms of the Zilog Employee Performance Incentive Plan (hereinafter "EPIP"), and the EPIP Executive Bonus Plan (hereinafter "Executive Bonus") as such plans may be modified from time to time and as modified by this Agreement. C. Zilog Employee Stock Option Plan. Zilog has provided to Moore stock options under the 1994 Long Term Incentive Plan (hereinafter "LTIP"), a copy of such plan being attached hereto. Vesting will continue in accordance with the plan provisions during the term of this Agreement. 2 3 4. Benefits. As an employee of Zilog, Moore will be entitled to such benefits as Zilog normally provides its employees. In addition, Zilog will provide Moore with Directors and Officers (D & 0) insurance in an amount deemed appropriate by the Company. 5. Company Policies. Moore agrees to be bound by all Zilog company Policies applicable to its employees including but not limited to Business Ethics, Conflict of Interest, Proprietary Information and Antitrust Compliance, and he agrees to sign any such documents as Zilog requests evidencing such agreement. 6. Termination of Employment. Zilog reserves the right to terminate the employment of Moore at any time during the term of this Agreement, for any reason or for no reason, with or without cause, by giving Moore at least thirty (30) days written notice of such termination or compensation in lieu of notice; and Moore may terminate his employment by giving at least thirty (30) days written notice to Zilog. Zilog reserves the right to accelerate any deferred resignation date given it by Moore, and any such acceleration of such date will not alter the character of such termination from voluntary to involuntary. 7. Payment Upon Termination. Notwithstanding any other provisions of this Agreement to the contrary, Zilog's obligations to Moore, if his employment with Zilog is terminated prior to the end of this Agreement, shall be as follows: 3 4 A. If Moore voluntarily resigns his employment for 1) other than Good Reason (as defined in Paragraph 7.B. below) or 2) other than Retirement (as defined in Paragraph 7.C. below) prior to the termination date of this Agreement, he will be entitled to: (1) base salary then due and owing for services previously performed, (2) Payouts under EPIP which become payable to Moore pursuant to the terms of EPIP prior to the effective date of resignation, and (3 Payouts under the Executive Bonus which become payable to Moore pursuant to the terms of the Executive Bonus prior to the effective date of resignation. Upon payment of the foregoing items, Zilog will have no further obligation to Moore. B. If Moore voluntarily resigns his employment for Good Reason, as defined herein, prior to the termination date of this Agreement, he will be entitled to the benefits provided in Paragraph 7.D. below. Good Reason, as used herein, shall mean: (i) assignment to Moore of duties, responsibilities or titles materially inconsistent with his status as Sr. Vice President, Technology of Zilog; 4 5 (ii) a reduction in Moore's base salary other than in connection with a general reduction applicable to the Vice Presidents of Zilog who are members of the Management Committee; (iii) a reduction in form and effect or cessation of any benefit or compensation plan, except EPIP, the Executive Bonus, the Deferred Compensation Plan, or those that may occur for the Zilog employee group in general in accord with a general policy change; (iv) a change in Moore's principal work location from the area of Campbell, California, except for required travel on Zilog's business to an extent substantially consistent with Moore's normal business travel obligations and except as might occur in the event of a relocation of the Zilog Corporate Headquarters; (v) any material breach of this Agreement on the part of Zilog not fully remedied by Zilog within sixty (60) days after written notice by Moore of such breach. 5 6 C. If Moore retires as defined in PM60-05 prior to the termination date of this Agreement, he will be entitled to the following at the effective date of retirement: (1) base salary then due and owing for services previously performed, (2) Payouts under EPIP for Awards made prior to the effective date of the retirement, and (3) Payouts under the Executive Bonus for Awards made prior to the effective date of the retirement. EPIP and Executive Bonus Awards may also be granted at Zilog's sole discretion for the year in which the retirement occurs, prorated to the date of the retirement. Payouts for all Awards will be made at the same time and on the same schedule as those for active employees. Upon the payment of the foregoing items, Zilog will have no further obligation to Moore. D. If Zilog terminates Moore's employment during the term of this Agreement other than for Cause or Detrimental Activity as defined in 7.E. below, he will be entitled to receive the following: (1) the then current base salary for the period remaining in this Agreement, (2) Payouts under EPIP for Awards made prior to the effective date of termination of employment which Payouts are payable to Moore pursuant to the terms of EPIP prior to expiration of the term of this Agreement, and (3) Payouts under the 6 7 Executive Bonus for Awards made prior to the effective date of termination of employment which Payouts are payable to Moore pursuant to the terms of the Executive Bonus prior to expiration of the term of this Agreement. Moore will not be eligible for Awards under EPIP or the Executive Bonus made after the date on which his employment at Zilog ceased or for Payouts made on any Awards after the expiration date of this Agreement. Vesting of common stock and stock options granted under ZSOP and LTIP will continue for the period remaining in this Agreement. Upon the payment of the foregoing items, Zilog will have no further obligation to Moore. E. If Zilog terminates Moore during the term of this Agreement for Cause, or for Detrimental Activity as defined herein, Zilog will have no further monetary obligation to Moore other than: (1) any base salary then due and owing for services previously performed, (2) Payouts under EPIP which become payable to Moore pursuant to the terms of EPIP prior to the effective date of termination, and (3) Payouts under the Executive Bonus which become payable to Moore pursuant to the terms of the Executive Bonus prior to the effective date of termination. Cause or Detrimental Activity shall be a willful violation of a major company policy, conviction of 7 8 any criminal or civil law involving moral turpitude, willful misconduct which results in a material reduction in Moore's effectiveness in the performance of his duties, or willful and reckless disregard for the best interests of the Company. F. If Moore ceases to be an employee of Zilog during the term of this Agreement because of total and permanent disability or death, Zilog's obligations to Moore or his beneficiaries will be limited solely to: (1) any base salary then due and owing for services previously performed, (2) Payouts in accordance with the terms of EPIP, (3) Payouts in accordance with the terms of the Executive Bonus, and (4) any benefits including LTIP benefits normally provided by Zilog to its employees due to or on account of total and permanent disability or death. 8. Moore Representations. Moore represents to Zilog that to the best of his knowledge he is under no obligation to any employer or third party which would preclude his full, complete and unfettered discharge of his duties under this Agreement. 8 9 9. Notices. Any notices required to be given hereunder shall be in writing, and if by Zilog shall be addressed to Moore as indicated in Zilog's personnel records or such other address as Moore shall specify in writing and if by Moore to Zilog at: Zilog, Inc. 210 East Hacienda Avenue Campbell, California 95008-6600 Attn: Vice President, Human Resources and Administration Such addresses may be changed by written notice from either Zilog or Moore, to the other. 10. Amendment. This Agreement may be amended only in writing, signed by both parties hereto. 11. Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon Zilog, its successors and assigns. Moore may not assign, transfer, pledge or hypothecate any of his rights or obligations hereunder, Awards or Payouts under EPIP or the Executive Bonus or other compensation to which he may be entitled hereunder. 9 10 12. Waiver of Breach. The waiver by Zilog of a breach of any provisions of this Agreement by Moore shall not operate or be construed as a waiver of any subsequent breach by Moore. 13. Severability. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision hereof. 14. Entire Agreement. This entire Agreement consists of this document, together with the following documents: A. EPIP, attached as Exhibit I; B. Executive Bonus, attached as Exhibit II; C. Zilog 1994 Long Term Incentive Plan, attached as Exhibit III; D. Employee Proprietary Rights and Non-Disclosure Agreement, attached as Exhibit IV; E. Conflict of Interest Statement, attached as Exhibit V; F. Statement addressed to "Human Resources," attached as Exhibit VI; G. Policy on Business Ethics, attached as Exhibit VII; and H. PM60-05, attached as Exhibit VIII. 10 11 15. Governing Law. This Employment Agreement shall be governed by the laws of the State of California, without regard to conflict of laws principles. Executed effective November 6, 1996 By /s/ Richard L. Moore By /s/ E. A. Sack ------------------------------------ ------------------------------------ Richard L. Moore E. A. Sack, President and CEO Dated: November 10, 1996 Dated: 11-29-96 -------------------------------- -------------------------------- 11 EX-10.17 7 EMPLOYMENT AGREEMENT DATED 11/6/96 - JAMES MAGILL 1 EXHIBIT 10.17 EMPLOYMENT AGREEMENT This Agreement is made by and between Zilog, Inc., a California corporation (hereinafter "Zilog") and James J. Magill (hereinafter "Magill"), whereby Zilog and Magill agree that Magill accepts employment as Vice President and General Manager, Datacom Division of Zilog, under the following terms and conditions: 1. Term. Zilog and Magill agree that Magill will be Vice President and General Manager, Datacom Division of Zilog for a period of twenty four (24) months, commencing on November 6, 1996 and ending November 5, 1998. This Agreement may be extended upon written agreement of Zilog and Magill. 2. Extent of Services. Magill shall devote his entire time, attention and energies to his position as Vice President and General Manager, Datacom Division of Zilog and shall not, during the term of this Employment Agreement be engaged in any other business activity whether or not such business activity is pursued for gain, profit or other pecuniary advantage; provided, that Magill may engage in personal investment activities consistent with Zilog's Conflict of Interest Policy. 1 2 3. Compensation. A. Salary. For each month of employment, Zilog will pay, or cause to be paid, to Magill the sum of at least $13,334 as base salary. Such sum will be paid in monthly installments or such other normal periodic payment schedule as Zilog may establish for its executives. Magill's salary will be reviewed periodically in accordance with established salary review procedures and adjustments to his salary, if any, will be based upon such reviews. B. Employee Performance Incentive Plan and Executive Bonus Plan. Magill will be eligible to receive Awards and Payouts in accordance with the terms of the Zilog Employee Performance Incentive Plan (hereinafter "EPIP"), and the EPIP Executive Bonus Plan (hereinafter "Executive Bonus") as such plans may be modified from time to time and as modified by this Agreement. C. Zilog Employee Stock Option Plan. Zilog has provided to Magill stock options under the 1990 Zilog Employee Stock Option Plan (hereinafter "ZS0P") and the 1994 Long Term Incentive Plan (hereinafter "LTIP"), copies of such plans being attached hereto. Vesting will continue in accordance with the plan provisions during the term of this Agreement. 2 3 4. Benefits. As an employee of Zilog, Magill will be entitled to such benefits as Zilog normally provides its employees. In addition, Zilog will provide Magill with Directors and Officers (D & 0) insurance in an amount deemed appropriate by the Company. 5. Company Policies. Magill agrees to be bound by all Zilog Company Policies applicable to its employees including but not limited to Business Ethics, Conflict of Interest, Proprietary Information and Antitrust Compliance, and he agrees to sign any such documents as Zilog requests evidencing such agreement. 6. Termination of Employment. Zilog reserves the right to terminate the employment of Magill at any time during the term of this Agreement, for any reason or for no reason, with or without cause, by giving Magill at least thirty (30) days written notice of such termination or compensation in lieu of notice; and Magill may terminate his employment by giving at least thirty (30) days written notice to Zilog. Zilog reserves the right to accelerate any deferred resignation date given it by Magill, and any such acceleration of such date will not alter the character of such termination from voluntary to involuntary. 7. Payment Upon Termination. Notwithstanding any other provisions of this Agreement to the contrary, Zilog's obligations to Magill, if his employment with Zilog is terminated prior to the end of this Agreement, shall be as follows: 3 4 A. If Magill voluntarily resigns his employment for 1) other than Good Reason (as defined in Paragraph 7.B. below) or 2) other than Retirement (as defined in Paragraph 7.C. below) prior to the termination date of this Agreement, he will be entitled to: (1) base salary then due and owing for services previously performed, (2) Payouts under EPIP which become payable to Magill pursuant to the terms of EPIP prior to the effective date of resignation, and (3) Payouts under the Executive Bonus which become payable to Magill pursuant to the terms of the Executive Bonus prior to the effective date of resignation. Upon payment of the foregoing items, Zilog will have no further obligation to Magill. B. If Magill voluntarily resigns his employment for Good Reason, as defined herein, prior to the termination date of this Agreement, he will be entitled to the benefits provided in Paragraph 7.D. below. Good Reason, as used herein, shall mean: (i) assignment to Magill of duties, responsibilities or titles materially inconsistent with his status as Vice President and General Manager, Datacom Division of Zilog; 4 5 (ii) a reduction in Magill's base salary other than in connection with a general reduction applicable to the Vice Presidents of Zilog who are members of the Management Committee; (iii) a reduction in form and effect or cessation of any benefit or compensation plan, except EPIP, the Executive Bonus, the Deferred Compensation Plan, or those that may occur for the Zilog employee group in general in accord with a general policy change; (iv) a change in Magill's principal work location from the area of Campbell, California, except for required travel on Zilog's business to an extent substantially consistent with Magill's normal business travel obligations and except as might occur in the event of a relocation of the Zilog Corporate Headquarters; (v) any material breach of this Agreement on the part of Zilog not fully remedied by Zilog within sixty (60) days after written notice by Magill of such breach. 5 6 C. If Magill retires as defined in PM60-05 prior to the termination date of this Agreement, he will be entitled to the following at the effective date of retirement: (1) base salary then due and owing for services previously performed, (2) Payouts under EPIP for Awards made prior to the effective date of the retirement, and (3) Payouts under the Executive Bonus for Awards made prior to the effective date of the retirement. EPIP and Executive Bonus Awards may also be granted at Zilog's sole discretion for the year in which the retirement occurs, prorated to the date of the retirement. Payouts for all Awards will be made at the same time and on the same schedule as those for active employees. Upon the payment of the foregoing items, Zilog will have no further obligation to Magill. D. If Zilog terminates Magill's employment during the term of this Agreement other than for Cause or Detrimental Activity as defined in 7.E. below, he will be entitled to receive the following: (1) the then current base salary for the period remaining in this Agreement, (2) Payouts under EPIP for Awards made prior to the effective date of termination of employment which Payouts are payable to Magill pursuant to the terms of EPIP prior to expiration of the term of this Agreement, and (3) Payouts under the 6 7 Executive Bonus for Awards made prior to the effective date of termination of employment which Payouts are payable to Magill pursuant to the terms of the Executive Bonus prior to expiration of the term of this Agreement. Magill will not be eligible for Awards under EPIP or the Executive Bonus made after the date on which his employment at Zilog ceased or for Payouts made on any Awards after the expiration date of this Agreement. Vesting of common stock and stock options granted under ZSOP and LTIP will continue for the period remaining in this Agreement. Upon the payment of the foregoing items, Zilog will have no further obligation to Magill. E. If Zilog terminates Magill during the term of this Agreement for Cause, or for Detrimental Activity as defined herein, Zilog will have no further monetary obligation to Magill other than: (1) any base salary then due and owing for services previously performed, (2) Payouts under EPIP which become payable to Magill pursuant to the terms of EPIP prior to the effective date of termination, and (3) Payouts under the Executive Bonus which become payable to Magill pursuant to the terms of the Executive Bonus prior to the effective date of termination. Cause or Detrimental Activity shall be a willful violation of a major company policy, conviction of 7 8 any criminal or civil law involving moral turpitude, willful misconduct which results in a material reduction in Magill's effectiveness in the performance of his duties, or willful and reckless disregard for the best interests of the Company. F. If Magill ceases to be an employee of Zilog during the term of this Agreement because of total and permanent disability or death, Zilog's obligations to Magill or his beneficiaries will be limited solely to: (1) any base salary then due and owing for services previously performed, (2) Payouts in accordance with the terms of EPIP, (3) Payouts in accordance with the terms of the Executive Bonus, and (4) any benefits including ZSOP and LTIP benefits normally provided by Zilog to its employees due to or on account of total and permanent disability or death. 8. Magill Representations. Magill represents to Zilog that to the best of his knowledge he is under no obligation to any employer or third party which would preclude his full, complete and unfettered discharge of his duties under this Agreement. 8 9 9. Notices. Any notices required to be given hereunder shall be in writing, and if by Zilog shall be addressed to Magill as indicated in Zilog's personnel records or such other address as Magill shall specify in writing and if by Magill to Zilog at: Zilog, Inc. 210 East Hacienda Avenue Campbell, California 95008-6600 Attn: Vice President, Human Resources and Administration Such addresses may be changed by written notice from either Zilog or Magill, to the other. 10. Amendment. This Agreement may be amended only in writing, signed by both parties hereto. 11. Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon Zilog, its successors and assigns. Magill may not assign, transfer, pledge or hypothecate any of his rights or obligations hereunder, Awards or Payouts under EPIP or the Executive Bonus or other compensation to which he may be entitled hereunder. 9 10 12. Waiver of Breach. The waiver by Zilog of a breach of any provisions of this Agreement by Magill shall not operate or be construed as a waiver of any subsequent breach by Magill. 13. Severability. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision hereof. 14. Entire Agreement. This entire Agreement consists of this document, together with the following documents: A. EPIP, attached as Exhibit I; B. Executive Bonus, attached as Exhibit II; C. Zilog Employee Stock Option Plan, attached as Exhibit III; D. Zilog 1994 Long Term Incentive Plan, attached as Exhibit IV; E. Employee Proprietary Rights and Non-Disclosure Agreement, attached as Exhibit V; F. Conflict of Interest Statement, attached as Exhibit VI; G. Statement addressed to "Human Resources," attached as Exhibit VII; H. Policy on Business Ethics, attached as Exhibit VIII; and I. PM60-05, attached as Exhibit IX. 10 11 15. Governing Law. This Employment Agreement shall be governed by the laws of the State of California, without regard to conflict of laws principles. Executed effective November 6, 1996 By: /s/ James J. Magill By: /s/ E. A. Sack ---------------------------------- ---------------------------------- James J. Magill E. A. Sack, President and CEO Dated: 11-6-96 Dated: 11-25-96 ------------------------------- ------------------------------- 11 EX-11.1 8 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11.1 STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, ------------------------------------ 1994 1995 1996 -------- -------- -------- Net Income................................................ $34,909 $42,465 $30,001 PRIMARY: Common shares outstanding................................. 18,332 19,173 19,897 Common equivalent shares: Common shares under stock options outstanding........... 1,048 1,112 557 ------- ------- ------- Common and common equivalent shares used in computing net income per share................................. 19,380 20,285 20,454 ======= ======= ======= Net Income Per Share (Primary)............................ $1.80 $2.09 $1.47 ======= ======= ======= FULLY DILUTED SHARES: Common shares outstanding................................. 18,332 19,173 19,897 Common equivalent shares: Common shares under stock options outstanding........... 1,072 1,289 634 ------- ------- ------- Common and common equivalent shares used in computing net income per share, assuming full dilution......... 19,404 20,462 20,531 ======= ======= ======= Net Income Per Share (Fully Diluted)...................... $1.80 $2.08 $1.46 ======= ======= =======
EX-13.1 9 1996 ANNUAL REPORT TO SHAREHOLDERS 1 EXHIBIT 13.1 FINANCIAL HIGHLIGHTS
SALES NET INCOME CAPITAL EXPENDITURES SHAREHOLDERS' EQUITY ----- ---------- -------------------- -------------------- (Dollars in Millions) 1992...................... 145.7 15.8 27.1 108.1 1993...................... 202.7 26.8 39.7 165.6 1994...................... 223.3 34.9 68.7 212.6 1995...................... 285.1 42.5 79.3 278.9 1996...................... 298.4 30.0 117.1 325.3
9 2 SELECTED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
=============================================================================================================== FIVE FISCAL YEARS ENDED DECEMBER 31, 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------- Sales $ 298,425 $ 265,122 $ 223,316 $ 202,727 $ 145,666 Net income $ 30,001 $ 42,465 $ 34,909 $ 26,767 $ 15,795 Net income per share $ 1.47 $ 2.09 $ 1.80 $ 1.43 $ 0.94 Number of shares used in computing per share amounts 20,454 20,285 19,380 18,779 16,893 Capital expenditures $ 117,065 $ 79,346 $ 68,708 $ 39,658 $ 27,083 Working capital $ 88,567 $ 102,761 $ 85,173 $ 88,131 $ 52,869 Total assets $ 401,066 $ 353,430 $ 286,691 $ 212,470 $ 148,404 Shareholders' equity $ 325,280 $ 278,864 $ 212,595 $ 165,580 $ 108,136 ===============================================================================================================
10 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis provides information concerning the Company's business environment, consolidated results of operations and liquidity and capital resources. In addition to historical information, management's discussion and analysis includes certain forward-looking statements regarding events and financial trends that may effect the Company's future operating results and financial position. Such statements are subject to risks and uncertainties that could cause the Company's actual results and financial position to differ materially. Such risks and uncertainties include, but are not limited to those specifically discussed below as well as those set forth in Item 1 of the Company's annual report on Form 10-K for the year ended December 31, 1996 under the caption "Business Factors That May Affect Future Results." Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company expressly disclaims any obligation or undertaking to publicly release any updates or revisions to these forward-looking statements to reflect events or circumstances that occur or arise after the date hereof to reflect the occurrence of anticipated events. The following discussion and analysis of the Company's results of operations and financial condition should be read in conjunction with "Selected Financial Information" and the Financial Statements and related notes included elsewhere herein. RESULTS OF OPERATIONS Sales The Company's sales increased from $223.3 million in 1994 to $265.1 million in 1995, or 18.7%, and to $298.4 million in 1996, or 12.6% from 1995. The growth in 1996 sales over 1995 was driven by increased unit volumes of products in the Company's data communications and consumer sectors. The Company's products are sold to system manufacturers in the data communications, consumer electronics and computer peripherals industries. No single customer accounted for more than 8.5% of sales in 1994 and 1995, and no more than 12.8% of sales in 1996, see note 7. International sales represented 56%, 57% and 56% of sales in 1994, 1995 and 1996, respectively. International sales have been predominantly in the Far East and Europe. A number of uncertainties exist that may affect the Company's future operating results, including uncertain political and general economic conditions, market acceptance of the Company's new products, the Company's ability to introduce new products and technologies on a timely basis, changes in product mix or fluctuations in manufacturing yield that affect the Company's gross margins, and numerous competitive factors. A prolonged slump in one or more industries which the Company serves may continue to affect the Company's future operating results. During 1996, Zilog introduced a total of 48 new products for its consumer, peripheral controller and data communications product lines. The success of these new products is dependent on a number of factors, including the Company's ability to continue to achieve design wins for these products and the Company's ability to manufacture the products in sufficient quantities to meet anticipated demand. New products may exhibit technological defects which may impede market acceptance if these defects are not resolved promptly. There can be no assurance that any new products will receive or maintain substantial market acceptance, nor can there be assurance that the Company will continue to introduce new products at a similar pace to that established over the past year.
================================================================================================================================== Year Ended December 31, 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------------- Sales 100.0% 100.0% 100.0% Costs and Expenses: Cost of Sales 58.7 50.9 49.9 Research and Development 10.2 9.3 10.3 Selling, General and Administrative 16.1 15.8 16.9 ------ ------ ------ Total Cost and Expenses 85.0 76.0 77.1 ------ ------ ------ Operating Income 15.0 24.0 22.9 Other Income (expense): Interest Income, net 0.8 1.0 1.1 Other, net, including license and royalty income (0.3) (0.2) 0.4 ------ ------ ------ Income before income taxes 15.5 24.8 24.4 Provision for income taxes 5.4 8.8 8.8 ------ ------ ------ Net income 10.1% 16.0% 15.6% ====== ====== ====== ==================================================================================================================================
Cost of Sales Zilog's cost of sales represents the cost of its wafer fabrication, assembly and test operations. Cost of sales increased as a percentage of sales from 49.9% in 1994 to 50.9% in 1995 and 58.7% in 1996. The increase in the percentage of cost of sales to sales for 1996 was primarily attributable to additional depreciation expenses and production overhead costs. In late 1995, the Company began production in its new eight-inch, submicron facility in Nampa, Idaho. Depreciation expenses related to the capital additions at the new facility are expected to increase during the first half of 1997. The financial impact of the additional depreciation will be, in part, determined by the volume of products produced, product mix and manufacturing productivity. Research and Development The Company plans to invest a major portion of its capital expenditures for 1997 in a new research facility with the capabilities of designing to a .35 micron feature size in so-called mixed signal processes. The Company believes that these processes are important to its continued introduction of new products. 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Selling, General and Administrative Expenses The Company's selling, general and administrative expenses as a percentage of sales decreased from 16.9% in 1994 to 15.8% in 1995 and increased to 16.1% in 1996. The increase in 1996 was primarily attributable to the costs associated with a litigation settlement. Operating Income The Company's operating income increased from $51.2 million in 1994 to $63.6 million in 1995 or 24.2%, and decreased to $44.6 million or 29.9% in 1996. As a percentage of sales, operating income increased from 22.9% in 1994 to 24.0% in 1995 and decreased to 15.0% in 1996. The decrease in 1996 was primarily due to a higher percentage of costs of goods sold as a result of increased depreciation charges and production overhead associated with a new eight-inch, submicron fabrication facility. Interest Income The Company's interest income, net, was $2.5 million, $2.7 million and $2.4 million in 1994, 1995 and 1996, respectively. The decrease of $0.3 million in 1996 reflected the lower average cash and short-term investment balances held during 1996, primarily as a result of the use of internal funds to finance the new fabrication facility. Other Income, Net, Including License and Royalty Income and Expenses The Company has entered into various license agreements in the semiconductor industry, involving both payments to and by the Company. These arrangements have provided for both one-time up-front payments, as well as ongoing royalty provisions. Also included in other income is the effect of foreign currency exchange gains of losses which tend to fluctuate from time to time. Although approximately 56%, 57% and 56% of sales during 1994, 1995 and 1996, respectively were to unaffiliated customers located outside of the United States, approximately 9% of sales in 1994 and 1995, and 7% in 1996 were not denominated in United States dollars and therefore subject to foreign currency fluctuations. The Company is also subject to foreign currency fluctuations on its working capital in the Philippines. The Company does not utilize derivative financial instruments in conjunction with this foreign currency risk. Provision for Income Taxes The Company's effective tax rate was 36% for 1994, 35.5% for 1995 and 35% for 1996. These rates differ primarily because of the Company's increased investment in tax exempt securities and state income tax credits. In 1996, the Company generated additional state investment tax credits primarily related to its new fabrication facility in Nampa, Idaho. Liquidity and Capital Resources The Company funded its capital expenditure and working capital needs during 1994 through 1996 by cash generated from operations and by stock options exercised. As of December 31, 1996, the Company's principal sources of liquidity consisted of cash, cash equivalents and short term investments totaling $68.9 million. The Company made capital expenditures of $68.7 million, $79.3 million and $117.1 million in 1994, 1995 and 1996 respectively, primarily for the expansion of production capacity and the addition of research and development equipment. The Company expects to make capital expenditures of approximately $50 million in 1997 for expansion of research and development facilities, as well as equipment for the Company new wafer fabrication facility in Nampa, Idaho. The Company believes that its current cash, cash equivalent and short-term investment balances, together with funds expected to be generated from operations, will provide adequate cash to fund the Company's anticipated liquidity needs for at least the next twelve months. The Company may also use bank borrowings and capital leases depending on the terms available. The Company's cash requirements in the future may also be financed by a combination of additional equity or debt financing. PRICE RANGE OF COMMON STOCK Since of May 17, 1995, the Company's Common Stock has been traded on the New York Stock Exchange under the symbol of "ZLG". Previously the Company's Common Stock traded on the Nasdaq National Market under the symbol "ZLOG." The following table shows the high and low closing prices for the Common Stock of the Company for the periods indicated, as reported by the Nasdaq National Market and the New York Stock Exchange:
=================================================================================================================================== High Low - ----------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1995: First Quarter $ 37 3/4 $ 28 1/4 Second Quarter 49 1/8 34 5/8 Third Quarter 53 1/4 38 7/8 Fourth Quarter 41 1/2 29 3/4 Year Ended December 31, 1996: First Quarter 38 7/8 30 1/8 Second Quarter 39 3/4 24 Third Quarter 26 3/4 15 1/2 Fourth Quarter 29 1/4 18 1/4 Year Ended December 31, 1997: First Quarter (through January 24, 1997) 27 3/8 24 3/8 ===================================================================================================================================
(1) As of December 31, 1996, there were approximately 1,142 holders of record of the Company's Common Stock. The Company has not paid cash dividends. It is the present policy of the Company to reinvest earnings in the Company to finance expansion of the Company's operations, and the Company does not expect to pay dividends in the foreseeable future. 12 5 CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
============================================================================================================================= YEAR ENDED DECEMBER 31, 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------- SALES $ 298,425 $ 265,122 $ 223,316 Costs and expenses Cost of sales 175,319 135,066 111,288 Research and development 30,548 24,546 23,948 Selling, general and administrative 47,934 41,943 37,790 ---------- ---------- --------- 253,801 201,555 172,126 ---------- ---------- --------- Operating income 44,624 63,567 51,190 Other income (expense): Interest income, net 2,443 2,676 2,496 Other, net, including license and royalty and expense (911) (360) 860 ---------- ---------- --------- Income before income taxes 46,156 65,883 54,546 Provision for income taxes 16,155 23,418 19,637 ---------- ---------- ---------- Net income $ 30,001 $ 42,465 $ 34,909 ========== ========== ========== Net income per share $ 1.47 $ 2.09 $ 1.80 ========== ========== ========== Number of shares used in computing per share amounts 20,454 20,285 19,380 ========== ========== ========== =============================================================================================================================
See accompanying notes. 13 6 CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) =================================================================================================================== DECEMBER 31, 1996 1995 ------------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 15,511 $ 7,784 Short-term investments 53,412 73,824 Accounts receivable, less allowance for doubtful accounts of $250 in 1996 and 1995 29,395 43,061 Inventories 34,469 28,152 Prepaid expenses, deferred income taxes and other current assets 15,516 16,071 ---------- ---------- Total current assets 148,303 168,892 Property, plant and equipment, at cost: Land, buildings and leasehold improvements 34,061 31,869 Machinery and equipment 345,867 232,242 ---------- ---------- 379,928 264,111 Less accumulated depreciation and amortization (131,217) (84,771) ---------- ---------- Net property, plant and equipment 248,711 179,340 Other Assets 4,052 5,198 ---------- ---------- $ 401,066 $ 353,430 ========== ========== ------------------------------------------------------------------------------------------------------------------- LIABILITIES AND Current liabilities: SHAREHOLDERS' Accounts payable $ 28,786 $ 36,207 EQUITY Accrued compensation and employee benefits 17,545 14,747 Other accrued liabilities 5,116 6,574 Income taxes payable 8,289 8,603 ---------- ---------- Total current liabilities 59,736 66,131 Deferred income taxes 16,050 8,435 Commitments and contingencies Shareholders' equity: Common Stock, no par value; 75,000,000 authorized, 20,127,976 shares issued and outstanding in 1996 and 19,455,627 in 1995 161,800 145,313 Retained earnings 163,375 133,374 Net unrealized gains on securities (Net of tax effect) 105 177 ---------- ---------- Total shareholders' equity 325,280 278,864 ---------- ---------- $ 401,066 $ 353,430 ========== ========== ===================================================================================================================
See accompanying notes. 14 7 CONSOLIDATED STATEMENTS OF CASH FLOWS (INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (IN THOUSANDS))
================================================================================================================ Years Ended December 31, 1996 1995 1994 ---------------------------------------------------------------------------------------------------------------- CASH FLOWS Net income $ 30,001 $ 42,465 $ 34,909 FROM Adjustments to reconcile net income to cash OPERATING provided by operating activities: ACTIVITIES Depreciation and amortization 48,315 27,214 20,858 Less from disposition of equipment 100 386 513 Deferred income taxes 3,811 4,794 2,235 Changes in assets and liabilities Accounts receivable 13,666 (5,640) (12,126) Inventories (6,317) (7,171) 4,401 Prepaid expense, and other assets 5,000 (9,956) (6,347) Accounts payable (7,421) (2,620) 20,168 Accrued compensation and employee benefits 2,798 2,068 2,006 Other accrued liabilities and income taxes payable 1,683 3,322 6,981 ------ ------ ------ Cash provided by operating activities 91,636 54,862 73,598 ================================================================================================================ CASH FLOWS Capital expenditures (117,065) (79,346) (68,708) FROM Short-term investments: INVESTING Purchases (55,006) (112,240) (129,013) ACTIVITIES Proceeds from sales 45,035 87,121 80,480 Proceeds from maturities 30,095 33,076 36,537 ------- ------- --------- Cash used for investing activities (96,941) (71,389) (80,704) ---------------------------------------------------------------------------------------------------------------- CASH FLOWS Proceeds from issuance of stock 13,032 16,276 9,480 FROM ------ ------ ------- FINANCING Cash provided by financing activities 13,032 16,276 9,480 ACTIVITIES ------- ------- ------ Increase (decrease) in cash and cash equivalents 7,727 (251) 2,374 Cash and cash equivalents--beginning of period 7,784 8,035 5,661 ------- ------- ------- Cash and cash equivalents--end of period $15,511 $ 7,784 $8,035 ====== ====== ===== Supplemental disclosures of cash flow information-- Cash paid for: Income taxes $ 9,249 $12,754 $14,277 ===== ====== ====== =============================================================================================================== SEE ACCOMPANYING NOTES.
15 8 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
=================================================================================================================================== Net Unrealized Gain Total Common Stock Retained (Loss) on Shareholders' ------------------------------ Earnings Securities Equity Shares Amount - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AT JANUARY 1, 1994 17,898,497 $ 109,580 $ 56,000 $ --- $ 165,580 Issuance of Common Stock under stock option and stock purchase plans, including tax benefit of $3,452 601,468 12,932 --- --- 12,932 Adjustment to unrealized gains (losses) on available-for-sale securities, net of tax --- --- --- (826) (826) Net income --- --- 34,909 --- 34,909 ----------- ---------- ---------- ---------- ---------- BALANCE AT DECEMBER 31, 1994 18,499,965 122,512 90,909 (826) 212,595 Issuance of Common Stock under stock option and stock purchase plans, including tax benefit of $6,525 955,662 22,801 --- --- 22,801 Adjustments to unrealized gains (losses) on available-for-sale securities, net of tax --- --- --- 1,003 1,003 Net income --- --- 42,465 --- 42,465 ----------- ---------- ---------- ---------- ---------- BALANCE AT DECEMBER 31, 1995 19,455,627 145,313 133,374 177 278,864 Issuance of Common Stock under stock option and stock purchase plans, including tax benefit of $3,455 672,349 16,487 --- --- 16,487 Adjustments to unrealized gains (losses) on available-for-sale securities, net of tax --- --- --- (72) (72) Net income --- --- 30,001 --- 30,001 ----------- ---------- ---------- ---------- ---------- BALANCE AT DECEMBER 31, 1996 20,127,976 $ 161,800 $ 163,375 $ 105 $ 325,280 =========== ========== ========== ========== ========== ===================================================================================================================================
SEE ACCOMPANYING NOTES. 16 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 Note 1. Summary of Significant Accounting Policies Nature of Business: Zilog designs, develops, manufactures and markets application specific standard integrated circuit products (ASSPs) for the data communications, consumer product controller and intelligent peripheral controller markets. Principles of Consolidation: The consolidated financial statements include the accounts of Zilog, Inc. and all its subsidiaries. All significant transactions and accounts between the Company and these subsidiaries have been eliminated in consolidation. Revenue Recognition: Certain of the Company's sales are made through distributors under agreements allowing limited right of return and price protection on merchandise unsold by the distributors. Revenue is recognized at the time of shipment with appropriate reserves provided for returns and price allowances. Royalty income is recognized on a quarterly basis when the income is earned and received from the licensees. Foreign Currency Translation: Accounts denominated in foreign currencies have been translated using the U.S. dollar as the functional currency. Accordingly, monetary accounts and transactions are remeasured at current exchange rates, and nonmonetary accounts are remeasured at historical rates. Revenues and expenses are remeasured at the average exchange rates for each period, except for depreciation expense which is remeasured at historical rates. Foreign currency exchange gains and (losses) were included in determining results of operations and aggregated $(540,000), $(508,000) and $213,000 for the years ended December 31, 1996, 1995 and 1994, respectively. Fair Values of Financial Instruments: The Company's short-term investments consist primarily of various State and Municipal bonds. Cash and cash equivalents consists primarily of cash in bank accounts and overnight investments in commercial paper. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and Cash Equivalents: The carrying amount (at cost), in the balance sheet for cash and cash equivalents at December 31, 1996 and 1995 were $15,511,000 and $7,784,000 respectively, which approximates fair value, due to their short maturities. Short-Term Investments: The fair values for marketable debt securities are based on quoted market prices. Investments consist primarily of marketable debt securities which are classified as available-for-sale and are carried at fair value. Unrealized gains and losses, net of tax, are reported in shareholders' equity. The cost basis of investments is adjusted for amortization of premiums and accretion of discounts to maturity, which is included in interest income. Realized gains and losses are included in other income. The cost of securities sold is based on the specific information method. The following is a summary of available-for-sale securities as of December 31, 1996 and 1995 (in thousands):
=================================================================================================================================== 1996 1995 -------------------- ----------------------------------------------- U.S. Government Municipal Municipal and Agency Total Bonds Bonds Securities Debt Securities - ----------------------------------------------------------------------------------------------------------------------------------- Cost $ 53,250 $ 68,717 $ 4,830 $ 73,547 Gross Unrealized Gains 173 325 6 331 Gross Unrealized (Losses) (11) (54) --- (54) ---------- ---------- ---------- ---------- Estimated Fair Value $ 53,412 $ 68,988 $ 4,836 $ 73,824 ========== ========== ========== ========== ===================================================================================================================================
The gross realized gains and (losses) on sales for the year ended December 31, 1996, 1995 and 1994 were not significant. The adjustment for unrealized holding gains and (losses) in shareholders' equity, net of tax effect, totaled $105,000 and $177,000 at December 31, 1996 and 1995, respectively. The maturities for the marketable debt securities at December 31, 1996 and 1995 are shown below (in thousands):
=================================================================================================================================== 1996 1995 ----------------------------------- ----------------------------------- Estimated Estimated Cost Fair Value Cost Fair Value - ----------------------------------------------------------------------------------------------------------------------------------- Due in 1 year or less $ 30,831 $ 30,921 $ 30,345 $ 30,473 Due after 1 year through 3 years 22,419 22,491 36,471 36,552 Due after 3 years (less than 5) --- --- 6,731 6,799 ----------- ----------- ----------- ----------- $ 53,250 $ 53,412 $ 73,547 $ 73,824 ========== ========== ========== =========== ===================================================================================================================================
17 10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 Inventories: Inventories are stated at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or market and consist of the following (in thousands):
=================================================================================================================================== December 31, December 31, 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- Raw materials $ 5,385 $ 3,195 Work-in-process 23,412 22,077 Finished goods 5,672 2,880 ------- -------- $ 34,469 $ 28,152 ======== ======== ==================================================================================================================================
Property, plant and equipment: Depreciation is computed using the straight-line method over the estimated economic lives of the assets which are generally five years for machinery and equipment and thirty years for buildings. Amortization of leasehold improvements is computed using the shorter of the remaining terms of the leases or the estimated economic lives of the improvements. Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Concentration of Credit Risk: Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, short-term investments and trade accounts receivable. By policy, the Company places its investments only with high credit quality financial institutions. Almost all of the Company's trade accounts receivable are derived from sales to electronics distributors and to manufacturers of consumer products, intelligent computer peripherals and products which network computers and peripherals. The Company performs ongoing credit evaluations of its customers' financial condition and limits its exposure to accounting losses by limiting the amount of credit extended whenever deemed necessary and generally does not require collateral. Long lived Assets: The Company has no long-lived assets used in operations that currently requires impairment losses to be recorded as required by FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. Other Assets: Other assets are primarily licensing agreements stated at cost. Amortization is computed using the straight line method over the estimated economic lives of the assets which are generally five years. Accumulated amortization amounted to approximately $4,495,000 and $2,684,000 at December 31, 1996 and 1995, respectively. Stock Awards: The Company accounts for employee stock awards in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees. As stock option grants are issued with an exercise price equal to the fair value of the stock, the Company recognizes no compensation expense for stock option grants. Additionally, as the Stock Purchase Plan qualifies as an "Employee Stock Purchase Plan" under Section 423 of the Code, no compensation expense is recorded. Pro forma information required by FASB Statement No. 123, Accounting for Stock Based Compensation is presented in Note 4, below. Net income per share: Net income per share is calculated using the weighted average number of common and common equivalent shares outstanding from dilutive stock options under the treasury stock method. NOTE 2. CREDIT AGREEMENT Effective December 31, 1991, the Company originally entered into a three-year unsecured credit agreement, which has been extended to February 28, 1997, with two banks which provides for a total of $20,000,000 in available borrowings. There have been no borrowings under this agreement and no amounts are outstanding as of December 31, 1996. Currently, the Company is evaluating its financial options and has made no decision regarding renewing a bank line of credit. Under the provisions of this agreement, the banks restrict the declaration or payment of dividends (other than dividends payable solely in the Company's Common Stock) without prior written consent, restrict the Company from entering into certain transactions and require the Company to maintain minimum levels of working capital, net income, tangible net worth and certain other financial ratios. Borrowings under this agreement will bear interest at defined formula rates based on certain options elected by the Company. There was no interest expense from borrowings for the years ended 1996, 1995 and 1994. NOTE 3. EMPLOYEE BENEFIT PLANS Employee Performance Incentive Plan: Under the amended 1987 Employee Performance Incentive Plan (the Incentive Plan), domestic exempt employees not included in any other Company incentive program are eligible to participate in incentive awards. The Incentive Plan provided for awards of up to 7.5% of pretax profit (as defined) for the periods 1996, 1995, and 1994 dependent upon the attainment of certain operating results. Results of operations were charged approximately $2,141,000, $3,893,000 and $3,840,000 in the years ended December 31, 1996, 1995 and 1994, respectively, under this plan. The Incentive Plan may be continued, discontinued or amended by the Company's Board of Directors. 18 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 Savings Plan: The Company has an employee savings plan that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the plan, participating U.S. employees may defer a portion of their pretax earnings, up to the Internal Revenue Service annual contribution limit ($9,500 for calendar year 1996). The Company may make matching contributions on behalf of each participating employee in an amount equal to 100% of the participant's deferral contribution, up to 1-1/2% of the participant's compensation on a quarterly basis. The Company may also make additional discretionary contributions to the 401(k) Plan up to a limit set by federal tax law. Matching contributions to the savings plan were approximately $589,000, $549,000 and $436,000 in 1996, 1995 and 1994, respectively. The discretionary contributions for 1996, 1995 and 1994 were approximately $2,354,000, $1,308,000 and $1,581,000, respectively. NOTE 4. SHAREHOLDERS' EQUITY Stock purchase plan: During 1990, the Company adopted an employee purchase plan (the "Stock Purchase Plan") allowing eligible employees to purchase shares of the Company's Common Stock. The total number of shares of Common Stock authorized for issuance under the plan is 600,000. All full-time employees of the Company are eligible to participate, subject to certain limited exceptions. The Stock Purchase Plan provides a means for the Company's employees to purchase stock through payroll deductions of up to 10% of their gross compensation. The purchase price for shares offered under the Stock Purchase Plan is equal to 85% of the lower of the closing price of the Common Stock on the first day of the six month offer period, or the last day of the six month offer period. As of December 31, 1996, a total of 395,151 shares had been purchased. Stock Option Plans: The Zilog New Employee and Employee Promotion Common Share Option Plan (the "1989 Option Plan") and The Zilog Employee Common Share Option Plan (the "1990 Option Plan") expired during 1995, and no further stock options may be granted under these plans. In April 1994, the 1994 Long-Term Stock Incentive Plan (the "1994 Option Plan") was adopted, effective January 1, 1994. Under the 1994 Option Plan, the Company may grant to eligible employees: restricted shares, stock units, incentive stock options, nonqualified stock options or stock appreciation rights, to purchase up to a total of 3,385,187 shares as of December 31, 1996. The exercise price for incentive stock options, nonqualified stock options and stock appreciation rights will be determined by the Board of Directors. Under the terms of the plan, restricted shares and stock units may be awarded to eligible employees at no cost. Options under the plans generally vest 25% at the end of one year from the date of grant and 25% on each anniversary of the grant date thereafter. Eligible employees under the option plans are new employees and employees at certain position classification levels within the Company. Effective January 1, 1995 and on each January 1 thereafter for the remaining term of the Plan, an additional 1,000,000 Common Shares shall be reserved for award as Restricted Shares, Stock Units, Options and SARs. Any Common Shares that have been reserved but not awarded as Restricted Shares, Stock Units, Options and SARs during any calendar year shall not remain available for award in any subsequent calendar year. All options granted have 10 year terms. Shares granted and cancelled for 1996, include a Stock Option Replacement offered by the Company to existing grant holders of unexercised shares of the 1994 plan which were granted prior to October 18, 1996. Under the terms of the Stock Option Replacement offer, 2,494,352 shares were cancelled and re-granted at FMV, at the election of the grant holder. These new grants are not otherwise exercisable for one year from the date of the stock option replacement on November 6, 1996, but with the same vesting schedule and expiration date of the original grants. The following table summarizes activity under the 1989, 1990 and 1994 Option Plans:
================================================================================ Shares Options Outstanding Available Price per for Grant Shares Share - -------------------------------------------------------------------------------- Balance at December 31, 1993 1,686,751 4,169,659 $ 0.13-$34.63 Granted (1,464,350) 1,464,350 $26.50-$35.25 Exercised - (545,988) $ 0.13-$27.50 Cancelled 210,781 (425,161) $ 0.13-$34.63 ---------- --------- Balance at December 31, 1994 433,182 4,662,860 $ 0.13-$35.25 Shares reserved 1,000,000 - - Granted (1,644,600) 1,644,600 $29.75-$47.75 Exercised - (907,787) $ 0.13-$35.25 Cancelled 248,913 (549,149) $ 2.67-$47.75 ---------- --------- Balance at December 31, 1995 37,495 4,850,524 $ 0.13-$47.75 ========== ========= ================================================================================
19 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 A summary of the Company's stock option activity, and related information for the year ended December 31, 1996 follows:
==================================================================================================================================== 1996 ---------------------------------------------- Shares Options Available Shares Weighted-Average for Grant Outstanding Exercise Price ---------------------------------------------- Balance at January 1, 1996 37,495 4,850,524 $ 27.1266 Shares reserved 1,000,000 -- -- Granted (3,598,502) 3,598,502 $ 25.5675 Exercised -- (607,262) $ 19.1244 Cancelled 2,561,007 (3,171,491) $ 33.1675 --------- --------- Balance at December 31, 1996 -- 4,670,273 $ 20.6779 ========= ========= ====================================================================================================================================
==================================================================================================================================== Options Outstanding Options Exercisable ------------------------------------------------------- ------------------------------------ Number Weighted Average Weighted Number Range of Outstanding Remaining Average Exercisable Weighted Avg. Exercisable Prices at 12/31/96 Contractural Life Exercisable Price at 12/31/96 Exercise Price ------------------------------------------------------- ------------------------------------- $ 0.1333 - $10.00 219,50 3.94 $ 5.8763 219,100 $ 5.8767 $10.6666 - $20.00 2,815,958 8.79 $19.3131 868,877 $17.8181 $20.1666 - $30.00 1,337,117 6.83 $23.1422 997,593 $21.9937 $30.1250 - $47.75 297,948 8.52 $33.4088 106,267 $31.9914 --------- ---- -------- ------- -------- $0.1333 - $47.75 4,670,273 7.99 $20.6777 2,191,837 $19.2121 ========= ========= The weighted average fair value of options granted in 1996 and 1995 were $9.2311 and $12.2639 per share, respectively. ====================================================================================================================================
Pro forma Stock Based Compensation: Pro forma information regarding net income and earnings per share is required by FASB Statement 123, which also required that the information be determined as if the Company has accounted for its employee options granted subsequent to December 31, 1994 under the fair value method of that statement. The fair value for these options was estimated at the date of grant utilizing a Black-Scholes option pricing model with a multiple option approach. The following weighted-average assumptions for 1995 and 1996, respectively, were used: risk-free interest rates (annual average) of 6.4% and 5.5%; dividend yields of zero; volatility factors of the expected market price of the Company's common stock of .40 and .67; and a weighted-average expected life of the option of 4.5 years. To comply with the pro forma reporting requirements of FAS No. 123 for stock awards granted under the employee stock purchase plan, compensation cost is estimated for the fair value of the employees' purchase rights using the Black-Scholes model with the following assumptions for those rights granted in 1995 and 1996; dividend yield of 0.0%; an expected life ranging up to .5 years; expected volatility factor of .42 and .61; and a risk free interest rate of 6.1% and 5.4%. The weighted average fair value of those purchase rights granted in March 1995, September 1995, March 1996, and September 1996 were $3.23, $3.75, $3.59, and $3.54 respectively. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in managements opinion, the existing models do not necessarily provide a reliable, single measure of the fair value of its employee stock options. For purposes of pro forma disclosure, the expense amortization of the options' fair value is allocated over the options' vesting period (4 years). The Company pro forma information follows (in thousands except for earnings per share information):
==================================================================================================================================== YEAR ENDED DECEMBER 31, 1996 1995 - --------------------------------------------------------------------------- Pro forma net income $10,413 $36,957 Pro forma earnings per share; Primary 0.54 1.86 - ------------------------------------------------------------------------------------------------------------------------------------
For pro forma disclosure in accordance with FAS No. 123, the Stock Option Replacement offer options are treated as a modification of an award. Any additional compensation arising from the modification is recognized over the remaining vesting period of the new grant. FAS No. 123 is effective for options granted by the Company commencing January 1, 1995. All options granted before January 1, 1995 have not been valued and no pro forma compensation expense has been recognized. However any option granted before January 1, 1995 that was repriced in 1996 is treated as a new grant within 1996 and valued accordingly. In addition, as compensation expense is recognized over the vesting period of the option, which is typically four years, and pro forma disclosure is only required commencing with 1995, the initial impact on pro forma income may not be representative of pro forma compensation expense in future years. 20 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 Note 5. Income Taxes The provision for income taxes is as follows (in thousands):
================================================================================ Year Ended December 31, 1996 1995 1994 - -------------------------------------------------------------------------------- Federal: Current $10,076 $15,998 $14,310 Deferred 3,360 4,074 1,960 ------- ------- ------- 13,436 20,072 16,270 State: Current 966 1,478 2,062 Deferred 636 684 235 ------- ------- ------- 1,602 2,162 2,297 Foreign: Current 1,302 1,148 1,030 Deferred (185) 36 40 ------- ------- ------- 1,117 1,184 1,070 ------- ------- ------- Provision for income taxes $16,155 $23,418 $19,637 ======= ======= =======
================================================================================ The tax benefits associated with the exercise of stock options reduce taxes currently payable as shown above by $3,455,000, $6,525,000 and $3,452,000 in 1996, 1995 and 1994 respectively. Such benefits are credited to additional paid-in-capital when realized. Pretax income from foreign operations was $4,678,000, $3,901,000 and $2,680,000, for the years ended December 31, 1996, 1995 and 1994, respectively. Unremitted foreign earnings that are considered to be permanently invested outside the United States and on which no deferred taxes have been provided amounted to approximately $13,000,000 at December 31, 1996. If such amounts were remitted, the residual U.S. tax liability (net of foreign tax credits), would be approximately $2,000,000. The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before taxes. The sources and tax effects of the differences are as follows (in thousands):
================================================================================ Year Ended December 31, 1996 1995 1994 - -------------------------------------------------------------------------------- Computed expected provision $16,155 $23,059 $19,091 State tax, net of federal benefit 1,042 1,405 1,486 Tax exempt interest income (745) (710) (761) Other (297) (336) (179) ------- ------- ------- $16,155 $23,418 $19,637 ======= ======= =======
================================================================================ Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets are as follows (in thousands):
================================================================================ Year Ended December 31, 1996 1995 - -------------------------------------------------------------------------------- Deferred tax liabilities: Tax over book depreciation $(16,046) $(8,830) Valuation of investment portfolio (57) (100) -------- ------- (16,103) (8,930) Deferred tax assets: Inventory valuation adjustment and reserves 4,106 1,028 Accruals not currently deductible 2,297 1,624 Prepaid expenses and other 537 719 ------- ------- 6,940 3,371 ------- ------- Net deferred tax liabilities $(9,163) $(5,559) ======= =======
=============================================================================== 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 Note 6. Commitments and Contingencies The Company leases certain of its facilities under noncancelable operating leases which expire in 1997 through 2004. The facilities lease agreements generally provide for base rental rates which increase at various times during the terms of the leases and also provide for renewal options at fair market rental value. Minimum future payments under these noncancelable operating leases at December 31, 1996 are as follows (in thousands): ================================================================================ 1997 $2,141 1998 867 1999 292 2000 213 2001 173 Thereafter 412 ------ $4,098 ======
================================================================================ Total rental expense, including month-to-month rentals, was $2,778,000. $2,732,000 and $2,311,000, for the years ended December 31, 1996, 1995 and 1994, respectively. The Company is participating in litigation arising in the ordinary course of business. The Company will defend itself vigorously. The Company believes that it is unlikely that the outcome of these matters will have a material adverse effect on its financial position, results of operations, or cash flow. The estimate of the potential impact on the Company's financial position or overall results of operations for the above legal proceedings could change in the future. Note 7. Geographic Information The Company operates in one industry segment and is primarily engaged in the design, development, manufacturing and marketing of application specific standard semiconductor products. The Company sells its products to system manufacturers in a broad range of industries. During the period ending December 31, 1996 one customer, Lucent Technologies, represented 12.8% of sales or approximately $38,000,000. No single customer accounted for more than 8.5% of sales during the period ended December 31, 1995 and 1994. Export sales to unaffiliated customers located outside the United States, expressed as a percentage of consolidated sales, consist of the following:
================================================================================ 1996 1995 1994 - -------------------------------------------------------------------------------- Far East 42% 40% 39% Europe 9 10 11 Other 5 7 6 -- -- -- 56% 57% 56% == == ==
================================================================================ The Company's operating results are subject to the risks inherent in international sales and purchases, including, but not limited to various regulatory requirements, political and economic changes and disruptions, transportation delays, foreign currency fluctuations, export/import controls, tariff regulations, higher freight rates, difficulties in staffing and managing foreign sales operations, greater difficulty in accounts receivable collection, and potentially adverse tax consequences. Duty, tariff and freight costs can materially increase the cost of crucial components for the Company's products. Foreign exchange fluctuations may render the Company's products less competitive relative to locally manufactured product offerings, or could result in foreign exchange losses. The Company remains subject to the transaction exposures that arise from foreign exchange movements between the dates foreign currency export sales or purchase transactions are recorded and the dates cash is received or payments are made in foreign currencies. There can be no assurance that the Company's current or any future currency exchange strategy will be successful in avoiding exchange related losses or that any of the factors listed above will not have a material adverse effect on the Company's business, financial condition and results of operations. The Company's operations outside the United States consist of two assembly plants in the Philippines and sales offices in certain foreign countries. Domestic operations are responsible for the design, development and wafer fabrication of all products, as well as the coordination of production planning and shipping to meet world-wide customer commitments. The Philippine assembly plants are reimbursed in relation to value added during assembly, and the foreign sales offices receive a commission on export sales within their territory. Accordingly, for financial statement purposes, it is not meaningful to segregate revenues or operating profits for the assembly and foreign sales operations. Identifiable assets by geographic area are as follows (in thousands):
================================================================================ December 31, 1996 1995 - -------------------------------------------------------------------------------- United States (including corporate assets) $329,304 $304,953 Philippines 70,388 47,310 Other 1,374 1,167 -------- -------- Total assets $401,066 $353,430 ======== ========
================================================================================ 15 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors and Shareholders Zilog, Inc. We have audited the accompanying consolidated balance sheets of Zilog, Inc. as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Zilog, Inc. at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. San Jose, California January 22, 1997 16 QUARTERLY INFORMATION QUARTERLY RESULTS The following table presents unaudited quarterly results and those results as a percentage of net sales for the eight quarters of 1995 and 1996. The Company believes that all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to state fairly the selected quarterly information when read in conjunction with the Consolidated Financial Statements. The Company's year-end is December 31, with interim results based on fiscal quarters of thirteen weeks of duration ending on the last Sunday of each quarter. The operating results for any quarter are not necessarily indicative of results for any subsequent period. QUARTERLY INFORMATION (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
=================================================================================================================================== QUARTERS ENDED APRIL 2, JULY 2, OCT. 1 DEC. 31, MAR. 31, JUN. 30, SEP. 29, DEC. 31, 1995 1995 1995 1995 1996 1996 1996 1996 - ----------------------------------------------------------------------------------------------------------------------------------- Sales $62,710 $66,729 $62,715 $72,968 $80,999 $85,459 $63,803 $68,164 Costs and expenses: Cost of sales 31,246 33,474 32,264 38,082 42,941 47,534 41,178 43,666 ------- ------- ------- ------- ------- ------- ------- ------- Gross margin 31,464 33,255 30,451 34,886 38,058 37,925 22,625 24,498 Research and development 6,089 6,740 5,562 6,155 7,587 7,412 7,360 8,189 Selling, general and administrative 10,311 10,852 9,159 11,621 12,037 11,477 12,838 11,582 ------- ------- ------- ------- ------- ------- ------- ------- Total costs and expenses 47,656 51,066 46,985 55,858 62,565 66,423 61,376 63,437 ------- ------- ------- ------- ------- ------- ------- ------- Operating income 15,064 15,663 15,730 17,110 18,434 19,036 2,427 4,727 Other income (expense) net: Interest income, net 613 593 826 645 562 623 555 613 Other, net, including license and royalty income and expense 1 769 (418) (713) (368) (726) (157) 340 ------- ------- ------- ------- ------- ------- ------- ------- Income before income taxes 15,678 17,025 16,138 17,042 18,718 18,933 2,825 5,680 Provision for income taxes 5,644 6,129 5,810 5,835 6,645 6,533 989 1,988 ------- ------- ------- ------- ------- ------- ------- ------- Net income $10,034 $10,896 $10,328 $11,207 $12,073 $12,400 $ 1,836 $ 3,692 ======= ======= ======= ======= ======= ======= ======= ======= Net income per share $ 0.51 $ 0.54 $ 0.50 $ 0.55 $ 0.59 $ 0.60 $ 0.09 $ 0.18 ======= ======= ======= ======= ======= ======= ======= ======= As a Percentage of Sales - ----------------------------------------------------------------------------------------------------------------------------------- Sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Costs and expenses: Cost of sales 49.0 50.2 51.4 52.2 53.0 55.6 64.5 64.1 ------- ------- ------- ------- ------- ------- ------- ------- Gross margin 50.2 49.8 48.6 47.8 47.0 44.4 35.5 35.9 Research and development 9.7 10.1 8.9 8.4 9.4 8.7 11.5 12.0 Selling, general and administrative 16.5 16.2 14.6 15.9 14.9 13.4 20.1 17.0 ------- ------- ------- ------- ------- ------- ------- ------- Total costs and expenses 76.0 76.5 74.9 76.5 77.3 77.7 96.1 93.1 ------- ------- ------- ------- ------- ------- ------- ------- Operating income 24.0 23.5 25.1 23.5 22.7 22.3 3.9 6.9 Other income (expense) net: Interest income, net 1.0 0.9 1.3 0.9 0.8 0.7 0.8 0.9 Other, net, including license and royalty income and expense 0.0 1.1 (0.7) (1.0) (0.4) (0.9) (0.2) 0.5 ------- ------- ------- ------- ------- ------- ------- ------- Income before income taxes 25.0 25.5 25.7 23.4 23.1 22.1 4.5 8.3 Provision for income taxes 9.0 9.2 9.2 8.0 8.2 7.6 1.6 2.9 ------- ------- ------- ------- ------- ------- ------- ------- Net income 16.0% 16.3% 16.5% 15.4% 14.9% 14.5% 2.9% 5.4% ======= ======= ======= ======= ======= ======= ======= ======= ===================================================================================================================================
EX-23.1 10 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS 1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Zilog, Inc. of our report dated January 22, 1997 included in the 1996 Annual Report to Shareholders of Zilog, Inc. Our audits also included the financial statement schedule of Zilog, Inc. listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 33-67938 and 33-95110) pertaining to the 1990 Zilog Employee Common Share Option Plan, the 1990 Zilog Employee Stock Purchase Plan and the 1994 Long-Term Stock Incentive Plan and in the related Prospectuses of our report dated January 22, 1997 with respect to the consolidated financial statements and schedules included or incorporated by reference in this Annual Report (Form 10-K) of Zilog, Inc. ERNST & YOUNG LLP San Jose, California March 27, 1997 EX-27.1 11 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1 15,511 53,412 29,645 250 34,469 148,303 379,928 131,217 401,066 59,736 0 0 0 161,800 163,480 401,066 298,425 298,425 175,319 175,319 30,548 107 290 46,156 16,155 30,001 0 0 0 30,001 1.47 1.46
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