<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from__________ to__________
Commission File Number: 0-27246
ZORAN CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-2794449
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2041 MISSION COLLEGE BOULEVARD, SANTA CLARA, CALIFORNIA 95054
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 986-1314
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No __
The number of outstanding shares of the registrant's Common Stock, $.001 par
value, as of October 31, 1996 was 7,037,652.
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ZORAN CORPORATION
INDEX
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1996 and December 31, 1995 3
Condensed Consolidated Income Statements
Three and Nine Months Ended September 30, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 15
2
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ZORAN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,534 $20,521
Short-term investments 11,841 -
Accounts receivable, net 11,600 4,479
Inventory 1,637 2,255
Prepaid expenses and other current assets 620 439
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Total current assets 33,232 27,694
Property and equipment, net 2,306 1,391
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Total assets $35,538 $29,085
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $2,107 $3,414
Accrued expenses and other liabilities 5,872 4,444
Current portion of long-term debt 343 372
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Total current liabilities 8,322 8,230
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Long-term debt 395 601
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Stockholders' equity:
Common Stock, $0.001 par value;
20,000,000 shares authorized;
7,007,444 and 6,538,530 shares
issued and outstanding 7 7
Additional paid-in capital 76,423 72,567
Accumulated deficit (49,609) (52,320)
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Total stockholders' equity 26,821 20,254
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Total liabilities and stockholders' equity $35,538 $29,085
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-------- -------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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ZORAN CORPORATION
CONDENSED CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
1996 1995 1996 1995
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenues:
Product sales $10,067 $5,322 $25,169 $12,399
Development and licensing 379 400 1,184 1,310
------- ------- ------- -------
Total revenues 10,446 5,722 26,353 13,709
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Costs and expenses:
Cost of product sales 5,563 2,610 14,278 6,268
Research and development 1,614 1,120 3,727 3,021
Selling, general and administrative 2,190 1,613 6,033 3,829
------- ------- ------- -------
Total costs and expenses 9,367 5,343 24,038 13,118
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Operating income 1,079 379 2,315 591
Interest expense (46) (54) (119) (251)
Interest and other income, net 258 21 850 48
------- ------- ------- -------
Income before income taxes 1,291 346 3,046 388
Provision for income taxes 142 120 335 126
------- ------- ------- -------
Net income $1,149 $226 $2,711 $262
------- ------- ------- -------
------- ------- ------- -------
Net income per share $0.14 $0.03 $0.33 $0.04
------- ------- ------- -------
------- ------- ------- -------
Weighted average common shares
and equivalents 8,167 6,384 8,256 6,400
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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ZORAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1996 1995
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,711 $ 262
Adjustments:
Depreciation and amortization 636 599
Changes in assets and liabilities:
Accounts receivable (7,121) (2,494)
Inventory 618 (622)
Prepaid expenses and other current assets (181) 12
Accounts payable (1,307) 1,138
Accrued expenses and other liabilities 1,428 1,072
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Net cash used in operating activities (3,216) (33)
--------- -------
Cash flows from investing activities:
Purchases of short-term investments, net (11,841) -
Expenditures for property and equipment (1,521) (260)
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Net cash used in investing activities (13,362) (260)
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Cash flows from financing activities:
Proceeds (repayment) of debt, net (235) 208
Proceeds from issuance of Preferred Stock, net - 656
Proceeds from issuance of Common Stock, net 3,826 5
--------- -------
Net cash provided by financing activities 3,591 869
--------- -------
Net increase (decrease) in cash and cash equivalents (12,987) 576
Cash and cash equivalents at beginning of period 20,521 1,054
--------- -------
Cash and cash equivalents at end of period $ 7,534 $ 1,630
--------- -------
--------- -------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
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ZORAN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
contain all adjustments (consisting only of normal recurring adjustments) which,
in the opinion of management, are necessary to present fairly the financial
information included therein. While the Company believes that the disclosures
are adequate to make the information not misleading, it is suggested that these
financial statements be read in conjunction with the audited consolidated
financial statements and accompanying notes included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1995. Results for the
interim periods presented are not necessarily indicative of the results to be
expected for the full year.
2. BALANCE SHEET COMPONENTS
September 30, December 31,
1996 1995
------------ ------------
Inventories (in thousands):
Work-in-process $ 845 $ 942
Finished goods 792 1,313
-------- ---------
$ 1,637 $ 2,255
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3. STOCKHOLDERS' EQUITY
Stockholders' equity as of September 30,
1996 reflects the exercise of the underwriters' over-allotment option in
January 1996, which was related to the December 1995 initial public stock
offering. This exercise resulted in the sale of 307,500 additional shares of
Common Stock for net proceeds of approximately $3.5 million.
4. REVENUES
Product sales for the current quarter include revenue
from an advance payment deferred in prior periods and recognized in the third
quarter upon the completion of a multi-year sales program with a strategic
partner. Without the benefit of this revenue, product gross margin for the
third quarter of 1966 would have been approximately the same as the second
quarter.
5. INCOME TAXES
The provision for income taxes reflects the
estimated annualized effective tax rate applied to earnings for the interim
period. The effective tax rate differs from the U.S. statutory rate due to
utilization of net operating losses and State of Israel tax benefits on
foreign earnings. The provision includes primarily foreign withholding taxes
and alternative minimum taxes.
6. NET INCOME PER SHARE
Net income per share is computed using the
weighted average number of common and common equivalent shares outstanding
during the period. Common equivalent shares consist of shares issuable upon
exercise of stock options and warrants (using the treasury stock method).
Pursuant to the requirements of the Securities and Exchange Commission,
Common Stock, Preferred Stock and common equivalent shares issued during the
twelve months prior to the initial public offering are included in the
computation for all periods presented.
7. ACQUISITION AGREEMENT
In October 1996, the Company entered into
an agreement to acquire privately-held CompCore Multimedia, Inc., a provider
of digital compression software and integrated circuit cores. Under the
terms of the agreement, CompCore stockholders will receive approximately
1,957,000 shares of Zoran Common Stock and CompCore stock option holders will
receive approximately 896,000 options for Zoran Common Stock. The
transaction will be accounted for as a pooling of interests and is intended
to qualify as a tax-free reorganization. The transaction is expected to be
completed in the first quarter of 1997 and is subject to approval by the
stockholders of both companies and other customary conditions.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO
THE COMPANY'S FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE CURRENTLY ANTICIPATED DEPENDING UPON A VARIETY OF
FACTORS, INCLUDING THOSE DESCRIBED BELOW UNDER THE SUB-HEADING, "FUTURE
PERFORMANCE AND RISK FACTORS" AND DISCUSSED MORE FULLY IN THE COMPANY'S
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1995.
OVERVIEW
From the Company's inception in 1981 through 1991, the Company
derived the substantial majority of its revenue from digital filter
processors ("DFPs") and vector signal processors ("VSPs") used principally in
military, industrial and medical applications. In 1989, the Company
repositioned its business to develop and market integrated circuits designed
to compress video and audio data for commercial and consumer applications in
evolving multimedia markets. At that time, the Company discontinued
development of DFP and VSP products, and in mid-1994, the Company advised its
customers that it was discontinuing production of these products.
"End-of-life" sales of DFP and VSP products contributed substantially to
revenues and operating income during the first quarter of 1995, while sales
of these products declined during the balance of 1995 and have not been
significant in 1996. DFP and VSP products are not expected to contribute
significant revenues in future periods. The Company's current lines of
multimedia compression products include JPEG products used in video editing
and filmless digital cameras, MPEG products used in video playback and Dolby
AC-3 audio products used in movie and home theater systems and DVD players
which the Company believes will be introduced by manufacturers later this
year.
Historically, average selling prices ("ASPs") in the semiconductor
industry in general, and for the Company's products in particular, have
decreased over the life of a particular product. To date, the Company has
not experienced a recognizable pattern of declines in the ASPs of its
multimedia products. Although ASPs have fluctuated substantially from period
to period, these fluctuations have been driven principally by changes in
customer mix (original equipment manufacturer ("OEM") sales versus sales to
distributors) and the transition from low-volume "test" sales to high-volume
production sales rather than by factors related to product life cycles.
During 1996, Zoran has experienced pricing pressure on certain of its first
generation multimedia products which has adversely affected ASPs. The Company
believes that, as its multimedia product lines continue to mature and
competitive markets evolve, it is likely to experience further declines in
the ASPs of its multimedia products, although the timing and amount of such
future changes cannot be predicted with any certainty. There can be no
assurance that costs will decrease at the same rate as such declines in ASPs,
or at all.
The Company sells its products, either directly or through
distributors or independent sales representatives, to OEMs worldwide. Sales
prices to distributors are generally lower than selling prices for direct
sales, as distributors are responsible for certain sales and marketing
expenses, customer support and training. Lower gross margins on sales to
distributors are partially offset by reduced selling and marketing expenses
related to such sales. Sales in Japan are primarily made through Fujifilm
Microdevices Co., Ltd. ("Fujifilm"), the Company's strategic partner and
distributor in Japan. Fujifilm provides more sales and marketing support than
Zoran's other distributors.
Zoran has historically generated a significant percentage of its
total revenues from development contracts, primarily with key customers.
These development contracts have provided the Company with partial funding
for the development of certain of its products. Payments received by the
Company under these development contracts are recorded as development
revenue. The Company classifies all development costs, including costs
related to these development contracts, as research and development expenses.
The Company retains ownership of the intellectual property developed by it
under these development contracts.
7
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The Company is a party to certain research and development agreements
with the Office of the Chief Scientist in Israel's Ministry of Trade and
Industry Department (the "Chief Scientist") and the Israel-United States
Binational Industrial Research and Development Foundation ("BIRDF"), which
fund up to 50% of incurred project costs for approved products up to
specified contract maximums. These agreements require the Company to use its
best efforts to achieve specified results and require the Company to pay
royalties at rates of 2 1/2% to 5% of resulting product sales, and up to 30%
of resulting license revenues, up to a maximum of 100% to 150% of total
funding received. Reported research and development expenses are net of
these grants, which fluctuate from period to period.
The Company conducts research and development and certain sales and
marketing and administrative operations in Israel through its wholly-owned
Israeli subsidiary. As a result, certain expenses are incurred in Israeli
shekels. Until May 1995, substantially all of the Company's product sales
were made from the Company's U.S. facility. In May 1995, the Company
restructured its manufacturing and sales organizations and began selling a
portion of its products directly from its facility in Israel. To date,
substantially all of the Company's product sales have been denominated in
U.S. dollars and most costs of product sales have been incurred in U.S.
dollars. The Company expects that most of its sales and costs of sales will
continue to be denominated and incurred in U.S. dollars for the foreseeable
future. The Company has not experienced material losses or gains as a result
of currency exchange rate fluctuations and has not engaged in hedging
transactions to reduce is exposure to such fluctuations. The Company intends
to actively monitor its foreign exchange exposure and to take appropriate
action to reduce its foreign exchange risk, if such risk becomes material.
RESULTS OF OPERATIONS
REVENUES
Total revenues for the quarter and nine months ended September 30,
1996 were $10.4 million and $26.4 million, respectively, increases of 83% and
92%, respectively, compared to the same periods in 1995. This growth was due
to increases of 89% and 103% in product sales for the quarter and nine
months, respectively, compared to last year. The increases in product sales
resulted from continued growth in unit sales of the Company's Dolby AC-3
digital audio decoders, which are used in home audio equipment and DVD
players. Although sales of these products were up substantially from the
prior periods, there have been delays in the development of the DVD market
and there is still uncertainty regarding the timing of volume production and
shipping of DVD players. In addition, unit sales of the Company's JPEG
devices were up slightly for the current quarter compared to the same quarter
last year. This modest increase reflected slower than anticipated
development of the market for consumer-oriented video editing equipment.
Despite the increase in unit sales, revenue for this product line declined
from the comparable quarter last year due to a shift in product mix toward
lower-priced devices. Unit sales and revenue for the Company's JPEG products
increased for the current nine months compared to last year. Product sales
for the current quarter also reflected revenue from an advance payment
deferred in prior periods and recognized in the third quarter upon the
completion of a multi-year sales program with a strategic partner. Sales to
Fujifilm, the Company's strategic partner and distributor in Japan, as well
as an OEM customer, accounted for 47% and 38% of the Company's product sales
in the quarter and nine months ended September 30, 1996, respectively,
compared to 1% and 2%, respectively, in the comparable 1995 periods. The
Company's next two largest customers in the quarter ended September 30, 1996
accounted for an aggregate of 28% and 27% of the Company's product sales in
the quarter and nine months ended September 30, 1996, respectively, compared
to 2% and 8%, respectively, in the comparable 1995 periods. Fast Multimedia,
Inc. accounted for 0% and 8% of product sales during the third quarter and
nine months ended September 30, 1996, respectively, compared to 73% and 45%
for the comparable periods in 1995. Sales of discontinued DFP and VSP
military and industrial products were insignificant in the current nine
months compared to sales of $1.5 million for these products during the first
nine months of 1995, primarily in the first quarter.
8
<PAGE>
Development and licensing revenue for the quarter and nine months
ended September 30, 1996 decreased slightly compared to the same periods last
year due to the completion of several development projects in prior periods.
While Zoran intends to continue to enter into development contracts with
certain strategic partners, it expects development revenue to fluctuate in
future periods and to continue to represent a relatively minor portion of
total revenues.
PRODUCT GROSS PROFIT
Product gross margin was 45% and 43% during the current quarter and
nine months, respectively, compared to 39% in the second quarter of 1996 and
51% and 49% for the quarter and nine months ended September 30, 1995,
respectively. The margin rate decreases from the prior year were primarily
due to higher volume sales of relatively lower priced, lower margin Dolby
AC-3 products sold to Fujifilm, the Company's strategic partner, customer and
distributor in Japan. Without the benefit of revenues recognized from the
completion of the multi-year sales program with a strategic partner, product
gross margin for the third quarter of 1996 would have been approximately the
same as the second quarter. Zoran's product gross margin is dependent on
product mix and on the percentage of products sold directly to Zoran's OEM
customers versus indirectly through its marketing partners who purchase the
Company's products at lower prices but absorb most of the associated
marketing and sales support expenses. Product gross margin during the first
nine months of last year was also positively impacted by sales of
high-margin, "end-of-life" DFP and VSP products, primarily in the first
quarter. The Company expects product and customer mix to continue to
fluctuate in future quarters. In the near term, the Company believes that
the proportion of its product sales represented by lower priced Dolby AC-3
products sold indirectly to manufacturers through Fujifilm will continue to
be high, placing pressure on margins.
RESEARCH AND DEVELOPMENT
Research and development ("R&D") expenses of $1.6 million and $3.7
million for the quarter and nine months ended September 30, 1996,
respectively, were approximately 44% and 23% above the comparable periods of
1995. As a result of higher revenues, R&D expenses as a percentage of total
revenues decreased substantially compared to the same periods last year. The
Company continues to believe that significant investments in R&D are required
for it to remain competitive, and anticipates that such expenses in terms of
absolute dollars will increase in future periods, although such expenses as a
percentage of total revenues may fluctuate.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expenses increased to $2.2
million for the current quarter from $1.6 million for the third quarter of 1995
and increased to $6.0 million for the nine months ended September 30, 1996 from
$3.8 million for the comparable nine-month period last year. SG&A expenses,
however, decreased as a percentage of total revenues in each comparable period.
The increase in absolute dollars for the current periods was due primarily to
increased sales and marketing expenses to support increased sales levels,
increased royalties related to higher product sales and increased administrative
expenses associated Zoran's status as a publicly-traded company. The Company
expects that SG&A expenses will continue to increase in order to support the
growth of the Company.
9
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INTEREST AND OTHER INCOME (EXPENSE), NET
Net interest and other income and expense resulted in net other
income of $212,000 and $731,000 for the quarter and nine months ended
September 30, 1996, respectively, compared to net other expenses in the
comparable periods of 1995. Interest expense decreased due to the use of
proceeds from the initial public stock offering of the Company's Common Stock
(the "IPO") in December 1995 to repay short-term debt. Interest income
increased due to the investment of the IPO proceeds, including proceeds from
the January 1996 exercise of the underwriters' over-allotment option.
PROVISION FOR INCOME TAXES
The provision for income taxes increased to $142,000 and $335,000 for
the current quarter and nine months, respectively, from $120,000 and $126,000
for the comparable periods last year. The Company's estimated effective tax
rate of 11% for the current year reflects alternative minimum tax on its
domestic earnings and foreign withholding taxes on intercompany royalties.
LIQUIDITY AND CAPITAL RESOURCES
Net proceeds from the Company's December 1995 IPO and the exercise of
certain warrants in connection with the IPO totaled $17.5 million. The
Company also received net proceeds of $3.5 million in January 1996 upon the
exercise of the underwriters' over-allotment option. At September 30, 1996,
the Company had $19.4 million of cash, cash equivalents and short-term
investments.
The Company's operating activities used cash of $3.2 million in the
nine months ended September 30, 1996. Cash used in operating activities
reflected changes in working capital, partially offset by net income and
depreciation and amortization. The principal change in working capital
during the nine-month period was an increase in accounts receivable of $7.1
million due primarily to a significant portion of quarterly sales being
shipped late in the quarter and delayed payments from a significant customer.
Accounts receivable from this customer represented 14% of total accounts
receivable at September 30, 1996. Subsequent to September 30, 1996, the
Company received approximately half of the quarter-end balance due from this
customer with most of the remainder supported by promissory notes due by year
end. There can be no assurance that this remaining balance will be received.
During the nine-month period, the Company's capital expenditures were $1.5
million and it repaid long-term debt of $235,000.
The Company believes that its current balances of cash, cash
equivalents and short-term investments and anticipated cash flow from
operations, will satisfy the Company's anticipated working capital and
capital equipment requirements through 1997.
10
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FUTURE PERFORMANCE AND RISK FACTORS
THE COMPANY'S FUTURE BUSINESS, OPERATING RESULTS AND FINANCIAL
CONDITION ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES, INCLUDING THOSE
DESCRIBED BELOW.
PRODUCT CONCENTRATION; EVOLVING MARKETS. To date, only a limited
number of commercial and consumer products that incorporate the Company's
integrated circuits are in volume production. Current applications for the
Company's products include professional and consumer video editing systems,
PC-based video CD systems, stand-alone video CD systems, digital audio
systems and filmless digital cameras. During 1994 and 1995, the Company
derived a majority of its product revenues from the sale of integrated
circuits for video editing applications. Sales of audio products have
accounted for an increased percentage of product sales in 1996. The Company
expects that sales of its devices for digital audio and video editing
applications will continue to account for a significant portion of its
revenues for the near future. Over the longer term, the Company's ability to
generate increased revenues will be dependent on the expansion of sales of
its products for use in other existing applications, as well as the
development and acceptance of new applications for the Company's technologies
and products. The potential size of the markets for new applications and the
timing of their development and acceptance is uncertain. The Company's
future success will depend upon whether manufacturers select the Company's
integrated circuits for incorporation into their products, and upon the
successful marketing of these products by the manufacturers. There can be no
assurance that demand for existing applications will be sustained, that new
markets will develop or that manufacturers developing products for any of
these markets will design the Company's integrated circuits into their
products or successfully market them. The failure of existing and new
markets to develop or to be receptive to the Company's products would have a
material adverse effect on the Company's business, operating results and
financial condition.
The emergence of markets for the Company's integrated circuits will
be affected by a variety of factors beyond the Company's control. In
particular, the Company's products are designed to conform with certain
current industry standards. There can be no assurance that manufacturers
will continue to follow these standards or that competing standards will not
emerge which will be preferred by manufacturers. The emergence of markets
for the Company's products is also dependent in part upon third-party content
providers developing and marketing content for end user systems, such as
video and audio playback systems, in a format compatible with the Company's
products. There can be no assurance that these or other factors beyond the
Company's control will not adversely affect the development of markets for
the Company's products.
RELIANCE ON INDEPENDENT FOUNDRIES AND CONTRACTORS. The Company does
not operate any manufacturing facilities, and from time to time shortages of
foundry capacity develop for certain process technologies in the
semiconductor industry. The Company currently relies on independent foundries
to manufacture substantially all of its products. The Company's independent
foundries fabricate products for other companies and may also produce
products of their own design. The Company does not have a long-term supply
contract with two of its principal foundries and, therefore, neither of these
suppliers is obligated to supply products to the Company for any specific
period, in any specific quantity or at any specified price, except as may be
provided in a particular purchase order.
The Company's reliance on independent foundries involves a number of
risks, including the inability to obtain adequate capacity, the
unavailability of or interruption in access to certain process technologies,
reduced control over delivery schedules, quality assurance, manufacturing
yields and cost, and potential misappropriation of the Company's intellectual
property. The loss of any of the Company's foundries as a supplier, the
inability of the Company in a period of increased demand for its products to
expand supply or the Company's inability to obtain timely and adequate
deliveries from its current or future suppliers could reduce or delay
shipments of the Company's products. Any of these developments could damage
relationships with the Company's current and prospective customers and have a
material adverse effect on the Company's business, operating results or
financial condition.
11
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All of the Company's semiconductor products are currently being
assembled by one of two independent contractors and tested by those
contractors or other independent contractors. The Company's reliance on
independent assembly and testing houses limits its control over delivery
schedules, quality assurance and product cost. Disruptions in the provision
of services by the Company's assembly or testing houses or other
circumstances that would require the Company to seek alternative sources of
assembly or testing could lead to supply constraints or delays in the
delivery of the Company's products. These constraints or delays could damage
relationships with current and prospective customers and have a material
adverse effect on the Company's business, operating results or financial
condition.
PENDING ACQUISITION. On October 20, 1996, the Company entered into
an Agreement and Plan of Reorganization (the "Plan of Reorganization")
pursuant to which the Company has agreed to acquire CompCore Multimedia, Inc.
("CompCore") through a merger (the "Merger") of CompCore with a wholly-owned
subsidiary of the Company. The managements of the Company and CompCore have
entered into the Plan of Reorganization with the expectation that the Merger
will result in beneficial synergies for the Company and CompCore. Achieving
the anticipated benefits of the Merger will depend in part upon whether the
integration of the two companies businesses is accomplished in an efficient
and effective manner, and there can be no assurance that this will occur.
The combination of the two companies will require, among other things,
integration of the companies respective product offerings and technology and
coordination of their research and development, sales and marketing, and
financial reporting efforts. There can be no assurance that such integration
will be accomplished smoothly or successfully. If significant difficulties
are encountered in the integration of the existing product lines and
technology, resources could be diverted from new product development,
resulting in delays in new product introductions. The difficulties of such
integration may be increased by the necessity of coordinating geographically
separated organizations with distinct cultures. The integration of certain
operations following the Merger will require the dedication of management and
other personnel resources which may temporarily distract from the day-to-day
business of the combined company. Failure to successfully accomplish the
integration of the two companies operations could have a material adverse
effect on the combined company's business, financial condition or results of
operations.
There can be no assurance that the distributors, resellers and
present and potential customers of the Company or CompCore will continue
their current buying patterns without regard to the announced Merger. In
particular, the Company and CompCore believe that certain customers may defer
purchasing decisions as they evaluate the Company's future product strategy.
Any such deferrals could have a material adverse effect upon the combined
company's business, financial condition or results of operations.
The Company and CompCore expect that the combined company will incur
Merger-related expenses of approximately $2 million for transaction fees and
costs for financial advisors, legal counsel and accountants and to reflect
costs associated with the combined operations of the two companies. This is
a preliminary estimate only and therefore subject to change. There can be no
assurance that the Company will not incur additional charges in subsequent
periods to reflect costs associated with the Merger or that management will
be successful in its efforts to integrate the operations of the two companies.
NEW PRODUCT DEVELOPMENT AND TIMELY INTRODUCTION OF NEW AND ENHANCED
PRODUCTS. The markets for the Company's products are characterized by
rapidly changing technologies, evolving industry standards, frequent new
product introductions and short product life cycles. The Company expects to
increase its expenses relating to product development, and its future success
will depend to a substantial degree upon its ability to develop and
introduce, on a timely and cost-effective basis, new and enhanced products
that meet changing customer requirements and industry standards. There can
be no assurance that the Company will successfully develop, introduce or
manage the transition to new products. Future delays in the introduction or
shipment of new or enhanced products, the inability of such products to gain
market acceptance or problems associated with new product transitions could
adversely affect the Company's business, operating results and financial
condition.
12
<PAGE>
COMPETITION; PRICING PRESSURES. The Company's existing and potential
competitors include many large domestic and international companies that have
substantially greater financial, manufacturing, technical, marketing,
distribution and other resources, broader product lines and longer standing
relationships with customers than the Company. The markets in which the
Company competes are intensely competitive and are characterized by rapid
technological change, declining ASPs and rapid product obsolescence.
CUSTOMER CONCENTRATION; CHANGE IN CUSTOMER MIX. The Company's
largest customers have accounted for a substantial percentage of its
revenues, and sales to these large customers have varied materially from year
to year. There can be no assurance that the Company will be able to retain
its key customers or that such customers will not cancel purchase orders to
reschedule or decrease their level of purchases. In addition, sales to these
key customers may fluctuate significantly from quarter to quarter. Any
development that would result in a substantial decrease or delay in sales to
one or more key customers, including actions by competitors or technological
changes, could have a material adverse effect on the Company's business,
operating results or financial condition. In addition, any development that
would affect the collectibility of account balances from one or more key
customers could have a material adverse effect on the Company's business,
operating results or financial condition.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS. The Company's quarterly
operating results have varied significantly due to a number of factors,
including the timing of new product introductions by the Company and its
competitors, market acceptance of new and enhanced versions of the Company's
products and products of its customers, the timing of large customer orders,
the availability of development funding and the timing of development
revenue, changes in the mix of products sold and the mix of distribution
channels employed and competitive pricing pressures. The Company expects
that its operating results will fluctuate in the future as a result of these
factors and a variety of other factors, including the availability of
adequate foundry capacity, fluctuations in manufacturing yields, the
emergence of new industry standards, product obsolescence, changes in pricing
policies by the Company, its competitors or its suppliers, the cyclical
nature of the semiconductor industry, the evolving and unpredictable nature
of the markets for products incorporating the Company's integrated circuits
and the amount of research and development expenses associated with new
product introductions. The Company's operating results could also be
adversely affected by economic conditions generally or in various geographic
areas where the Company or its customers do business, other conditions
affecting the timing of customer orders, a downturn in the markets for its
customer's products, particularly the consumer electronics market, or order
cancellations or reschedulings. These factors are difficult or impossible to
forecast, and these or other factors could materially affect the Company's
quarterly or annual operating results. The Company places orders to purchase
its products from independent foundries several months in advance of the
scheduled delivery date, often in advance of receiving non-cancelable orders
from its customers. If anticipated shipments or development revenue in any
quarter are canceled or do not occur as quickly as expected, expense and
inventory levels could be disproportionately high. A significant portion of
the Company's expenses is relatively fixed, and the timing of increases in
expenses is based in large part on the Company's forecast of future revenues.
As a result, if revenues do not meet the Company's expectations it may be
unable to quickly adjust expenses to levels appropriate to actual revenues,
which could have a material adverse effect on the Company's business,
operating results or financial condition. To date, the Company's operating
results have not been materially affected by seasonal factors. However, as
markets for consumer products incorporating the Company's integrated circuits
mature, the Company expects that sales will tend to be stronger during the
last several months of the calendar year than at other times due to increased
demand for consumer products during the holiday season. As a result of the
foregoing, the Company's operating results and stock price may be subject to
significant volatility, particularly on a quarterly basis. Any shortfall in
revenues or net income from levels expected by securities analysts could have
an immediate and significant adverse effect on the trading price of the
Company's Common Stock.
13
<PAGE>
MANAGEMENT OF GROWTH. The Company has recently experienced rapid
growth and expansion which has placed, and will continue to place, a
significant strain on its administrative, operational and financial resources
and has resulted, and will continue to result, in a continuing increase in
the level of responsibility for both existing and new management personnel.
The Company anticipates that future growth, if any, will require it to
recruit and hire a substantial number of new engineering, managerial, sales
and marketing personnel. The Company's ability to manage its growth
successfully will also require the Company to continue to expand and improve
its administrative, operational, management and financial systems and
controls. Many of the Company's key operations, including research and
development and a significant portion of its sales and administrative
operations, are located in Israel, while a majority of its sales and
marketing and certain of its administrative personnel, including its
President and Chief Executive Officer, are based in the United States. The
geographic separation of these operations is likely to place additional
strain on the Company's resources and its ability to effectively manage its
growth. If the Company's management is unable to manage growth effectively,
the Company's business, operating results or financial condition could be
materially and adversely affected.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a
significant degree upon the continuing contributions of its senior
management, particularly Levy Gerzberg, a co-founder of the Company and its
President and Chief Executive Officer. The loss of Dr. Gerzberg or other key
management personnel could delay product development cycles or otherwise have
a material adverse effect on the Company's business, operating results or
financial condition. There can be no assurance that the Company will be able
to retain the services of Dr. Gerzberg or any of its other key employees.
The Company believes that its future success will also depend in large part
on its ability to attract and retain highly-skilled engineering, managerial,
sales and marketing personnel, both in the United States and in Israel.
Competition for such personnel is intense, and there can be no assurance that
the Company will be successful in attracting, integrating and retaining such
personnel. Failure to attract and retain key personnel could have a material
adverse effect on the Company's business, operating results or financial
condition.
RELIANCE ON INTERNATIONAL SALES AND OPERATIONS; RELIANCE ON
OPERATIONS IN ISRAEL. The Company anticipates that international sales will
continue to represent a significant portion of total revenues. In addition,
substantially all of the Company's products are manufactured, assembled and
tested outside of the United States by independent foundries and
subcontractors. The Company is subject to the risks of doing business
internationally, including unexpected changes in regulatory requirements,
fluctuations in exchange rates, imposition of tariffs and other barriers and
restrictions and the burdens of complying with a variety of foreign laws. The
Company is also subject to general geopolitical risks, such as political and
economic instability and changes in diplomatic and trade relationships, in
connection with its international operations.
The Company's principal research and development facilities and a
substantial portion of its sales operations are located in the State of
Israel. Therefore, the Company is directly affected by the political,
economic and military conditions to which that country is subject. In
addition, many of the Company's expenses in Israel are paid in Israeli
shekels, thereby subjecting the Company to the risk of foreign currency
fluctuations and to economic pressures resulting from Israel's generally high
rate of inflation. There can be no assurance that such factors will not have
a material adverse effect of the Company's business, operating results or
financial condition.
VOLATILITY OF STOCK PRICE. The market price of the Company's Common
Stock has fluctuated significantly since the IPO and is subject to material
fluctuations in the future in response to announcements concerning the
Company or its competitors or customers, quarterly variations in operating
results, announcements of technological innovations, the introduction of new
products or changes in product pricing policies by the Company or its
competitors, proprietary rights or other litigation, changes in analysts'
earnings estimates, general conditions in the semiconductor industry,
developments in the financial markets and other factors. In addition, the
stock market has, from time to time, experienced extreme price and volume
fluctuations that have particularly affected the market prices for technology
companies and which have been unrelated to the operating performance of the
affected companies. Broad market fluctuations of this type may adversely
affect the future market price of the Common Stock.
14
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 Statement re: Computation of Net Income Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
September 30, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZORAN CORPORATION
Date: November 8, 1996 /s/ Levy Gerzberg
-----------------------
Levy Gerzberg
President
Chief Executive Officer
Date: November 8, 1996 /s/ Ami Kraft
-----------------------
Ami Kraft
Vice President, Finance
Chief Financial Officer
15
<PAGE>
Exhibit 11.1
ZORAN CORPORATION
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1996 1995 1996 1995
------- ------ ------ ------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 6,992 190 6,913 177
Convertible Preferred Stock (1) - 2,027 - 2,027
Dilutive effect of stock options and warrants
based on the treasury stock method (1) 1,175 484 1,343 513
Cheap stock (1) - 3,683 - 3,683
------ ------ ------ ------
Weighted average common shares and
equivalents 8,167 6,384 8,256 6,400
------ ------ ------ -----
------ ------ ------ -----
Net income $1,149 $226 $2,711 $262
------ ------ ------ -----
------ ------ ------ -----
Net income per share $0.14 $0.03 $0.33 $0.04
------ ------ ------ -----
------ ------ ------ -----
(1) Pursuant to the requirements of the Securities and Exchange Commission, Common Stock,
Preferred Stock and common equivalent shares issued during the twelve months prior to the
initial public offering are included in the computation for all periods presented.
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED INCOME STATEMENTS, THE CONSOLIDATED BALANCE SHEETS AND THE
ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 7,534
<SECURITIES> 11,841
<RECEIVABLES> 11,950
<ALLOWANCES> 350
<INVENTORY> 1,637
<CURRENT-ASSETS> 33,232
<PP&E> 6,429
<DEPRECIATION> 4,123
<TOTAL-ASSETS> 35,538
<CURRENT-LIABILITIES> 8,322
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 26,814
<TOTAL-LIABILITY-AND-EQUITY> 35,538
<SALES> 25,169
<TOTAL-REVENUES> 26,353
<CGS> 14,278
<TOTAL-COSTS> 14,278
<OTHER-EXPENSES> 9,760
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 119
<INCOME-PRETAX> 3,046
<INCOME-TAX> 335
<INCOME-CONTINUING> 2,711
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,711
<EPS-PRIMARY> .33
<EPS-DILUTED> .33
</TABLE>
