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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-27246
ZORAN CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-2794449
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2041 MISSION COLLEGE BOULEVARD, SANTA CLARA, CALIFORNIA 95054
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 986-1314
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of outstanding shares of the registrant's Common Stock, $.001 par
value, as of July 31, 1996 was 7,000,804.
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ZORAN CORPORATION
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 1996 and December 31, 1995 3
Consolidated Income Statements
Three and Six Months Ended June 30, 1996 and 1995 4
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
2
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ZORAN CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
JUNE 30, DECEMBER 31,
1996 1995
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ASSETS
Current assets:
Cash and cash equivalents $ 2,859 $ 20,521
Short-term investments 16,577 -
Accounts receivable, net 10,555 4,479
Inventory 1,887 2,255
Prepaid expenses and other current assets 839 439
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Total current assets 32,717 27,694
Property and equipment, net 2,011 1,391
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Total assets $ 34,728 $ 29,085
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,314 $ 3,414
Accrued expenses and other liabilities 5,030 4,444
Current portion of long-term debt 372 372
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Total current liabilities 8,716 8,230
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Long-term debt 436 601
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Stockholders' equity:
Common Stock, $0.001 par value;
20,000,000 shares authorized;
6,940,494 and 6,538,530 shares
issued and outstanding 7 7
Additional paid-in capital 76,327 72,567
Accumulated deficit (50,758) (52,320)
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Total stockholders' equity 25,576 20,254
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Total liabilities and stockholders'
equity $ 34,728 $ 29,085
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The accompanying notes are an integral part of these consolidated
financial statements.
3
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ZORAN CORPORATION
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
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<S> <C> <C> <C> <C>
Revenues:
Product sales $ 8,721 $ 3,662 $ 15,102 $ 7,077
Development and licensing 581 350 805 910
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Total revenues 9,302 4,012 15,907 7,987
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Costs and expenses:
Cost of product sales 5,290 1,903 8,715 3,658
Research and development 1,127 870 2,113 1,901
Selling, general and administrative 2,156 1,126 3,843 2,216
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Total costs and expenses 8,573 3,899 14,671 7,775
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Operating income 729 113 1,236 212
Interest expense (43) (88) (73) (197)
Interest and other income, net 329 10 592 27
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Income before income taxes 1,015 35 1,755 42
Provision for income taxes 111 5 193 6
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Net income $ 904 $ 30 $ 1,562 $ 36
------------------------- ------------------------
------------------------- ------------------------
Net income per share $ 0.11 $ 0.01 $ 0.19 $ 0.01
------------------------- ------------------------
------------------------- ------------------------
Weighted average common shares
and equivalents 8,280 6,400 8,301 6,407
------------------------- ------------------------
------------------------- ------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
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ZORAN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
1996 1995
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Cash flows from operating activities:
Net income $ 1,562 $ 36
Adjustments:
Depreciation and amortization 417 376
Changes in assets and liabilities:
Accounts receivable (6,076) (275)
Inventory 368 (13)
Prepaid expenses and other current assets (400) (56)
Accounts payable (100) (715)
Accrued expenses and other liabilities 586 436
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Net cash used in operating activities (3,643) (211)
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Cash flows from investing activities:
Purchases of short-term investments, net (16,577) -
Expenditures for property and equipment (1,017) (101)
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Net cash used in investing activities (17,594) (101)
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Cash flows from financing activities:
Proceeds (repayment) of debt, net (165) 383
Proceeds from issuance of Common Stock, net 3,740 2
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Net cash provided by financing activities 3,575 385
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Net increase (decrease) in cash and cash
equivalents (17,662) 73
Cash and cash equivalents at beginning of period 20,521 1,054
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Cash and cash equivalents at end of period $ 2,859 $ 1,127
---------- ----------
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The accompanying notes are an integral part of these consolidated
financial statements.
5
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ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements contain all
adjustments (consisting only of normal recurring adjustments) which, in the
opinion of management, are necessary to present fairly the financial information
included therein. While the Company believes that the disclosures are adequate
to make the information not misleading, it is suggested that these financial
statements be read in conjunction with the audited consolidated financial
statements and accompanying notes included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1995. Results for the interim periods
presented are not necessarily indicative of the results to be expected for the
full year.
2. BALANCE SHEET COMPONENTS
June 30, December 31,
1996 1995
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(in thousands)
Inventories:
Work-in-process $ 1,153 $ 942
Finished goods 734 1,313
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$ 1,887 $ 2,255
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3. STOCKHOLDERS' EQUITY
Stockholders' equity as of June 30, 1996 reflects the exercise of the
underwriters' over-allotment option in January 1996, which was related to the
December 1995 initial public stock offering. This exercise resulted in the sale
of 307,500 additional shares of Common Stock for net proceeds of approximately
$3.5 million.
4. INCOME TAXES
The provision for income taxes reflects the estimated annualized effective
tax rate applied to earnings for the interim period. The effective tax rate
differs from the U.S. statutory rate due to utilization of net operating losses,
State of Israel tax benefits on foreign earnings, foreign withholding taxes and
an alternative minimum tax liability.
5. NET INCOME PER SHARE
Net income per share is computed using the weighted average number of
common and common equivalent shares outstanding during the period. Common
equivalent shares consist of shares issuable upon exercise of stock options and
warrants (using the treasury stock method). Pursuant to the requirements of the
Securities and Exchange Commission, Common Stock, Preferred Stock and common
equivalent shares issued during the twelve months prior to the initial public
offering are included in the computation for all periods presented.
6
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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. The Company believes that, as
its multimedia product lines mature and competitive markets evolve, it is likely
to experience declines in the ASPs of its multimedia products, although the
timing and amount of such future changes cannot be predicted with any certainty.
There can be no assurance that costs will decrease at the same rate as such
declines in ASP's, or at all.
The Company sells its products, either directly or through distributors or
independent sales representatives, to OEMs worldwide. Sales prices to
distributors are generally lower than selling prices for direct sales, as
distributors are responsible for certain sales and marketing expenses, customer
support and training. Lower gross margins on sales to distributors are
partially offset by reduced selling and marketing expenses related to such
sales. Sales in Japan are primarily made through Fujifilm Microdevices Co.,
Ltd. ("Fujifilm"), the Company's strategic partner and distributor in Japan.
Fujifilm provides more sales and marketing support than Zoran's other
distributors.
Zoran has historically generated a significant percentage of its total
revenues from development contracts, primarily with key customers. These
development contracts have provided the Company with partial funding for the
development of certain of its products. Payments received by the Company under
these development contracts are recorded as development revenue. The Company
classifies all development costs, including costs related to these development
contracts, as research and development expenses. The Company retains ownership
of the intellectual property developed by it under these development contracts.
7
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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 six months ended June 30, 1996 were $9.3
million and $15.9 million, respectively, increases of 132% and 99%,
respectively, compared to the same periods in 1995. This growth was due to 138%
and 113% increases in product sales for the quarter and six months,
respectively, compared to last year. The increase in product sales resulted from
continued growth in unit sales of the Company's Dolby AC-3 digital audio
decoders for home audio equipment and DVD players and its JPEG video compression
devices for video editing and digital filmless cameras. Sales to Fujifilm, the
Company's strategic partner, customer and distributor in Japan, accounted for
46% and 32% of the Company's product sales in the quarter and six months ended
June 30, 1996, respectively, compared to 0% and 3%, respectively, in the
comparable 1995 periods. The Company's next two largest customers accounted for
an aggregate of 26% and 39% of the Company's product sales in the quarter and
six months ended June 30, 1996, respectively, compared to 42% and 28%,
respectively, in the comparable 1995 periods. Sales of discontinued DFP and VSP
military and industrial products were insignificant in the current six months
compared to sales of $1.4 million for these products during the first six months
of 1995, primarily in the first quarter.
Development and licensing revenue for the quarter ended June 30, 1996
increased compared to the same quarter last year due to license revenue
associated with a discontinued product and decreased during the current six
months compared to last year due to the completion of several development
projects in prior periods. While Zoran intends to continue to enter into
development contracts with certain strategic partners, it expects development
revenue to fluctuate in future periods and to continue to represent a relatively
minor portion of total revenues.
8
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PRODUCT GROSS PROFIT
Product gross margin was 39% and 42% during the current quarter and six
months, respectively, compared to 46% in the first quarter of 1996 and 48% for
the quarter and six months ended June 30, 1995. The margin rate decreases were
primarily due to higher volume sales of relatively lower priced, lower margin
Dolby AC-3 products sold to Fujifilm, the Company's strategic partner, customer
and distributor in Japan. Zoran's product gross margin is dependent on product
mix and on the percentage of products sold directly to Zoran's OEM customers
versus indirectly through its marketing partners who purchase the Company's
products at lower prices but absorb most of the associated marketing and sales
support expenses. Product gross margin during the first six months of last year
was positively impacted by significant sales of high-margin, "end-of-life" DFP
and VSP products, primarily in the first quarter. The Company expects product
and customer mix to continue to fluctuate in future quarters.
RESEARCH AND DEVELOPMENT
Research and development ("R&D") expenses of $1.1 million and $2.1 million
for the quarter and six months ended June 30, 1996, respectively, were
approximately 30% and 11% above the comparable periods of 1995. As a result of
higher revenues, R&D expenses as a percentage of total revenues decreased
substantially compared to the same periods last year. The Company continues to
believe that significant investments in R&D are required for it to remain
competitive, and anticipates that such expenses in terms of absolute dollars
will increase in future periods, although such expenses as a percentage of total
revenues may fluctuate.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expenses increased to $2.2
million for the current quarter from $1.1 million for the second quarter of 1995
and increased to $3.8 million for the six months ended June 30, 1996 from $2.2
million for the comparable six-month period last year. SG&A expenses, however,
decreased as a percentage of total revenues in each comparable period. The
increase in absolute dollars for the current periods was due primarily to
increased administrative expenses associated Zoran's status as a publicly-traded
company, increased sales and marketing expenses to support increased sales
levels and to increased royalties and commissions related to higher product
sales. The Company expects that SG&A expenses will continue to increase in
order to support the growth of the Company.
INTEREST AND OTHER INCOME (EXPENSE), NET
Net interest and other income and expense resulted in net other income of
$286,000 and $519,000 for the quarter and six months ended June 30, 1996,
respectively, compared to net other expenses in the comparable periods of 1995.
Interest expense decreased due to the use of proceeds from the December 1995
initial public stock offering ("IPO") to repay short-term debt. Interest income
increased due to the investment of the IPO proceeds, including proceeds from the
January 1996 exercise of the underwriters' over-allotment option.
PROVISION FOR INCOME TAXES
The provision for income taxes increased to $111,000 and $193,000 for the
current quarter and six months, respectively, from $5,000 and $6,000 for the
comparable periods last year. The Company's estimated effective tax rate of 11%
for the current year reflects alternative minimum tax on its domestic earnings
and foreign withholding taxes on intercompany royalties.
9
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LIQUIDITY AND CAPITAL RESOURCES
Net proceeds from the Company's December 1995 IPO and the exercise of
certain warrants in connection with the IPO totaled $17.5 million. The Company
also received net proceeds of $3.5 million in January 1996 upon the exercise of
the underwriters' over-allotment option. At June 30, 1996, the Company had
$19.4 million of cash, cash equivalents and short-term investments.
The Company's operating activities used cash of $3.6 million in the six
months ended June 30, 1996. Cash used in operating activities reflected changes
in working capital, partially offset by net income and depreciation and
amortization. The principal change in working capital during the six month
period was an increase in accounts receivable of $6.1 million due primarily to a
significant portion of quarterly sales being shipped late in the quarter and
delayed payments from a significant customer. Accounts receivable from this
customer represented 16% of total accounts receivable at June 30, 1996. The
Company expects to receive payment in full from this customer before September
30, 1996, but there can be no assurance that expected amounts will be received.
During the six month period, the Company's capital expenditures were $1.0
million and it repaid long-term debt of $165,000.
The Company believes that its current balances of cash, cash equivalents
and short-term investments and anticipated cash flow from operations, will
satisfy the Company's anticipated working capital and capital equipment
requirements through 1996.
FUTURE PERFORMANCE AND RISK FACTORS
THE COMPANY'S FUTURE BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION
ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES, INCLUDING THOSE DESCRIBED BELOW.
PRODUCT CONCENTRATION; EVOLVING MARKETS. To date, only a limited number of
commercial and consumer products that incorporate the Company's integrated
circuits are in volume production. Current applications for the Company's
products include professional and consumer video editing systems, PC-based video
CD systems, stand-alone video CD systems, digital audio systems and filmless
digital cameras. During 1994 and 1995, the Company derived a majority of its
product revenues from the sale of integrated circuits for video editing
applications. The Company expects that video editing applications will continue
to account for a significant portion of its revenues for the near future,
although sales of audio products are expected to account for an increased
percentage of product sales in 1996. Over the longer term, the Company's
ability to generate increased revenues will be dependent on the expansion of
sales of its products for use in other existing applications, as well as the
development and acceptance of new applications for the Company's technologies
and products. The potential size of the markets for new applications and the
timing of their development and acceptance is uncertain. The Company's future
success will depend upon whether manufacturers select the Company's integrated
circuits for incorporation into their products, and upon the successful
marketing of these products by the manufacturers. There can be no assurance
that demand for existing applications will be sustained, that new markets will
develop or that manufacturers developing products for any of these markets will
design the Company's integrated circuits into their products or successfully
market them. The failure of existing and new markets to develop or to be
receptive to the Company's products would have a material adverse effect on the
Company's business, operating results and financial condition.
10
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The emergence of markets for the Company's integrated circuits will be
affected by a variety of factors beyond the Company's control. In particular,
the Company's products are designed to conform with certain current industry
standards. There can be no assurance that manufacturers will continue to follow
these standards or that competing standards will not emerge which will be
preferred by manufacturers. The emergence of markets for the Company's products
is also dependent in part upon third-party content providers developing and
marketing content for end user systems, such as video and audio playback
systems, in a format compatible with the Company's products. There can be no
assurance that these or other factors beyond the Company's control will not
adversely affect the development of markets for the Company's products.
RELIANCE ON INDEPENDENT FOUNDRIES AND CONTRACTORS. The Company does not
operate any manufacturing facilities, and from time to time shortages of foundry
capacity develop for certain process technologies in the semiconductor industry.
The Company currently relies on independent foundries to manufacture
substantially all of its products. The Company's independent foundries
fabricate products for other companies and may also produce products of their
own design. The Company does not have a long-term supply contract with two of
its principal foundries and, therefore, neither of these suppliers is obligated
to supply products to the Company for any specific period, in any specific
quantity or at any specified price, except as may be provided in a particular
purchase order.
The Company's reliance on independent foundries involves a number of risks,
including the inability to obtain adequate capacity, the unavailability of or
interruption in access to certain process technologies, reduced control over
delivery schedules, quality assurance, manufacturing yields and cost, and
potential misappropriation of the Company's intellectual property. The loss of
any of the Company's foundries as a supplier, the inability of the Company in a
period of increased demand for its products to expand supply or the Company's
inability to obtain timely and adequate deliveries from its current or future
suppliers could reduce or delay shipments of the Company's products. Any of
these developments could damage relationships with the Company's current and
prospective customers and have a material adverse effect on the Company's
business, operating results or financial condition.
All of the Company's semiconductor products are currently being assembled
by one of two independent contractors and tested by those contractors or other
independent contractors. The Company's reliance on independent assembly and
testing houses limits its control over delivery schedules, quality assurance and
product cost. Disruptions in the provision of services by the Company's assembly
or testing houses or other circumstances that would require the Company to seek
alternative sources of assembly or testing could lead to supply constraints or
delays in the delivery of the Company's products. These constraints or delays
could damage relationships with current and prospective customers and have a
material adverse effect on the Company's business, operating results or
financial condition.
NEW PRODUCT DEVELOPMENT AND TIMELY INTRODUCTION OF NEW AND ENHANCED
PRODUCTS. The markets for the Company's products are characterized by rapidly
changing technologies, evolving industry standards, frequent new product
introductions and short product life cycles. The Company expects to increase
its expenses relating to product development, and its future success will depend
to a substantial degree upon its ability to develop and introduce, on a timely
and cost-effective basis, new and enhanced products that meet changing customer
requirements and industry standards. There can be no assurance that the Company
will successfully develop, introduce or manage the transition to new products.
Future delays in the introduction or shipment of new or enhanced products, the
inability of such products to gain market acceptance or problems associated with
new product transitions could adversely affect the Company's business, operating
results and financial condition.
11
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COMPETITION; PRICING PRESSURES. The Company's existing and potential
competitors include many large domestic and international companies that have
substantially greater financial, manufacturing, technical, marketing,
distribution and other resources, broader product lines and longer standing
relationships with customers than the Company. The markets in which the Company
competes are intensely competitive and are characterized by rapid technological
change, declining ASPs and rapid product obsolescence.
CUSTOMER CONCENTRATION; CHANGE IN CUSTOMER MIX. The Company's largest
customers have accounted for a substantial percentage of its revenues, and sales
to these large customers have varied materially from year to year. There can be
no assurance that the Company will be able to retain its key customers or that
such customers will not cancel purchase orders to reschedule or decrease their
level of purchases. In addition, sales to these key customers may fluctuate
significantly from quarter to quarter. Any development that would result in a
substantial decrease or delay in sales to one or more key customers, including
actions by competitors or technological changes, could have a material adverse
effect on the Company's business, operating results or financial condition. In
addition, any development that would affect the collectibility of account
balances from one or more key customers could have a material adverse effect on
the Company's business, operating results or financial condition.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS. The Company's quarterly
operating results have varied significantly due to a number of factors,
including the timing of new product introductions by the Company and its
competitors, market acceptance of new and enhanced versions of the Company's
products and products of its customers, the timing of large customer orders, the
availability of development funding and the timing of development revenue,
changes in the mix of products sold, the mix of distribution channels employed
and competitive pricing pressures. The Company expects that its operating
results will fluctuate in the future as a result of these factors and a variety
of other factors, including the availability of adequate foundry capacity,
fluctuations in manufacturing yields, the emergence of new industry standards,
product obsolescence, changes in pricing policies by the Company, its
competitors or its suppliers, the cyclical nature of the semiconductor industry,
the evolving and unpredictable nature of the markets for products incorporating
the Company's integrated circuits and the amount of research and development
expenses associated with new product introductions. The Company's operating
results could also be adversely affected by economic conditions generally or in
various geographic areas where the Company or its customers do business, other
conditions affecting the timing of customer orders, a downturn in the markets
for its customer's products, particularly the consumer electronics market, or
order cancellations or reschedulings. These factors are difficult or impossible
to forecast, and these or other factors could materially affect the Company's
quarterly or annual operating results. The Company places orders to purchase its
products from independent foundries several months in advance of the scheduled
delivery date, often in advance of receiving non-cancelable orders from its
customers. If anticipated shipments or development revenue in any quarter are
canceled or do not occur as quickly as expected, expense and inventory levels
could be disproportionately high. A significant portion of the Company's
expenses is relatively fixed, and the timing of increases in expenses is based
in large part on the Company's forecast of future revenues. As a result, if
revenues do not meet the Company's expectations it may be unable to quickly
adjust expenses to levels appropriate to actual revenues, which could have a
material adverse effect on the Company's business, operating results or
financial condition. To date, the Company's operating results have not been
materially affected by seasonal factors. However, as markets for consumer
products incorporating the Company's integrated circuits mature, the Company
expects that sales will tend to be stronger during the last several months of
the calendar year than at other times due to increased demand for consumer
products during the holiday season. As a result of the foregoing, the Company's
operating results and stock price may be subject to significant volatility,
particularly on a quarterly basis. Any shortfall in revenues or net income from
levels expected by securities analysts could have an immediate and significant
adverse effect on the trading price of the Company's Common Stock.
12
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MANAGEMENT OF GROWTH. The Company has recently experienced rapid growth
and expansion which has placed, and will continue to place, a significant strain
on its administrative, operational and financial resources and has resulted, and
will continue to result, in a continuing increase in the level of responsibility
for both existing and new management personnel. The Company anticipates that
future growth, if any, will require it to recruit and hire a substantial number
of new engineering, managerial, sales and marketing personnel. The Company's
ability to manage its growth successfully will also require the Company to
continue to expand and improve its administrative, operational, management and
financial systems and controls. Many of the Company's key operations, including
research and development and a significant portion of its sales and
administrative operations, are located in Israel, while a majority of its sales
and marketing and certain of its administrative personnel, including its
President and Chief Executive Officer, are based in the United States. The
geographic separation of these operations is likely to place additional strain
on the Company's resources and its ability to effectively manage its growth. If
the Company's management is unable to manage growth effectively, the Company's
business, operating results or financial condition could be materially and
adversely affected.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a
significant degree upon the continuing contributions of its senior management,
particularly Levy Gerzberg, a co-founder of the Company and its President and
Chief Executive Officer. The loss of Dr. Gerzberg or other key management
personnel could delay product development cycles or otherwise have a material
adverse effect on the Company's business, operating results or financial
condition. There can be no assurance that the Company will be able to retain
the services of Dr. Gerzberg or any of its other key employees. The Company
believes that its future success will also depend in large part on its ability
to attract and retain highly-skilled engineering, managerial, sales and
marketing personnel, both in the United States and in Israel. Competition for
such personnel is intense, and there can be no assurance that the Company will
be successful in attracting, integrating and retaining such personnel. Failure
to attract and retain key personnel could have a material adverse effect on the
Company's business, operating results or financial condition.
RELIANCE ON INTERNATIONAL SALES AND OPERATIONS; RELIANCE ON OPERATIONS IN
ISRAEL. The Company anticipates that international sales will continue to
represent a significant portion of total revenues. In addition, substantially
all of the Company's products are manufactured, assembled and tested outside of
the United States by independent foundries and subcontractors. The Company is
subject to the risks of doing business internationally, including unexpected
changes in regulatory requirements, fluctuations in exchange rates, imposition
of tariffs and other barriers and restrictions and the burdens of complying with
a variety of foreign laws. The Company is also subject to general geopolitical
risks, such as political and economic instability and changes in diplomatic and
trade relationships, in connection with its international operations.
The Company's principal research and development facilities and a
substantial portion of its sales operations are located in the State of Israel.
Therefore, the Company is directly affected by the political, economic and
military conditions to which that country is subject. In addition, many of the
Company's expenses in Israel are paid in Israeli shekels, thereby subjecting the
Company to the risk of foreign currency fluctuations and to economic pressures
resulting from Israel's generally high rate of inflation. There can be no
assurance that such factors will not have a material adverse effect of the
Company's business, operating results or financial condition.
VOLATILITY OF STOCK PRICE. The market price of the Company's Common Stock
has fluctuated significantly since the IPO and is subject to material
fluctuations in the future in response to announcements concerning the Company
or its competitors or customers, quarterly variations in operating results,
announcements of technological innovations, the introduction of new products or
changes in product pricing policies by the Company or its competitors,
proprietary rights or other litigation, changes in analysts' earnings estimates,
general conditions in the semiconductor industry, developments in the financial
markets and other factors. In addition, the stock market has, from time to
time, experienced extreme price and volume fluctuations that have particularly
affected the market prices for technology companies and which have been
unrelated to the operating performance of the affected companies. Broad market
fluctuations of this type may adversely affect the future market price of the
Common Stock.
13
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's 1996 Annual Meeting of Stockholders was held on June 6, 1996.
At the meeting the following six persons nominated by management were elected to
serve as directors of the Company:
Shares
-----------------------
Nominee Voted For Withheld
------------------ --------- --------
Levy Gerzberg 5,791,448 5,005
Uzia Galil 5,791,448 5,005
Arie Kahana 5,791,448 5,005
James D. Meindl 5,791,448 5,005
Arthur B. Stabenow 5,791,448 5,005
Philip M. Young 5,623,923 172,530
The following additional items were voted upon at the meeting:
1. A proposal to amend the Company's 1995 Employee Stock Purchase Plan to
increase the maximum number of shares purchasable by an individual participant
in any calendar year was approved by a vote of: 5,743,076 shares for; 18,617
shares against; 14,339 shares abstaining; and 20,421 broker non-votes.
2. A proposal to ratify the appointment of Price Waterhouse LLP as the
independent auditors of the Company for the year ended December 31, 1996 was
approved by a vote of: 5,787,774 shares for; 4,135 shares against; 4,544 shares
abstaining; and 0 broker non-votes.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Summary of Discussion Between Zoran (Microelectronics Ltd.)
(Registrant's subsidiary) and Matam of April 23, 1996
regarding Lease Agreement dated October 1, 1992 between
Zoran Microelectronics Ltd. and Matam-Haifa Scientific
Industries Center Ltd.
10.2 Memorandum of Understanding Between Zoran Micro-Electronics
Ltd.and IBM Israel Ltd., dated April 23, 1996, regarding
Lease Agreement dated October 1, 1992 between Zoran
Microelectronics Ltd and Matam-Haifa Scientific Industries
Center Ltd.
11.1 Statement re: Computation of Net Income Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
June 30, 1996.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZORAN CORPORATION
Date: August 5, 1996 /s/ Levy Gerzberg
---------------------------------
Levy Gerzberg
President
Chief Executive Officer
Date: August 5, 1996 /s/ Ami Kraft
---------------------------------
Ami Kraft
Vice President, Finance
Chief Financial Officer
15
<PAGE>
Ref. GLUSMAN/ZORAN2/5/8/96
[TRANSLATED FROM THE HEBREW]
23rd April 1996
SUMMARY OF DISCUSSION BETWEEN ZORAN AND MATAM OF 23/4/96
--------------------------------------------------------
Participated: Zoran - Meir Tzadik, Ami Kraft, Raab Hamutel
Matam - Zvika Ligati, Oded Biran
Matam and Zoran agreed that Zoran shall move from the premises in building 8/1
within the context of the existing tenancy agreement between them dated 1st
October 1992 (hereinafter referred to as "the existing agreement") to exchanged
premises in building no. 30 (hereinafter referred to as "the exchanged
premises"), and it was also agreed that Zoran shall rent an area in a new
building which Matam shall construct (hereinafter referred to as "the premises
in the new building"), and all pursuant to the principles set forth below:
1. The exchanged premises are of an area of 1,646 square metres comprised of
1,342 square metres on the 5th floor and 304 square metres on the ground
floor. The exchanged premises on the 5th floor shall be delivered to Zoran
in accordance with the finishing plan agreed upon with IBM and PST which is
in the course of execution. Changes to the plan shall be effected with
Zoran's funding.
2. The tenancy term in building 30 shall commence on the date of actual
delivery of the exchanged premises on the 5th floor and the premises on the
ground floor and shall end on 15th May 1999 or on the actual delivery date
of the premises in the new building - whichever is the later.
The planned delivery dates of the premises: on the 5th floor - 31st May
1996; on the ground floor - within three months of the date on which Matam
receives interior finishing plans signed by Zoran and approved by PST.
Matam shall enable Zoran to effect agreed changes in the finishing plan
(two laboratories) on the 5th floor as from 15th May 1996.
<PAGE>
3. Zoran undertakes to appear on the delivery date to accept the 5th floor,
which constitutes part of the exchanged premises, within seven days of
Matam's notice thereof.
Zoran undertakes to vacate the premises in building 8/1 and to return
possession of this area to Matam within 14 days of the delivery of the 5th
floor in building 30 as aforesaid. This vacation day, according to Zoran's
notice, has been agreed with IBM.
4. It has been agreed between IBM and Zoran, with Matam's consent, that the
payment of the rent from May 1996 and thereafter shall be as detailed
below:
(a) IBM shall pay the rent of the exchanged premises until 30th June 1996
and shall pay for the upper floor in building 8/1 from 1st July 1996.
(b) Zoran shall pay rent for the upper floor in building 8/1 until 30th
June 1996 and for the exchanged premises commencing on 1st July 1996.
5. In the tenancy term from June to December 1996, Matam shall give Zoran a
monthly reduction of $ 7,500 in the rent that shall be due from it and a
further discount of $ 1.41 per square metre per month in building 30, which
shall be deducted from the rent as particularised in clause 8 [sic].
6. Further to the matters agreed upon between IBM, Zoran and Matam - Zoran
shall, in respect of its part of executing finishing works in the area of
the exchanged premises, bear an amount of $ 30,000 against the submission
of an invoice which shall be charged and paid at the following stages:
(a) US$ 15,000 within 30 days of the signing of this document;
(b) US$ 15,000 within 30 days of delivery of the premises.
7. PST's expenses in respect of the architect's services, that were provided
for the puropses of planning the area of the premises in an amount of up to
$ 31,666, shall be paid by Zoran to Matam within 30 days of the signing of
this summary.
2
<PAGE>
The demand shall be supported by receipts and/or invoices
attesting to the said expenses.
8. Matam intends constructing a new building of an area of approx. 5,000
square metres. The size of the area shall be determined by Matam having
regard to Zoran's requirements.
The building shall be constructed in accordance with the technical
specification that shall be agreed upon between the parties, but not less
than the specification of buildings 23 and 30 which Matam has constructed.
The location of the new building shall be determined by Matam within the
Matam Park, including West Matam, with Zoran's consent - and Zoran shall
not object to the location on unreasonable grounds.
The planned delivery date of the premises to Zoran in the new building is:
15th May 1999.
9. Zoran shall rent an area of approx. 2,500 square metres in the new building
for a tenancy term of seven years. Zoran shall have the right to give
notice by 15th May 1997 of a reduction or increase in the area of the
premises in the new building by 500 square metres. In such a case, Matam
shall have the right to change the area of the new building in accordance
with its discretion.
Matam shall, if necessary, permit Zoran to rent out part of the area which
it shall rent in the new building to a sub-tenant, provided that such a
sub-tenancy is approved by Matam.
It shall be agreed in consultation with the parties by 15th May 1998 which
additional areas in the building, apart from the area which Zoran shall
rent as aforesaid in this clause, shall be rented to other tenants for a
term of up to three years to enable Zoran to expand in the future.
10. The monthly rent per square metre in the exchanged premises and in the new
building shall be $ 12.74 plus VAT and linked to the base index of February
1996 as follows:
3
<PAGE>
(a) The rent for 1,330 square metres shall be linked to the dollar
together with the CPI index until 15th May 2003.
(b) All the area of the premises in excess of 1,330 square metres shall be
linked to the Israeli consumer price index with the base exchange rate
being NIS 3.11 to the US dollar.
(c) The rent for the 1,330 square metres mentioned in clause (a) above
from 16th May 2003 shall be identical to the average of the rent for
the area of the premises in excess of 1,330 square metres, pursuant to
the matters set forth in clause (b) above, and the rent in NIS in the
month of May 2003 calculated pursuant to clause 10(a).
(d) On 1st April 1997, Zoran shall pay a lump sum supplementary rent of
US$ 19,000.
(e) For the tenancy term from 1st January 1997 to 15th May 1999, Zoran
shall pay a monthly supplementary rent supplement in the sum of 63.95
cents per metre of premises.
11. The management and maintenance of the common areas in building 30
(including the dining room on the ground floor in building 30) shall be
regulated in accordance with "appendix "I" - addendum to tenancy agreements
in building 30" annexed hereto.
12. The parties shall use their best endeavours, within 60 days of the signing
of this discussion summary, to sign a new agreement based on this
discussion summary and the existing agreement and the parties'
understandings with regard to matters that are not dealt with within the
context of this summary.
With regard to 1,330 square metres until 15th 2003, the new agreement shall
only be based on the existing agreement and this discussion summary.
For the avoidance of doubt, if for any reason whatsoever the new building
will not be constructed, Zoran shall rent an area of 1,330 square metres
until 15th May 2003 at Matam, the premises wherein shall be with a
specification of the standard of building 30.
4
<PAGE>
Zoran shall increase its collateral and shall, on the date of the signing
of this document, pay Matam a deposit of US$ 49,000.
Zoran can use the monies of this deposit as follows:
(a) On 1st April 1997 - against the payment of rent as provided in clause
9(d).
(b) The balance of the deposit - against the payment of rent on 1st April
1998 and thereafter.
13. The renting of the replacement area in building 30 is subject to PST and
IBM signing discussion summaries on this subject that have been sent to
them.
The construction and renting of the areas in the new building are subject
to the approval of the board of directors of Matam and [..... sic].
Recorder: Oded Biran
We confirm our consent to the discussion summary.
(Signed and Stamped)
- ------------------------------
Zoran Ltd
We confirm our consent to the discussion summary.
(Signed)
- ------------------------------
Matam
5
<PAGE>
[TRANSLATED FROM THE HEBREW]
MEMORANDUM OF UNDERSTANDING
BETWEEN: ZORAN MICRO-ELECTRONICS LTD
(hereinafter referred to as "Zoran")
AND: IBM ISRAEL LTD
(hereinafter referred to as "IBM")
1. BACKGROUND
1.1 IBM was in negotiations with PST to rent by way of a sub-tenancy an
area of 1,646 square metres situated in building 30 at Matam which is
divided in the following manner:
1,342 square metres on the 5th floor of the building (hereinafter
referred to as "F5);
304 square metres on the ground floor in building 30 (hereinafter
referred to as "GF").
(For the purposes of this memorandum of understanding, F5 and GF are
hereinafter referred to as "building 30".)
1.2 Zoran presently rents the 5th floor of building 8/1 in Matam. This
building cupied on its other floors by IBM's offices.
1.3 The parties wish to exchange the rented areas such that Zoran shall
rent building 30 directly from Matam and IBM shall rent the 5th floor
in building 8/1 directly from Matam as well.
1.4 Matam is prepared to allow the exchange of the premises subject to the
terms and conditions that shall be determined between it and each of
the parties separately and subject to the consents which the parties
shall reach inter se.
6
<PAGE>
2. DELIVERY
Zoran shall deliver the 5th floor in building 8/1 to IBM within 14 days of
the date on which it shall receive possession of F5 (hereinafter referred
to as "the delivery date").
Zoran shall give notice to IBM of the estimated delivery date immediately
upon receiving Matam's notice of the delivery date of F5 to it (hereinafter
referred to as "the notice").
3. PAYMENTS
3.1 IBM shall pay the rent for building 30 until 30th June 1996 or until
the delivery of F5 by Matam and the acceptance thereof by Zoran,
whichever is the later, and Zoran shall pay the rent for the 5th floor
in building 8/1 until 30th June 1996 or until building 30 is received
by Zoran, whichever is the later.
3.2 In addition to the rent particularised above, IBM shall pay Zoran an
amount in NIS equal to US$ 140,000 (one hundred and forty thousand US
dollars) for improvements in the premises which Zoran executed on the
5th floor in building 8/1. IBM shall also pay Zoran a supplementary
amount to a maximum of $ 160,000 if the cost of the communications on
the 5th floor in building 8/1 shall cost IBM less than $ 30,000. The
supplement shall be the difference between $ 30,000 and the actual
cost, if the cost shall be less than $ 30,000.
3.3 IBM shall also pay Zoran an amount of $ 102,000 (one hundred and two
thousand dollars) for furniture which Zoran shall sell it, less the
depreciated value of the chairs which shall remain owned by Zoran and
which it shall take with it.
Zoran shall furnish IBM with a list of the equipment which it is
selling IBM in the said agreed amount by 7th May 1996.
7
<PAGE>
4. PAYMENT TERMS
IBM shall effect the payments particularised in clause 3 upon the terms and
conditions and at the times set forth below:
4.1 The payments prescribed in sub-clauses 3.2 and 3.3 shall be paid
within 30 days from the date of the tax invoice that shall be
submitted to IBM by Zoran and after Zoran has received F5.
4.2 The payments prescribed in sub-clause 3.1 shall be paid to Matam at
the times prescribed in the agreements between IBM and them.
5. FINISHING WORKS IN F5
5.1 Within the context of the agreement between IBM and Matam, IBM
undertook to execute, through Matam, finishing works in accordance
with the specification annexed to this agreement as appendix "B".
5.2 Zoran shall contribute to the finishing works expenses and shall pay
Matam on account of such works an amount in NIS equal to $ 30,000
(thirty thousand US dollars) upon such terms and conditions and at
such times as shall be determined with Matam.
5.3 Matam shall bear any additional payment for the purposes of executing
the finishing works in F5.
5.4 Zoran shall bear the expenses of the finishing works in GF.
6. SUSPENSORY CONDITIONS
6.1 Zoran shall not be under a duty to delivery the 5th floor in building
8/1 to IBM prior to F5 being delivered to it.
6.2 It is hereby expressly agreed that Zoran shall not be required to pay
more than rent in respect of one property, that is to say: Zoran shall
not be required to bear the payment of rent for F5 and the 5th floor
in building 8/1. Insofar as Zoran shall be required to pay rent for
F5, IBM shall bear the payment of the rent for the 5th floor in
building 8/1 to Matam.
8
<PAGE>
6.3 This memorandum of understanding shall come into effect subject to
Matam, PST and Zoran signing their consents to the discussion
summaries and the changes required in the various tenancy agreements
so that they shall accord with the consents particularised in this
agreement or insofar as the parties shall agree upon changes to the
terms and conditions of this memorandum of understanding deriving from
the discussion summaries and agreements with Matam and PST.
7. DOLLAR
A payment in this agreement relating to a US dollar shall be effected in
shekels according to the representative rate of exchange of the shekel
compared to the dollar at its rate on the date of actual payment, provided
that the payment is effected prior to 11:00 hours on a day on which there
are transactions in foreign currency.
In any other case, the rate published on the business day immediately
thereafter shall apply.
IN WITNESS WHEREOF WE HAVE SET OUR HANDS THIS 23RD DAY OF APRIL 1996
(Signed) (Signed)
- ------------------------------ ------------------------------
Zoran Micro-Electronics Ltd IBM Israel Ltd
9
<PAGE>
EXHIBIT 11.1
ZORAN CORPORATION
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1996 1995 1996 1995
------------------------- -------------------------
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding 6,899 175 6,874 170
Convertible Preferred Stock (1) - 2,027 - 2,027
Dilutive effect of stock options and
warrants based on the treasury
stock method (1) 1,381 515 1,427 527
Cheap stock (1) - 3,683 - 3,683
------------------------- -------------------------
Weighted average common shares and
equivalents 8,280 6,400 8,301 6,407
------------------------- -------------------------
------------------------- -------------------------
Net income $ 904 $ 30 $ 1,562 $ 36
------------------------- -------------------------
------------------------- -------------------------
Net income per share $ 0.11 $ 0.01 $ 0.19 $ 0.01
------------------------- ------------------------
------------------------- -------------------------
</TABLE>
(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> <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> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,859
<SECURITIES> 16,577
<RECEIVABLES> 10,855
<ALLOWANCES> 300
<INVENTORY> 1,887
<CURRENT-ASSETS> 32,717
<PP&E> 5,948
<DEPRECIATION> 3,937
<TOTAL-ASSETS> 34,728
<CURRENT-LIABILITIES> 8,716
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 25,569
<TOTAL-LIABILITY-AND-EQUITY> 34,728
<SALES> 15,102
<TOTAL-REVENUES> 15,907
<CGS> 8,715
<TOTAL-COSTS> 8,715
<OTHER-EXPENSES> 5,956
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 73
<INCOME-PRETAX> 1,755
<INCOME-TAX> 193
<INCOME-CONTINUING> 1,562
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,562
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.19
</TABLE>
