<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, 1997
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from__________ to__________
Commission File Number: 0-27246
ZORAN CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-2794449
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3112 SCOTT BOULEVARD, SANTA CLARA, CALIFORNIA 95054
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 919-4111
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
The number of outstanding shares of the registrant's Common Stock, $.001 par
value, as of October 31, 1997 was 9,772,884.
<PAGE>
ZORAN CORPORATION
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1997 and December 31, 1996 3
Condensed Consolidated Income Statements
Three and Nine Months Ended September 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1997 and 1996 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 14
SIGNATURES 15
2
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ZORAN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 7,821 $ 11,176
Short-term investments 13,352 12,243
Accounts receivable, net 12,679 11,088
Inventory 1,689 1,799
Prepaid expenses and other current assets 2,292 1,219
-------- ---------
Total current assets 37,833 37,525
Property and equipment, net 5,274 3,857
-------- ---------
Total assets $ 43,107 $ 41,382
-------- ---------
-------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,133 $ 5,868
Accrued expenses and other liabilities 8,761 6,984
-------- ---------
Total current liabilities 10,894 12,852
-------- ---------
Stockholders' equity:
Common Stock, $0.001 par value;
20,000,000 shares authorized;
9,552,496 and 9,029,365 shares
issued and outstanding 10 9
Additional paid-in capital 78,264 77,855
Warrants 717 -
Accumulated deficit (46,778) (49,334)
-------- ---------
Total stockholders' equity 32,213 28,530
-------- ---------
Total liabilities and stockholders' equity $ 43,107 $ 41,382
-------- ---------
-------- ---------
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,
----------------------- ------------------------
1997 1996 1997 1996
----------------------- ------------------------
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 8,486 $ 10,067 $ 21,018 $ 25,169
Software, licensing and development 3,101 2,302 9,888 5,795
----------------------- ------------------------
Total revenues 11,587 12,369 30,906 30,964
----------------------- ------------------------
Costs and expenses:
Cost of product sales 4,044 5,563 10,048 14,278
Research and development 3,722 2,785 10,237 6,085
Selling, general and administrative 2,986 2,961 8,157 8,176
----------------------- ------------------------
Total costs and expenses 10,752 11,309 28,442 28,539
----------------------- ------------------------
Operating income 835 1,060 2,464 2,425
Interest and other income, net 316 208 944 749
----------------------- ------------------------
Income before income taxes 1,151 1,268 3,408 3,174
Provision for income taxes 288 136 852 368
----------------------- ------------------------
Net income $ 863 $ 1,132 $ 2,556 $ 2,806
----------------------- ------------------------
----------------------- ------------------------
Net income per share $ 0.08 $ 0.10 $ 0.23 $ 0.27
----------------------- ------------------------
----------------------- ------------------------
Weighted average common shares
and equivalents 11,131 10,851 11,079 10,542
----------------------- ------------------------
----------------------- ------------------------
</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)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1997 1996
-------- --------
Cash flows from operating activities:
Net income $ 2,556 $ 2,806
Adjustments:
Depreciation and amortization 1,243 903
Changes in assets and liabilities:
Accounts receivable (1,591) (7,027)
Inventory 110 618
Prepaid expenses and other current assets (371) (297)
Accounts payable (3,735) (1,287)
Accrued expenses and other liabilities 1,777 1,845
-------- --------
Net cash used in operating activities (11) (2,439)
-------- --------
Cash flows from investing activities:
Purchases of short-term investments, net (1,109) (11,841)
Expenditures for property and equipment (2,615) (2,077)
-------- --------
Net cash used in investing activities (3,724) (13,918)
-------- --------
Cash flows from financing activities:
Proceeds of debt, net - 765
Proceeds from issuance of Common Stock, net 380 3,822
-------- --------
Net cash provided by financing activities 380 4,587
-------- --------
Net decrease in cash and cash equivalents (3,355) (11,770)
Cash and cash equivalents at beginning of period 11,176 21,438
-------- --------
Cash and cash equivalents at end of period $ 7,821 $ 9,668
-------- --------
-------- --------
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,
1996. Financial statements for the three and nine months ended September 30,
1996 have been restated to reflect the acquisition of CompCore Multimedia,
Inc. ("CompCore") in December 1996 which was accounted for as a pooling of
interests. 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,
1997 1996
------------- ------------
Inventories (in thousands):
Work-in-process $ 719 $ 382
Finished goods 970 1,417
--------- ---------
$ 1,689 $ 1,799
--------- ---------
--------- ---------
3. INCOME TAXES
The provision for income taxes reflects the estimated annualized
effective tax rate applied to earnings for the interim periods. The
effective tax rate differs from the U.S. statutory rate due to utilization of
net operating losses and State of Israel tax benefits on foreign earnings.
The provision includes primarily taxes on income in excess of net operating
loss carryover limitations and foreign withholding taxes.
4. 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).
5. FAS 128 SAB 74 REQUIREMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
This Statement is effective for periods ending after December 15, 1997 and
redefines earnings per share under generally accepted accounting principles.
Under the new standard, primary earnings per share is replaced by basic
earnings per share and fully diluted earnings per share is replaced by
diluted earnings per share. If the Company had adopted this Statement for
the periods ended September 30, 1997, the Company's earnings per share would
have been as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic earnings per share $0.09 $0.13 $0.27 $0.32
Diluted earnings per share 0.08 0.10 0.23 0.27
</TABLE>
6. WARRANT
In September 1997, in connection with a software license agreement, the
Company issued a warrant to purchase 75,000 shares of its Common Stock at an
exercise price of $24.31 per share. The warrant is exercisable for a period
of four years from the date beginning one year after the issuance date of the
warrant. The estimated value of the warrant, included in prepaid expenses
and other current assets, is approximately $717,000, which will be amortized
over the four-year period of the license agreement.
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, 1996.
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 data compression products for the evolving
multimedia markets and discontinued development of DFP and VSP products. In
1994, the Company discontinued production of these products which are not
expected to contribute significant revenues in future periods. The Company's
current lines of multimedia compression products include JPEG-based products
used in video editing systems and filmless digital cameras, MPEG-based
products used in video playback and Dolby Digital-based audio products used
in movie and home theater systems and DVD players which have been recently
introduced by several manufacturers.
In December 1996, the Company acquired CompCore, a provider of
software-based compression products and a designer of cores for video and
audio decoder integrated circuits. The Company issued approximately 2.0
million shares of Zoran Common Stock in exchange for all of the outstanding
Common Stock of CompCore. The Company also assumed all outstanding options
to purchase CompCore Common Stock which were exchanged for options to
purchase approximately 900,000 shares of Zoran Common Stock. The acquisition
was accounted for as a pooling of interests, and the financial statements of
the Company and the information herein have been restated to include the
results of CompCore for all periods.
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. Although ASPs for the
Company's hardware products 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 to high-volume production
sales rather than by factors related to product life cycles. During 1996 and
1997, the Company reduced its ASPs on certain products in order to better
penetrate the consumer market. The Company believes that, as its product
lines continue to mature and competitive markets evolve, it is likely to
experience further declines in the ASPs of its 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 prices for direct sales, as
distributors are responsible for certain sales and marketing expenses,
maintenance of inventories and customer support and training. Lower gross
margins on sales to distributors are partially offset by reduced selling and
marketing expenses related to such sales. Product sales in Japan are
primarily made through Fujifilm 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.
7
<PAGE>
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. While the Company intends to continue to enter into
development contracts with certain strategic partners, it expects development
revenue to decrease as a percentage of total revenues.
The Company conducts a substantial portion of its 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 revenues
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 revenues
and costs of product 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 its 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, 1997
were $11.6 million and $30.9 million, respectively, decreases of 6% and less
than 1% compared to the same periods in 1996. Product sales of $8.5 million
and $21.0 million for the current quarter and nine months, respectively, each
decreased by 16% compared to the same periods last year. The decreases in
product sales resulted primarily from unit sales and revenue decreases for
the Company's Dolby Digital audio compression ICs sold through Fujifilm due
to early delays in the development of the DVD market and uncertainty
regarding the timing of volume production and shipment of DVD players. These
decreases were partially offset by unit sales and revenue increases for the
Company's JPEG-based products used in desktop video editing and digital
filmless cameras. Product sales for the current quarter were negatively
impacted by a delay in shipping a large order of JPEG-based devices while
product sales for the quarter ended September 30, 1996 reflected revenue from
an advance payment deferred in prior periods and recognized in the third
quarter of 1996 upon completion of a multi-year sales program with a
strategic partner. Software, licensing and development revenues of $3.1
million and $9.9 million for the quarter and nine months ended September 30,
1997, respectively, increased by 35% and 71% compared to the same periods
last year due primarily to significant new licensing contracts and progress
on long-term development contracts.
Customers comprising a significant portion of the Company's total
revenues for the respective periods were as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
A 19% 16% 16% 19%
B 13% 41% 12% 34%
C 11% -- 5% --
D 10% 1% 15% 2%
</TABLE>
8
<PAGE>
PRODUCT GROSS PROFIT
Product gross margin was 52% for the quarter and nine months ended
September 30, 1997, compared to 60% for the prior quarter ended June 30, 1997
and 45% and 43% for the quarter and nine months ended September 30, 1996,
respectively. The decrease from the second quarter of 1997 reflects
proportionally higher sales of lower margin products and a greater percentage
of sales through distributors and to higher volume customers. The increases
for the current quarter and nine months compared to last year were due to a
product sales mix that included an increased percentage of higher margin
product, an increased percentage of products sold directly to OEM customers
and lower manufacturing costs during the current periods. Product margins
for the quarter and nine months ended September 30, 1996 were positively
impacted by revenues recognized from the completion of the multi-year sales
program with a strategic partner. The Company's product gross margin is
dependent on product mix and on the percentage of products sold directly to
the Company'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. The Company expects product
and customer mix to continue to fluctuate in future quarters, causing further
fluctuations in margins.
RESEARCH AND DEVELOPMENT
Research and development ("R&D") expenses of $3.7 million and $10.2
million for the quarter and nine months ended September 30, 1997,
respectively, were 34% and 68% above the comparable periods in 1996. The
increases were a result of the planned enhancement of the Company's
technology and development capabilities in conjunction with the Company's
growth in general and its increased software, licensing and development
revenue. R&D expenses during the current quarter and nine month periods
increased as a percentage of total revenues compared to the same periods last
year due to the above factors and the decrease in product sales. The Company
continues to believe that significant investments in R&D are required for it
to remain competitive and expects to continue to devote significant resources
to product development, although such expenses as a percentage of total
revenues may fluctuate.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expenses of $3.0 million and
$8.2 million for the quarter and nine months ended September 30, 1997,
respectively, were basically equal to the comparable periods in 1996. SG&A
expenses for the quarter ended September 30, 1997 increased slightly compared
to last year as a percentage of total revenues due to decreased product
sales. Increased sales related expenses for the periods to support planned
revenue growth were offset by decreased administrative expenses due primarily
to certain expenses at non-recurring levels in the prior year. The Company
expects that future SG&A expenses will increase in order to support the
anticipated growth of the Company.
INTEREST AND OTHER INCOME, NET
Net interest and other income of $316,000 and $944,000 for the quarter
and nine months ended September 30, 1997, respectively, represented increases
of 52% and 26%, respectively, compared to the same periods last year. The
increases resulted primarily from decreased interest expense as a result of
the repayment of the Company's remaining debt during 1996.
PROVISION FOR INCOME TAXES
The Company's estimated effective tax rate increased to 25% for the
current year from 11% last year. The increase was primarily due to taxes on
income in excess of the net operating loss carryover limitation and foreign
withholding taxes.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Net proceeds from the initial public offering of the Company's Common
Stock (the "IPO") in December 1995, the exercise of certain warrants in
connection with the IPO and net proceeds from the exercise of the
underwriters' over-allotment option in January 1996 totaled $21.0 million.
At September 30, 1997, the Company had $21.2 million of cash, cash
equivalents and short-term investments.
The Company's operating activities used cash of $11,000 in the nine
months ended September 30, 1997. 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
months was a net decrease in accounts payable and accrued expenses of $2.0
million due partially to payments of expenses related to the acquisition of
CompCore in December 1996. In addition, accounts receivable increased by
$1.6 million due primarily to the high level of product shipments and
execution of licensing and development agreements during the last month of
the period and additional progress on development contracts. During the nine
months ended September 30, 1997, the Company's capital expenditures were $2.6
million. The Company had no bank debt at December 31, 1996 or at September
30, 1997.
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 at least the next twelve months.
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. Since the Company's markets are
still evolving, only a limited number of commercial and consumer products
that incorporate the Company's integrated circuits are currently in volume
production. Current applications for the Company's products include
professional and consumer video editing systems, PC-based and stand-alone
video CD and DVD players, digital audio systems, filmless digital cameras and
video conferencing systems. During 1994 and 1995, the Company derived a
majority of its product revenues from the sale of integrated circuits for
video editing applications. While sales of audio products accounted for an
increased percentage of product revenues in 1996, video editing applications
continued to account for the largest percentage of the Company's product
sales. Delays in the development of the DVD market have resulted in
decreased sales of the Company's audio products in 1997 compared to 1996.
The Company expects that sales of its devices for video capture and editing
applications and digital audio applications will continue to account for a
significant portion of its revenues for the near future. Over the longer
term, the Company's ability to generate increased revenues will be dependent
on the expansion of sales of its products for use in other existing
applications, as well as the development and acceptance of new applications
for the Company's technologies and products. The potential size of the
markets for new applications and the timing of their development and
acceptance is uncertain. The Company's future success will depend upon
whether manufacturers select the Company's integrated circuits and software
for incorporation into their products, and upon the successful marketing of
these products by the manufacturers. There can be no assurance that demand
for existing applications will be sustained, that new markets will develop or
that manufacturers developing products for any of these markets will design
the Company's integrated circuits into their products or successfully market
them. The failure of existing and new markets to develop or to be receptive
to the Company's products would have a material adverse effect on the
Company's business, operating results and financial condition.
The emergence of markets for the Company's integrated circuits will be
affected by a variety of factors beyond the Company's control. In
particular, the Company's products are designed to conform with certain
current industry standards. There can be no assurance that manufacturers
will continue to follow these standards or that competing standards will not
emerge which will be preferred by manufacturers. The emergence of markets
for the Company's products is also dependent in part upon third-party content
providers developing and marketing content for end-user systems, such as
video and audio playback systems, in a format compatible with the Company's
products. There can be no assurance that these or other factors beyond the
Company's control will not adversely affect the development of markets for
the Company's products.
10
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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. Although the Company has supply
understandings and arrangements with two of its principal foundries, it does
not have formal long-term supply contracts 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.
RECENTLY COMPLETED ACQUISITION. On December 27, 1996, the Company
acquired CompCore. The managements of the Company and CompCore have
completed the merger with the expectation that the merger will result in
beneficial synergies for the companies. 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.
The combination of the two companies has required, 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. Certain aspects of the integration are still in
process, and there can be no assurance that it will be completed 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 have been increased by
the necessity of coordinating geographically separated organizations with
distinct cultures. The integration of certain operations require the
dedication of management and other personnel resources which may temporarily
distract from the day-to-day business of the combined company. In addition,
certain former key employees of CompCore are no longer with the Company.
There can be no assurance that other former CompCore employees will remain
employed by the Company. Failure to successfully complete 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.
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
continue to devote significant resources 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
<PAGE>
COMPETITION; PRICING PRESSURES. The Company's existing and potential
competitors include 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. There
can be no assurance that the Company's products will continue to compete
favorably or that the Company will be successful in the face of increasing
competition from new products and enhancements introduced by existing or new
competitors. In addition, increased competition may result in price
reductions, reduced margins and loss of market share, any of which could have
a material adverse effect on the Company's business, operating results and
financial condition.
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 or
reschedule or decrease their level of purchases. In addition, sales to these
key customers may fluctuate significantly from quarter to quarter. Any
development that would result in a substantial decrease or delay in sales to
one or more key customers, including actions by competitors or technological
changes, could have a material adverse effect on the Company's business,
operating results or financial condition. In addition, any development that
would 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.
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 and shipments,
the availability of development funding and the timing of licensing and
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 software and the amount of research and development
expenses associated with new product introductions. The Company's operating
results could also be adversely affected by economic conditions generally or
in various geographic areas where the Company or its customers do business,
other conditions affecting the timing of customer orders, a downturn in the
markets for its customers' 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
licensing 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. The Company believes that its operating results have
been somewhat affected by seasonal factors reflecting stronger demand for
consumer products during the last several months of the calendar year. As
markets for consumer products incorporating the Company's integrated circuits
and software mature, the Company expects that these seasonal trends may
become more significant. 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
<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 the major portion of its
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 research and development and
administrative personnel, including its President and Chief Executive Officer
and other officers, are based in the United States. The geographic
separation of these operations 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. The loss of key management personnel could delay product
development cycles or otherwise have a material adverse effect on the
Company's business, operating results or financial condition. There can be
no assurance that the Company will be able to retain the services of any of
its key employees. The Company believes that its future success will also
depend in large part on its ability to attract and retain highly-skilled
engineering, managerial, sales and marketing personnel, both in the United
States and in Israel. Competition for such personnel is intense, and there
can be no assurance that the Company will be successful in attracting,
integrating and retaining such personnel. Failure to attract and retain key
personnel could have a material adverse effect on the Company's business,
operating results or financial condition.
RELIANCE ON INTERNATIONAL SALES AND OPERATIONS; RELIANCE ON OPERATIONS IN
ISRAEL. The Company anticipates that international sales will continue to
represent a significant portion of total revenues. In addition,
substantially all of the Company's products are manufactured, assembled and
tested outside of the United States by independent foundries and
subcontractors. The Company is subject to the risks of doing business
internationally, including unexpected changes in regulatory requirements,
fluctuations in exchange rates, imposition of tariffs and other barriers and
restrictions and the burdens of complying with a variety of foreign laws. The
Company is also subject to general geopolitical risks, such as political and
economic instability and changes in diplomatic and trade relationships, in
connection with its international operations.
A substantial portion of the Company's research and development and sales
operations are located in the State of Israel. Therefore, the Company is
directly affected by the political, economic and military conditions to which
that country is subject. In addition, many of the Company's expenses in
Israel are paid in Israeli shekels, thereby subjecting the Company to the
risk of foreign currency fluctuations and to economic pressures resulting
from Israel's generally high rate of inflation. There can be no assurance
that such factors will not have a material adverse effect on 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
semiconductor companies or technology companies generally and which have been
unrelated to the operating performance of the affected companies. Broad
market fluctuations of this type may adversely affect the future market price
of the Common Stock.
13
<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, 1997.
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: November 10, 1997 /s/ LEVY GERZBERG
--------------------------------
Levy Gerzberg
President
Chief Executive Officer
Date: November 10, 1997 /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,
------------------- -------------------
1997 1996 1997 1996
------------------- -------------------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 9,504 8,827 9,303 8,754
Dilutive effect of stock options and warrants
based on the treasury stock method 1,627 2,024 1,776 1,788
------------------ -----------------
Weighted average common shares and
equivalents 11,131 10,851 11,079 10,542
------------------ -----------------
------------------ -----------------
Net income $ 863 $ 1,132 $ 2,556 $ 2,806
------------------ -----------------
------------------ -----------------
Net income per share $ 0.08 $ 0.10 $ 0.23 $ 0.27
------------------ -----------------
------------------ -----------------
</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> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 7,821
<SECURITIES> 13,352
<RECEIVABLES> 13,734
<ALLOWANCES> 1,055
<INVENTORY> 1,689
<CURRENT-ASSETS> 37,833
<PP&E> 10,222
<DEPRECIATION> 4,948
<TOTAL-ASSETS> 43,107
<CURRENT-LIABILITIES> 10,894
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 32,203
<TOTAL-LIABILITY-AND-EQUITY> 43,107
<SALES> 21,018
<TOTAL-REVENUES> 30,906
<CGS> 10,048
<TOTAL-COSTS> 10,048
<OTHER-EXPENSES> 18,394
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,408
<INCOME-TAX> 852
<INCOME-CONTINUING> 2,556
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,556
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.23
</TABLE>
