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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended DECEMBER 31, 1996
[ ] 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)
(408) 986-1314
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of Exchange on which registered
------------------- ------------------------------------
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
(Title of Class)
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 Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of registrant's voting stock held by non-affiliates
of registrant, based upon the closing sale price of the Common Stock on March
21, 1997, as reported on the Nasdaq National Market System, was
approximately $98,825,033. Shares of Common Stock held by each officer,
director and holder of 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive
determination for other purposes.
Outstanding shares of registrant's Common Stock, $0.001 par value, as of March
21, 1997: 9,132,296
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the definitive proxy statement for registrant's 1997 Annual Meeting of
Shareholders to be filed with the Commission pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this Report are
incorporated by reference into Part III of this Report.
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PART I
THIS REPORT INCLUDES A NUMBER OF FORWARD-LOOKING STATEMENTS WHICH
REFLECT THE COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND
FINANCIAL PERFORMANCE. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO
CERTAIN RISKS AND UNCERTAINTIES, INCLUDING THOSE DISCUSSED IN "ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- FUTURE PERFORMANCE AND RISK FACTORS" AND ELSEWHERE IN THIS
REPORT, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL
RESULTS OR THOSE ANTICIPATED. IN THIS REPORT, THE WORDS "ANTICIPATES,"
"BELIEVES," "EXPECTS," "INTENDS," "FUTURE" AND SIMILAR EXPRESSIONS IDENTIFY
FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE
ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF.
ITEM 1. BUSINESS.
GENERAL
Zoran Corporation develops and markets integrated circuits and software
products for digital video and audio compression applications. The Company's
integrated circuits are used in a variety of video and audio products
addressing PC and consumer multimedia markets. Current applications for Zoran
products include professional and consumer video editing systems, PC-based
and stand-alone video CD and digital video disc ("DVD") players, digital
audio systems, filmless digital cameras and video conferencing systems.
In December 1996, the Company extended its presence in the video and
audio compression market through the acquisition of CompCore Multimedia, Inc.
("CompCore"), a designer of "cores" for video and audio decoder integrated
circuits and a provider of software-based compression products. Zoran issued
approximately 2.0 million shares of Zoran Common Stock in exchange for all of
the outstanding Common Stock of CompCore. Zoran also assumed all outstanding
options and warrants to purchase CompCore Common Stock which were exchanged
for options to purchase approximately 900,000 shares of Zoran
Common Stock. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Zoran Corporation was incorporated in California in December 1981 and
reincorporated in Delaware in November 1986. Unless the context otherwise
requires, the terms "Zoran" and the "Company," as used in this report, refer
to Zoran Corporation and its consolidated subsidiaries.
INDUSTRY BACKGROUND
Electronic processing of visual images and sound is pervasive in today's
society, with televisions, VCRs, computers and sound systems present in homes
and businesses throughout the developed world. Historically, video images and
audio soundtracks have been transmitted, edited and stored almost exclusively
using analog formats. More recently, however, advances in technology have
allowed video and audio to be processed and stored in digital form. Unlike
analog formats which are inherently unstable and difficult to edit and
enhance, digital formats permit the manipulation of video and audio signals,
through digital signal processing ("DSP"), and offer a number of fundamental
advantages over analog technologies. Through complex DSP operations, digital
video and audio signals may be compressed, providing significant storage and
transmission efficiencies, may be filtered, allowing for noise reduction, and
may be transmitted and reproduced without perceptible image or sound
degradation. Digital formats also provide users with additional benefits
including random access to data and superior editing capabilities.
The transition to the use of digital video and audio formats has been
dependent upon continuing technological advances which have steadily improved
the quality and flexibility of digital technology and reduced its cost.
Initial advances in DSP technology took place in military and industrial
applications where high performance and speed were of paramount importance
and cost was a secondary consideration. As costs have decreased and
technology has improved, digital technology has increasingly been applied to
commercial and consumer applications. One of the first applications of
digital audio formats in the consumer electronics market was the digital
audio compact disc. The benefits of digital audio processing
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led the consumer audio industry to convert from analog long playing records
to digital compact discs, resulting in the rapid growth in the market for
compact disc players. Subsequently, digital formats have increasingly been
applied in the development of a variety of consumer electronics products such
as video laser discs, video editing systems, filmless digital cameras,
digital surround sound systems, video conferencing systems, cable television
systems, direct broadcast satellite systems and multimedia computer products.
One of the most significant barriers to the widespread acceptance of
digital technology has been the huge amount of data required to represent
images and sounds in a digital format, making cost-effective storage or
transmission impractical. For example, storage of an hour-long video program
in uncompressed digital form would require approximately 100 CD-ROMs. Through
digital compression techniques, a substantial number of the redundancies
inherent in video and audio data can be identified and eliminated,
significantly reducing the overall amount of data which needs to be retained.
These compression techniques allow the same hour long video program which
required 100 CD-ROMs for storage to be compressed and stored on a single
CD-ROM. Additionally, digital compression of video data allows previously
unmanageable amounts of data to be stored in the memory of a standard
personal computer, thereby permitting the data to be accessed and edited
easily.
To drive the implementation and speed the adoption of compression
technologies, industry participants organized committees to define
international compression standards. Leaders in consumer electronics,
computers and telecommunications joined together through the International
Standards Organization (the "ISO") to define standards for the compression of
still images, motion video and audio for consumer electronics and broadcast
applications. The first standard adopted was JPEG (Joint Photographic Experts
Group), a standard designed for the high quality compression of still images
and the real-time, low cost compression and decompression (or playback) of
moving images. The first commercial products complying with the JPEG standard
were introduced in 1992. MPEG 1 (Moving Pictures Experts Group), a standard
for compression of both video and audio, was subsequently adopted. MPEG 1 was
designed to allow the high compression ratios necessary for the limited
storage capacity of the CD-ROM format. The first commercial products
complying with the MPEG 1 standard were introduced in 1993. MPEG 2, a
compression standard for both video and audio, was designed to provide
improved quality in broadcast and video playback applications. DVD players,
the initial commercial products complying with the MPEG 2 standards, were
introduced in late 1996 and early 1997, and the Company expects that these
products will be delivered in volume to the consumer market later in 1997.
In addition to the ISO standards, industry participants have from time
to time introduced technologies which have become industry standards. In
1992, Dolby Laboratories, Inc. ("Dolby") launched Dolby AC-3 ("Dolby
Digital"), an audio compression technique which has emerged as an industry
standard. Dolby Digital was developed as a successor to Dolby's Pro-Logic
analog technique for use in multichannel digital surround sound systems.
Dolby Ditigal has been principally used in movie theater sound systems and
has recently been introduced in home theater applications. Digital
compression of audio data facilitates enhanced audio playback in
video-oriented formats by allowing storage of additional information in the
limited space allocated for audio and facilitates the seamless integration of
sound with compressed video. The Company believes that Dolby Digital is the
most advanced audio compression technique currently available and will be the
principal audio compression technique used in conjunction with MPEG 2 video
compression in DVD players. Dolby Digital has also been adopted by the High
Definition Television ("HDTV") Grand Alliance, and several large cable
television operators have announced their intention to incorporate Dolby
Digital in their cable systems.
Each of these standard compression techniques specify data formats in
which compressed data must be presented in order to enable equipment from
multiple vendors to be integrated into a single system that can transmit and
display the data in digital video and audio form. These standards do not,
however, specify the compression or decompression methodologies to be
employed or additional functionality which may be used to enhance or
manipulate digital signals. These standards, therefore, do not determine
image or sound quality or compression efficiency. For example, data
compression may comply with relevant standards despite being poorly processed
and containing artifacts which result in image degradation in video
applications or poor sound quality in audio applications. As a result, there
can be significant differences in overall image or sound quality between two
solutions based on the same standard. Therefore,
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integrated circuit manufacturers and software developers can differentiate
their products through the quality of their compression solution, image
enhancement capabilities and audio effects.
Historically, as system vendors sought compression solutions, the cost,
complexity and time required to compress and decompress data have imposed
significant limitations on the use of digital compression. Over the last
several years, as cost-effective compression solutions have emerged, product
manufacturers have increasingly sought to design and market lower-cost
digital video and audio systems and products to address high volume consumer
applications. The current challenge to manufacturers of compression
integrated circuits and software developers is, therefore, to provide product
manufacturers with high-quality, cost-effective, standards-based solutions.
THE ZORAN SOLUTION
Zoran provides high-quality, cost-effective, standards-based compression
solutions to address a broad range of video and audio applications. Zoran was
a pioneer in the development of high performance DSP products and has
developed expertise in digital signal processing, integrated circuit design,
algorithms and software development, as well as proprietary DSP and
compression technologies. As a result of the CompCore acquisition in December
1996, the Company gained additional software and integrated circuit
engineering capability. The Company is focused on bringing its
multi-disciplinary expertise and proprietary technologies to bear in the
development of compression solutions for commercial and consumer applications
in evolving multimedia markets. The key elements of Zoran's solution are:
STANDARDS-PLUS TECHNOLOGY. Zoran has leveraged its broad
multi-disciplinary expertise and proprietary DSP and compression technologies
to develop integrated circuits and software that are fully compliant with
industry compression standards. Zoran's products go beyond industry standards
by improving image quality and allowing more efficient use of memory,
processing and communication resources. This "standards-plus" functionality
includes OEM-programmable effects for audio and user-selectable compression
ratios for video.
EXPANDABLE AND PROGRAMABLE ARCHITECTURE. The Company's integrated
circuits are based on a design that permits easy adaptation for a broad range
of specific applications. This adaptation is achieved through the addition of
modules to, or deletion of modules from, the architecture of the integrated
circuit or modification of the software embedded in the integrated circuit as
well as by the use of ready-to-manufacture "cores" that can be integrated
into a customer's chips. Combined with the enhanced functionality of the
Company's "standards-plus" technology, the Company's expandable and
programable architecture facilitates product design and upgrades and thereby
substantially accelerates customers' time to market.
COST-EFFECTIVE SOLUTIONS. The Company focuses on reducing the feature
size, power consumption and number of integrated circuits required to perform
compression functions. This reduces the cost of manufacturing and operating
end products incorporating the Company's integrated circuits, and permits the
use of these products in a broader variety of high volume applications. In
addition, the modular nature of the Company's architecture lowers the
Company's cost of new product development, and the Company's design engineers
work closely with its customers to meet new product specification
requirements within the customer's cost parameters.
INTEGRATED SYSTEM SOLUTIONS. Zoran assists its customers in solving
their total system requirements by providing integrated products that combine
hardware and software to address multiple system functions on a single
integrated circuit or chip set, thereby reducing the customer's total system
cost and allowing the customer to concentrate on differentiating its products
from those of its competitors. For example, in personal computer applications
requiring the decompression of both video and audio, the Company has
developed a single chip solution that provides standard video decompression
on the integrated circuit and audio decompression by means of embedded
software which is less costly and more energy efficient than a full hardware
solution. The addition of software based compression products as a result of
the CompCore acquisition has allowed the Company to provide lower-cost
solutions for certain compression applications.
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STRATEGY
The Company's objective is to be a leading provider of cost-effective,
high-performance digital video and audio compression solutions addressing
selected high volume applications in evolving multimedia markets. Key
elements of the Company's strategy include:
FOCUS ON HIGH VOLUME APPLICATIONS. The Company's strategy is to focus on
providing compression solutions for manufacturers seeking to design video and
audio products for emerging high volume PC and consumer applications. In
cooperation with leading manufacturers of video and audio equipment in the
commercial and consumer markets, Zoran attempts to identify market segments
which have the potential for substantial growth.
MAINTAIN AND LEVERAGE TECHNOLOGICAL LEADERSHIP. The Company's years of
experience in the fields of DSP, integrated circuit design, algorithms and
software development have enabled it to become a leader in the development of
compression solutions. Using its multi-disciplinary expertise, the Company
has developed new technologies for compression of both video and audio. For
example, the Company believes that its proprietary bit rate control
technology has helped the Company provide reliable and inexpensive JPEG-based
video compression and that its implementation of Dolby Digital technology on
a single chip is facilitating the emergence of Dolby Digital as a standard
for multi-channel digital sound. CompCore offers the smallest MPEG cores
currently available and was the first company to implement MPEG in software.
The Company intends to continue to invest in research and development in
order to maintain its technological leadership and leverage its proprietary
DSP and compression technologies.
ESTABLISH STRATEGIC PARTNERSHIPS. The Company works closely in the
product development process with leading manufacturers of products that
incorporate the Company's integrated circuits. Potential products are
designed to meet customer-driven product requirements defined jointly by the
Company and its partners with the partner providing technological input and,
in selected cases, a portion of the development funding. This strategy has
permitted the Company to develop products with substantial financial and
other assistance, while retaining ownership of the technology and ensuring an
established customer for the product once development is completed. In some
cases, the Company's strategic partners also provide sales and marketing
support. The Company has also established long-term relationships with
strategic partners that provide manufacturing capacity and will seek to
develop additional strategic relationships with manufacturers. Through the
CompCore acquisition, the Company has also obtained a number of valuable
strategic relationships developed by CompCore. See "Research and
Development," "Sales and Marketing" and "Manufacturing" for descriptions of
the Company's relationships with certain of its current strategic partners.
ACCELERATE CUSTOMERS' TIME-TO-MARKET. Being early to market is critical
to a customer's ability to capture market share and therefore to Zoran's
ability to make volume sales to the customer. Zoran works closely with key
customers and provides them early access to its technologies. In addition to
providing integrated solutions, the Company provides its customers with a
broad range of engineering reference boards complete with device driver
software and embedded software, substantially shortening the customer's
product design time. Zoran's expandable modular architecture also allows the
development of fully compatible upgrade products, which accelerates its
customers' time-to-market and reduces their development costs. As a result
of the CompCore acquisition, the Company also offers ready-to-manufacture
"cores" that can be integrated into chips manufactured by its OEM customers,
allowing these customers to reduce the cost of custom chip design and
accelerate the time-to-market of their products.
THE FOREGOING DISCUSSION OF THE COMPANY'S STRATEGY INCLUDES
FORWARD-LOOKING STATEMENTS. THE COMPANY'S STRATEGY MAY CHANGE AND ITS ACTUAL
RESULTS MAY VARY SUBSTANTIALLY DEPENDING UPON A VARIETY OF FACTORS, INCLUDING
THOSE DESCRIBED IN "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- FUTURE PERFORMANCE AND RISK
FACTORS."
MARKETS AND APPLICATIONS
The availability of standards-based digital and audio compression
technology has facilitated the development of products for a wide variety of
multimedia markets. Typically, new technology is initially adopted by
manufacturers of relatively expensive products designed primarily for
commercial and high-end
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consumer applications. As technology becomes less expensive to produce and is
more broadly accepted, manufacturers design lower-cost products for
high-volume consumer applications. Historically, the Company's products have
been implemented principally in commercial and high-end consumer
applications. The Company believes, however, that the markets for its
products will increasingly extend to high-volume consumer applications. The
Company's products are currently used in a variety of multimedia applications.
VIDEO EDITING SYSTEMS
Video editing systems are used in the video post-production process to
"cut and paste" video sequences and add special audio and video effects.
Historically, professional video editing systems have been comprised of
expensive pieces of analog video and audio equipment interconnected by means
of various interface devices. Compression technology allows video images to
be stored in a computer's memory in sufficient volume to permit "cut and
paste" editing to be performed through random access to stored images. Since
the early 1990s, a number of companies have introduced digital video editing
systems designed for the professional market. Companies such as Avid
Technology, Inc. ("Avid"), Fast Multimedia, Inc. ("Fast"), Matrox Electronic
Systems Ltd. ("Matrox"), miro Computer Products AG ("miro") and Truevision
Inc. ("Truevision") utilize the Company's JPEG-based products in their
professional video editing systems.
As costs of compression technology have declined, a number of
manufacturers have designed low cost digital video editing equipment. Add-in
boards and software allowing the creation of PC-based video editing systems
are now available with list prices starting under $400. The availability of
these low cost systems has created a new category of users in the corporate,
education, government and consumer markets. Add-in boards incorporating the
Company's JPEG-based products have been introduced by several manufacturers,
including Avid, Fast, Matrox, miro and Truevision.
VIDEO PLAYBACK SYSTEMS
COMPUTER APPLICATIONS. Almost all desktop personal computers now on the
market have accelerated graphics capability, and the Company believes that
more than half of the PCs sold in 1996 included CD-ROM and audio
capabilities. MPEG 1 compression technology is currently used to enable video
playback in personal computers. The high compression ratios offered by this
technology allow over one hour of video to be stored in digital format on a
single CD-ROM. Millions of computers worldwide are equipped with software for
real-time playback of CDs. The Company's MPEG 1 software is bundled by
leading PC and board manufacturers, such as Matrox Graphics, Ltd., NEC
Corporation and Packard Bell.
STAND-ALONE PLAYBACK APPLICATIONS. Currently, two types of video
playback systems are available for consumer video applications: video CD
players and laser disc players.
Video CD players are essentially CD audio players with MPEG 1 decoders
and a video output. This functionality adds between $50 and $200 to the
retail cost of a typical audio player. Video CD players offer video playback
of near-VCR quality and two-channel stereo audio playback. MPEG 1 compression
enables 60 to 70 minutes of video to be stored on a single compact disc. A
number of major film studios have released titles in video CD format. Video
CD players can also play karaoke titles and are particularly popular in the
Far East, which the Company believes will continue to be the primary market
for these products. The Company is currently selling a limited number of its
MPEG 1-based products to manufacturers of stand-alone video CD players.
High quality playback of audio and video is currently available on large
laser discs. Laser disc players generally cost somewhat more than video CD
players and VCRs. Laser disc technology uses no video compression, although
digital audio compression is required for storage of multi-channel audio data
in the limited space allocated for audio data on laser discs. Dolby Digital
technology provides audio compression and enhances audio quality by adding
multi-channel digital surround sound capability. The Company's Dolby
Digital-based audio compression products are currently used by manufacturers
of audio receivers for use with laser disc players, including Denon, Kenwood
Corporation ("Kenwood"), Pioneer Electronic Corporation ("Pioneer") and
Yamaha Corporation ("Yamaha").
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The latest generation of video playback systems, DVD players, use MPEG 2
video compression technology to provide significantly higher quality playback
than is possible with video CD players. The Company also expects that DVD
players will be included in some new personal computers in place of CD-ROM
drives and sold as upgrade products. The Company believes that most DVD
players will use Dolby Digital audio compression technology for storage and
playback of the audio soundtrack. Although the MPEG standards and various
competitors also prescribe audio compression techniques, the Company believes
that Dolby Digital audio compression technology provides enhanced
performance. There have been delays in the development of the DVD market,
and there still is uncertainty regarding the timing of volume production and
shipment of DVD players. Initial models of DVD players were introduced in
Japan in late 1996 and to the U.S. consumer market in early 1997. The
Company anticipates that additional models will be introduced during 1997.
The Company is currently selling Dolby Digital-based audio compression
products for use by manufacturers of DVD systems, including Pioneer, Samsung
Electronics Co., Ltd. ("Samsung") and Toshiba Corporation ("Toshiba"). In
addition, several PC and board manufacturers are evaluating the Company's
real-time DVD decoding software for incorporation in their products, while
other board manufacturers are developing hardware solutions using the
Company's integrated circuits to enable DVD decoding in the current
generation of PCs.
DIGITAL AUDIO SYSTEMS
In 1992, Dolby launched Dolby Digital, an audio compression technique
which has emerged as an industry standard. Dolby Digital was developed as a
successor to Dolby's Pro-Logic analog technique for use in multi-channel
digital surround sound systems. Dolby Digital is used in movie theater sound
systems and in home theater applications. Digital compression of audio data
facilitates enhanced audio playback in video-oriented formats by allowing
storage of additional information in the limited space allocated for audio
and facilitates the seamless integration of sound with compressed video.
Companies such as Kenwood, Pioneer and Yamaha incorporate the Company's Dolby
Digital-based products into equipment used in home theater applications,
while Dolby uses Zoran components in its movie theater playback systems. As
DVD technology becomes available, the Company expects consumer demand for
Dolby Digital-based home systems to increase. In addition, cable and
satellite programming companies are planning to offer multi-channel digital
sound through digital television services. The Company has sold its Dolby
Digital-based audio decoder to a major telecommunications company for use in
television set-top boxes that will receive this type of programming. The
Company believes that the availability of broadcast data in this form will
further increase the demand for Dolby Digital-based systems.
FILMLESS DIGITAL CAMERAS
In 1990, the Company introduced video compression devices that
facilitated the development of the first filmless digital cameras. These
cameras allow the capture of high resolution images, the viewing, editing and
storage of such images on a computer system and their transmission over
telephone lines and computer networks. High quality copies of these images
can be printed using color laser printers. As technology has advanced and
manufacturing costs have decreased, filmless digital cameras have been
introduced in the $1,000 to $5,000 price range. Recently, several
manufacturers announced filmless digital cameras with list prices below $500.
The Company believes that consumer demand for filmless digital cameras will
increase as they become available at prices approaching those of conventional
single lens reflex cameras and as the evolving desktop multimedia market
creates increasing uses for them. The Company's JPEG-based products are used
in filmless digital cameras manufactured for the consumer market by companies
such as Fujifilm, Samsung and Sony Corporation.
Compression technology has also enabled the development of tapeless
digital video cameras that are currently marketed for professional use. The
Company's JPEG-based products are currently used in tapeless digital video
cameras manufactured by Avid and Ikegami Electronics U.S.A. Inc.
COLOR LASER PRINTERS AND SCANNERS
Color laser printers and scanners have not received widespread market
acceptance to date due to the cost of the large amount of memory needed to
store and process color images. By reducing the memory required to store and
process images, compression technology has allowed the development of faster,
lower-
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priced color laser printers and scanners. Recently, color laser printers using
JPEG technology have been introduced with list prices under $1,000, and color
scanners have been introduced in the $1,000 to $1,500 price range. These
products are used principally in business applications. Canon Research Center
America, Inc. incorporates the Company's JPEG-based products in its color
scanners. The Company expects that as the cost of components continues to
decline and economies of scale are reached through higher manufacturing volumes,
the development of lower-priced color laser printers and scanners for home
computer markets will become feasible.
DESKTOP VIDEO CONFERENCING
During 1996, low-cost video conferencing and capture over regular
telephone lines and the Internet became available to desk-top computer users.
These video conferencing systems utilize the modem included in the PC, a
standard camcorder or low-cost video camera and software for video
compression. These systems have list prices under $300, including the camera.
Companies such as Animation Technologies, Boca Research, Data Experts and
Wearnes Peripherals use Zoran's products in these systems to enable the
efficient capture of video and audio data.
OTHER APPLICATIONS
Other existing and potential applications for audio and video
compression devices include arcade games and video kiosks, digital video and
digital security cameras. To date, the Company has made limited sales to
manufacturers developing products for these markets, and the Company does not
anticipate that sales of its integrated circuits for use in these products
will account for significant revenues in the foreseeable future.
THE FOREGOING DISCUSSION OF MARKETS AND APPLICATIONS FOR THE COMPANY'S
PRODUCTS INCLUDES FORWARD-LOOKING STATEMENTS, AND THE ACTUAL DEVELOPMENT OF
SUCH MARKETS MAY DIFFER SUBSTANTIALLY DEPENDING UPON A VARIETY OF FACTORS,
INCLUDING THOSE DESCRIBED IN "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- FUTURE PERFORMANCE AND
RISK FACTORS."
PRODUCTS AND TECHNOLOGY
The Company's multimedia product line consists of three product
families: video compression and decompression products based on JPEG
technology, audio and video decompression products based on MPEG technology
and audio decompression products for use in products using MPEG or Dolby
Digital technology.
The following table lists the Company's principal multimedia products
currently in production, including the months in which initial production
units were first made available to customers.
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<TABLE>
<CAPTION>
INITIAL PRINCIPAL
MARKET PRODUCTS COMMERCIAL APPLICATIONS
SHIPMENT
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
JPEG codec (ZR36050) April 1993
Motion JPEG controller (ZR36055) July 1994 PC video editing
JPEG PCI multimedia controller (ZR36057) June 1996
---------------------------------------------------------------------------------------
JPEG Color space converter (ZR36011)* December 1993 PC video editing
Filmless digital
Raster-to-block converter (ZR36015)* September 1993 cameras
Color scanners
Integrated converter (ZR36016)* February 1995 Color printers
- ------------------------------------------------------------------------------------------------------
MPEG 1 decoder (ZR36100) July 1994
MPEG 1 hardware decoder core ** January 1995 PC-based and stand-
MPEG 1 decoder (ZR36110) February 1996 alone video CD
players
SoftPEG, MPEG 1 decoder software ** June 1995
---------------------------------------------------------------------------------------
MPEG PCI multimedia controller (ZR36120) January 1996 CD players
Video conferencing
systems
---------------------------------------------------------------------------------------
MPEG 2 hardware decoder core** November 1996 DVD players
SoftPEG 2, MPEG 2/Dolby Digital decoder March 1997 PC-based
software entertainment
- ------------------------------------------------------------------------------------------------------
6-channel Dolby Digital decoder (ZR38500) December 1994 Home theater
---------------------------------------------------------------------------------------
Integrated Dolby Digital decoder (ZR38600) December 1996 Home theater
DVD players
---------------------------------------------------------------------------------------
2-channel Dolby Digital audio decoder February 1995 DVD players
Audio (ZR38501) Television set-top
2-channel Dolby Digital/MPEG 2 audio February 1995 boxes
decoder (ZR38521)
---------------------------------------------------------------------------------------
Programmable audio processor (ZR38001) November 1994 Programmable audio
effects
-----------------------------------------------------------------------------------------
SoundPEG audio decoder software** May 1995 PC-based CD players
</TABLE>
* Designed and manufactured by a third party and sold by Zoran under its name
pursuant to a non-exclusive license. See "Proprietary Rights and Licenses."
** Introduced by CompCore prior to its acquisition by the Company in December
1996.
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JPEG TECHNOLOGY AND PRODUCTS
THE JPEG STANDARD. In 1991, the JPEG (Joint Photographic Experts Group)
Committee of the ISO completed a technical specification for a standard to
compress individual digitized images which may consist of still images or
consecutive frames of video data. JPEG has been widely adopted for video
editing applications, since each frame in the video is individually
compressed, allowing cutting and pasting of sequences as well as modification
of individual frames or sequences. Images are compressed through elimination
of spatial redundancies within an image and the filtering of high frequency
areas to which the eye is less sensitive. Using these techniques, the JPEG
compression standard is able to reduce the data necessary to represent an
image without significant degradation of image quality. Still images or
motion video can be compressed to varying degrees using JPEG, with greater
compression resulting in lower quality. Typically, four-to-one or five-to-one
compression yields broadcast image quality while 20-to-one compression is
similar to VHS quality.
ZORAN JPEG TECHNOLOGY. Zoran JPEG technology incorporates a proprietary
bit rate control algorithm that enables its JPEG-based products to compress
any image to a predetermined size while optimizing video quality using
pre-selected parameters. Without this feature, the JPEG compression process
results in compressed data files of various sizes based on the actual content
of the original image, given a constant degree of compression, and an image
with large amounts of visual detail will generate a larger data file than
that generated from an image with less detail. Performance of many video
applications is hampered by variability in the size of the compressed images
in a video sequence, which can result in inefficient use of available memory,
bus speed or communication channel capacity or even the loss of images.
Zoran's bit rate control is a "standards-plus" solution that uses real-time
DSP algorithms to optimize video quality based on pre-selected parameters,
which can be programmed by OEMs, without the loss of any image or video
frame. Zoran's bit rate control has been incorporated in its JPEG-based
devices that are used in video editing systems, filmless and tapeless digital
cameras, color scanners, PC-based security systems, video conferencing and
other applications. Other features of Zoran's JPEG-based products include
their ability to handle a wide range of compression ratios, to perform a
"lossless" compression algorithm in the same JPEG device and to rapidly scan
or browse a large number of images. Zoran implements these functions in a
single integrated circuit while the Company believes most other
manufacturers' solutions require multiple chips, resulting in higher
manufacturing costs and greater power consumption.
JPEG-BASED PRODUCTS. The Company's ZR36050 codec is a compression/
decompression device used for real time encoding and decoding of JPEG video
for video editing applications. The ZR36050 is fully compliant with JPEG
standards. The ZR36050 utilizes the Company's proprietary bit rate control
technology for high quality video capture. It also features a unique embedded
"lossless" mode that allows customers to elect to use low compression ratio
techniques that result in no data loss for applications where quality is the
primary consideration. The ZR36050 is often installed in a chipset that
includes the ZR36055 motion controller or pre/post-processing devices such as
the ZR36011 color space converter, ZR36015 raster-to-block converter and the
ZR36016 integrated color space/raster-to-block converter. The ZR36057 is a
PCI motion JPEG controller targeting consumer-priced but professional quality
desktop video editing systems.
MPEG TECHNOLOGY AND PRODUCTS
THE MPEG STANDARDS. In 1991, the MPEG (Moving Pictures Expert Group)
Committee of the ISO completed a technical specification for a standard to
compress moving video and audio into a single data stream. Like JPEG, MPEG 1
removes spatial redundancies from single frames of video data. MPEG 1
improves on JPEG by also removing redundancies that occur between consecutive
video frames. Because video represents movement, it is possible to detect and
estimate the movement of similar picture elements between video frames, a
process called motion estimation. MPEG motion estimation uses the content of
previous and future frames to predict the content of the current frame
without using its full content. MPEG 1 implements audio compression by
exploiting psycho-acoustic masking, taking advantage of the fact that the ear
is less sensitive to a quiet note at one frequency when a much louder note is
present at a nearby frequency. MPEG 1 often achieves video compression ratios
of over 100-to-one and audio compression ratios of six-to-one. MPEG 1 is
particularly suitable for low-cost CD-ROM applications due to its low-cost
implementation.
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In 1993, the MPEG 2 video committee completed a technical specification
to address the more stringent requirements of the broadcast industry. MPEG 2
provides more sophisticated prediction techniques, enabling a compression
solution to comprehend video as interlaced fields of data, rather than
individual frames. MPEG 2 also allows for operation at higher resolution and
at higher bit rates than MPEG 1, resulting in improved image quality for high
motion, high detail video. MPEG 2 typically achieves compression ratios of
50-to-one. Because of its higher bit rate, MPEG 2 technology cannot be used
in standard CD-ROM applications, but will be used in DVD players.
ZORAN MPEG TECHNOLOGY. Zoran's MPEG 1 decoder technology offers an
on-chip solution for processing combined audio and video bit streams and
other system-level control data. This feature, combined with additional
software drivers, allows for high-quality audio-video synchronization and has
facilitated development of low-cost MPEG-based playback add-in boards for PC
applications. As a result of its acquisition of CompCore in 1996, the Company
now offers ready-to-manufacture MPEG 1 and MPEG 2 compression chip "cores"
that can be integrated into chips manufactured by its OEM customers, allowing
these customers to reduce the cost of custom chip design and accelerate the
time-to-market of their products.
MPEG-BASED PRODUCTS. The Company's ZR36100 and ZR36110 are single-chip
system and video decoders optimized for use in video CD playback
applications. The Company believes the ZR36100 is the first device of its
type to perform system decoding and synchronization between audio and video
functions. The ZR36110 is designed for use with later model, higher
performance video CD players. The ZR36120 PCI multimedia controller enables
the cost-effective integration of high performance multimedia functions on
PCI systems. The PCI bus, which is offered in most new multimedia personal
computers, permits the high-speed transfer of digital information, including
video, within the PC. The ZR36120 provides a single PCI bus interface for
chips performing digitizer, TV tuner, MPEG and TV out functions, thereby
eliminating numerous interfaces and minimizing the use of PCI slots. The
Company offers chip cores based on MPEG 1 and MPEG 2 compression standards.
The Company believes that its MPEG hardware designs have a smaller gate count
and require less memory than competing designs, resulting in integrated
circuits that offer significantly lower costs, lower power consumption and
higher performance. The Company's MPEG 1 software decoder, SoftPEG,
developed by CompCore, is designed to offer a low-cost MPEG 1 solution by
generating high video and audio quality in a PC environment without the need
for additional hardware. SoftPEG 2 is MPEG 2/Dolby Digital-based software
designed for use with an Intel Pentium processor supporting multimedia
extension ("MMX") technology. SoftPEG 2 supports new PC entertainment
applications without the need for specialized hardware.
AUDIO TECHNOLOGY AND PRODUCTS
THE DOLBY DIGITAL STANDARD. In 1992, Dolby launched Dolby Digital, an
audio compression technique which has emerged as an industry standard. Dolby
Digital was developed as a successor to Dolby's Pro-Logic analog technique
for use in multi-channel digital surround sound systems. Dolby Digital has
been used in sound systems that have been installed in over 8,000 movie
theaters and is also used in home theater applications. Digital compression
of audio data facilitates enhanced audio playback in video-oriented formats
by allowing storage of additional information in the limited space allocated
for audio and facilitates the seamless integration of sound with compressed
video. The Company believes that Dolby Digital is the most advanced audio
compression technique currently available and will be the principal audio
compression technique used in DVD players. Dolby Digital has also been
adopted by the HDTV Grand Alliance, and several large cable operators have
announced their intention to incorporate Dolby Digital in their cable systems.
ZORAN AUDIO TECHNOLOGY. Zoran, pursuant to a development agreement with
Dolby, has developed a programmable DSP engine with an architecture optimized
for Dolby Digital and other demanding audio applications and was the first to
develop a single-chip solution for Dolby Digital decoding. Zoran's audio
products incorporate the Dolby Digital algorithm for decompression of
multi-channel digital surround sound, along with additional standards such as
various layers of MPEG audio decompression and other functions such as Dolby
Pro-Logic decoding, digital filtering and equalization. Zoran's programmable
audio DSP architecture enables system manufacturers to reduce system cost
through software that allows these manufacturers to program proprietary
functions into Zoran's Digital-based decoder and eliminate the
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need for additional DSP devices while maintaining their own differentiation,
flexibility and standards compliance.
AUDIO PRODUCTS. The ZR38500 is a single-chip Dolby Digital-based
decoder for high quality audio systems that can support up to six output
channels and also includes implementation of Dolby Pro-Logic. The ZR38500
affords user-customizable memory for audio post-processing and special audio
effects. The ZR38521/501 are low cost versions of the ZR38500 which feature
six-channel Dolby Digital decoding and down-mixing to two-channel Dolby
Digital or Pro-Logic output. The ZR38521 also performs MPEG 2 audio decoding.
The ZR38001 is a high performance digital audio signal processor with on-chip
memory resources that is used for products that produce special acoustic
effects such as echoes. The ZR38600 is an integrated Dolby Digital decoder.
The ZR38600 includes the random access memory required for six-channel Dolby
Digital decoding and three to five additional devices used in Dolby Digital
systems. It also enables the creation of 3D audio effects with only two
speakers. SoundPEG is an audio-only version of SoftPEG which implements MPEG
audio decoding and is often bundled with MPEG 1 video chips. The combination
of hardware video and software audio offers a lower cost solution for the
personal computer market.
OTHER PRODUCTS
From the Company's inception through 1991, the Company's principal
products consisted of digital filter processors ("DFPs") and vector signal
processors ("VSPs"), which are DSP-based integrated circuits used for image
enhancement and processing, principally in military, industrial and medical
applications. In mid-1994, the Company advised its customers that it was
discontinuing production of these products. In June 1995, the Company
licensed the manufacture of these products to a third party under a
nonexclusive ten-year license agreement. In the future, the Company's
revenues from these products will be principally derived from license
revenues. The Company does not expect these products to produce significant
revenues in future periods. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations."
CUSTOMERS
The following table lists substantially all of the Company's customers
who purchased at least $100,000 of the Company's JPEG, MPEG or Dolby
Digital-based products from January 1, 1996 through December 31, 1996.
<TABLE>
<CAPTION>
PRODUCT FAMILY CUSTOMERS
- ------------------------------------------------------------------------------------------------------
<S> <C>
JPEG-based Products Avex Electronics Inc. miro Computer Products AG
Axis Components Quadrant International, Inc.
Data Translation Solectron Washington, Inc.
Edge Electronics Co Tektronix, Inc.
Fast Multimedia, Inc. Topas Electronics GmbH
Fujifilm Microdevices Co. Ltd. Truevision, Inc.
- ------------------------------------------------------------------------------------------------------
MPEG-based Products Animation Technologies Matrox Graphics, Ltd.
ATI Technologies, Inc. Matsushita Electric
Canopus Co., Ltd. Industrial Co., Ltd.
Cirrus Logic (including Crystal NEC Corporation
Semiconductor) Packard Bell
Diamond Multimedia Samsung Electronics Co. Ltd.
Fast Multimedia, Inc. Siemens AG
Fujifilm Microdevices Co. Ltd. Silicon Vision, Inc.
Fujitsu Limited Visual Circuits
Hitachi Ltd.
- ------------------------------------------------------------------------------------------------------
Audio Products AT&T Corporation Dooin Electric Co. Ltd.
Amega Technology Fujifilm Microdevices Co. Ltd.
Dolby Laboratories, Inc. NEC Technologies
</TABLE>
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Fujifilm purchases the Company's products both as an original equipment
manufacturer ("OEM") and as a distributor and resells these products, in many
cases under its own trade name. Fujifilm acts as the Company's primary
distributor in Japan and accounts for substantially all of the Company's
product sales in Japan. The Company's products are integrated into products
purchased from Fujifilm by consumer products manufacturers, including Denon
Corporation, Kenwood, Pioneer and Yamaha. See "Sales and Marketing."
In 1994, Fujifilm accounted for approximately 47% of the Company's
revenues, including 44% of its product sales and 54% of its development and
licensing revenues. Revenues from Fujifilm were significantly reduced in 1995
as a result of Fujifilm having accumulated a substantial inventory of the
Company's products during 1994 and a significant reduction of development
revenue from Fujifilm. During 1995, sales to Fujifilm accounted for 10% of
the Company's revenues, including 5% of product sales and 25% of development
and licensing revenue. In 1995, Fast accounted for approximately 27% of the
Company's revenues, including 35% of product sales. During 1996, sales to
Fujifilm accounted for 38% of the Company's revenues, including 43% of
product sales, sales to miro accounted for 16% of revenues, including 20% of
product sales, and sales to Fast accounted for 5% of revenues, including 6%
of product sales. During 1995 and 1996, the Company's four largest customers
accounted for approximately 47% and 61% of its revenues, respectively.
RESEARCH AND DEVELOPMENT
The Company believes that its future success depends on its ability to
continue to enhance its existing products and to develop new products that
maintain technological competitiveness and compliance with new standards in
rapidly evolving video and audio compression markets. The Company attempts to
leverage its expertise in the fields of DSP, integrated circuit design,
algorithms and software development to maintain its position as a leader in
the development of compression solutions. Accordingly, the Company devotes a
significant portion of its resources to sustaining and upgrading its products
to reduce integrated circuit cost, feature size, power consumption and the
number of integrated circuits required to perform compression functions as
well as to provide lower-cost, software-based solutions for certain
compression applications. In addition, the Company seeks to design integrated
circuits and chip cores which can reduce the time needed by manufacturers to
integrate the Company's products circuits into the manufacturers' products.
Zoran has historically generated a significant percentage of its total
revenues from development contracts with its strategic partners. These
development contracts provide that the Company will receive payments upon
reaching certain development milestones and that the Company will retain
ownership of the intellectual property developed. Development contracts have
enabled the Company to fund portions of its product development efforts, to
respond to the feature requirements of its customers, to accelerate the
incorporation of the Company's products into customer products and to
accelerate the "time to market" of the products the Company's customers. The
Company is currently developing new integrated circuits based on MPEG and
Dolby Digital compression standards pursuant to a development contract with
Fujifilm under which Fujifilm is providing a portion of the development
funding. Fujifilm has participated directly in product definition for these
development programs and will have the right to sell any resulting products
in Japan under its distribution agreement with the Company. Fujifilm will
also have the right to manufacture a portion of the Company's requirements
for these products, subject to certain conditions. In addition, the Company
developed its ZR36120 PCI multimedia controller pursuant to a development
contract with Siemens under which Siemens has provided a portion of the
development funding. See "Products and Technology." Siemens participated
directly in product definition for this product and has the right to purchase
the product as an OEM customer. See "Sales and Marketing" and "Manufacturing."
The Company is a party to certain research and development agreements
with the Chief Scientist in Israel's Ministry of Industry and Trade (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 projects up to specified contract
maximums. These agreements require the Company to use its best efforts to
achieve specified results and 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 the total
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funding received. Reported research and development expenses are net of these
grants, which fluctuate from period to period. Total grants earned during 1994,
1995 and 1996 were $549,000, $200,000 and $182,000, respectively. The terms of
Israeli Government participation also contain restrictions on the location of
research and development activities, and the terms of the grants from the Chief
Scientist prohibit the transfer of technology developed pursuant to these grants
to any person without the prior written consent of the Chief Scientist. The
Company is currently engaged in the development of new JPEG, MPEG and Dolby
Digital-based products under grants from the Chief Scientist. Although the
Company has received grants from the Chief Scientist and BIRDF in the past, the
Company intends to fund future research and development efforts for new products
primarily from its own funds and through research and development arrangements
with its major OEM customers.
As of December 31, 1996, the Company had a staff of 70 full-time and 15
part-time research and development personnel, 55 of whom are based in Israel.
During 1994, 1995 and 1996, the Company's net research and development
expenses were approximately $4.9 million, $5.9 million and $9.0 million,
respectively. See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
SALES AND MARKETING
Zoran's sales and marketing strategy is to focus on providing
compression solutions for manufacturers seeking to design video and audio
products for emerging high volume consumer applications. In cooperation with
leading manufacturers of video and audio equipment in the commercial and
consumer markets, Zoran attempts to identify market segments which have the
potential for substantial growth. To implement its strategy, the Company has
established a direct sales force and a worldwide network of independent sales
representatives and distributors. In some cases, the Company's strategic
partners also provide sales and marketing support to the Company.
The Company works closely in the product development process with
strategic partners to incorporate the Company's integrated circuits and
software into their products. Potential products are designed to meet
customer-specific product requirements defined jointly by the Company and its
strategic partners with the partners providing technological input and, in
selected cases, a portion of the development funding. This strategy has
permitted the Company to develop products with substantial financial and
other assistance, while retaining ownership of the technology and ensuring an
established customer for the product once development is completed. In
addition, Zoran's application engineers assist other customers in designing
their products to incorporate the Company's integrated circuits.
The Company's sales are generally made pursuant to purchase orders
received between one and six months prior to the scheduled delivery date. The
Company sells its products, and in certain cases distributes the products of
other companies, primarily through its 10-person direct sales staff, of whom
six are located in the United States and four are located in Israel. The
Company's United States sales staff is primarily responsible for sales in
North America, South America and Asia, and the Company's Israeli sales staff
is primarily responsible for sales in Europe and the Middle East. In
addition, the Company sells its products indirectly through 31 commissioned
sales representatives as well as certain distributors. The Company typically
warrants its products for a 12-month period. To date, the Company has not
experienced material product returns or warranty expense.
The Company distributes its integrated circuit products in Japan
primarily under an agreement with Fujifilm. Under this agreement, Fujifilm
acts as the primary distributor in Japan of products developed by the Company
under development contracts with Fujifilm. Fujifilm also sells certain of
these products in Japan under its own name. The Company may sell these
products directly in Japan only to specified customers and must first buy the
products from Fujifilm. Fujifilm also has a nonexclusive license to
distribute most of the Company's products outside of Japan. Certain of the
Company's other OEM customers also act as distributors of the Company's
products from time to time. See "Customers." The Company's software products
are distributed in Japan through a subsidiary of Matsushita, and most of its
cores are sold directly to end users.
The Company sells its Dolby Digital-based products under a perpetual,
non-exclusive license from Dolby to sell products that incorporate Dolby's
Digital algorithm. The Company is not required to pay
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license fees or royalties to Dolby under this agreement. The Company's
customers enter into license agreements directly with Dolby, pursuant to
which they pay royalties to Dolby. Under the Company's agreement with Dolby,
the Company may sell its Dolby Digital-based products only to customers who
are licensees of Dolby. To date, most potential customers for the Company's
Dolby Digital-based products are licensees of Dolby. However, the failure or
refusal of potential customers to enter into license agreements with Dolby in
the future could adversely affect the Company's business, operating results
or financial condition.
The Company licenses the manufacture and distribution of products
incorporating its DFP and VSP technologies to an OEM on a non-exclusive
basis. Under this license arrangement the Company received a one-time payment
and receives royalties on each sale by its licensee. The Company does not
expect to derive significant revenues in future periods from the licensing of
its DFP and VSP technologies.
BACKLOG
Sales of the Company's products are made pursuant to firm purchase
orders. However, the Company at times allows customers to cancel or
reschedule deliveries. In addition, purchase orders are subject to price
renegotiations and to changes in quantities of products ordered as a result
of changes in customers' requirements and manufacturing availability. The
Company's business is characterized by short lead times and quick delivery
schedules. As a result of the foregoing factors, the Company does not believe
that backlog at any given time is a meaningful indicator of future sales.
MANUFACTURING
The Company contracts its wafer fabrication, assembly and testing to
independent foundries and contractors, which enables the Company to focus on
its design strengths, minimize fixed costs and capital expenditures and gain
access to advanced manufacturing facilities. The Company's engineers work
closely with the Company's foundries and subcontractors to increase yields,
lower manufacturing costs and assure quality.
The Company's primary foundries are Taiwan Semiconductor Manufacturing
Company, Ltd. ("TSMC"), which has manufactured certain of the Company's
integrated circuits since 1987, Fujifilm, which has manufactured certain of
the Company's integrated circuits since 1993, and Motorola Inc. ("Motorola"),
which has manufactured gate array-based products for the Company since 1993.
In 1994, 1995 and 1996, these three foundries manufactured substantially all
of the Company's products. Fujifilm is currently manufacturing the Company's
JPEG coder, its JPEG-based converter products and its MPEG 1 decoder.
Motorola is currently manufacturing the Company's motion JPEG controller and
PCI multimedia controller, and TSMC is currently manufacturing the Company's
audio and JPEG products. The Company's independent foundries fabricate
products for other companies and may also produce products of their own
design.
Most of the Company's devices are currently fabricated using
complementary metal oxides semiconductor ("CMOS") process technology with 0.6
micron and 0.8 micron feature sizes. All of the Company's semiconductor
products are currently being assembled by one of two independent contractors,
ASAT, Inc. ("ASAT") and Anam Industrial ("Anam") and tested by those
contractors or other independent contractors.
Zoran's ZR36050 JPEG codec and ZR36100 and ZR36110 MPEG 1 decoder were
developed jointly with Fujifilm and are currently manufactured by Fujifilm
pursuant to an agreement that grants Fujifilm the right to manufacture up to
80% of the Company's requirements for these products subject to Fujifilm's
ability to manufacture these products on substantially the same or better
terms and conditions as the Company could obtain from a third party. This
agreement also grants Fujifilm certain marketing rights in Japan with respect
to these products. See "Sales and Marketing."
The Company currently purchases products from all of its foundries under
individually negotiated purchase orders. Zoran's agreement with Fujifilm
entitles Zoran to obtain wafer foundry services from Fujifilm on most favored
pricing and availability terms, subject to Fujifilm's technological
capabilities and reasonable limitations as to quality and delivery terms
requested by Zoran.
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The Company does not currently have a long-term supply contract with
TSMC or Motorola, and therefore neither TSMC nor Motorola is obligated to
supply products to the Company for any specific period, in any specific
quantity or at any specified price, except as may be provided in a particular
purchase order.
THE COMPANY'S RELIANCE ON INDEPENDENT FOUNDRIES AND ASSEMBLY AND TESTING
HOUSES INVOLVES A NUMBER OF RISKS. "ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - FUTURE
PERFORMANCE AND RISK FACTORS."
COMPETITION
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. Certain of the Company's principal competitors
maintain their own semiconductor foundries and may therefore benefit from
certain capacity, cost and technical advantages. In the market for JPEG-based
products for desktop video editing applications, the Company's principal
competitors are C-Cube Microsystems, Inc. ("C-Cube") and LSI Logic
Corporation ("LSI Logic"). In the market for MPEG-based products for video
playback applications, the Company's principal competitors are C-Cube, ESS
Technology, Oak Technology, Inc. ("Oak"), S3 Incorporated, SGS Thomson
Microelectronics, NV ("SGS Thomson") and Winbond Electronics Ltd. In the
markets for PCI multimedia controllers, the Company's principal competitors
are Auravision Corporation, Brooktree Corporation and Philips Semiconductor.
Motorola and SGS Thomson are shipping limited quantities of Dolby
Digital-based audio compression products, and several other companies,
including Crystal Semiconductor, LSI Logic and Texas Instruments have
announced their intention to introduce such products. C-Cube has introduced
integrated audio and video devices for DVD applications, and other
manufacturers have announced their intention to introduce such products.
These manufacturers, as well as others, are licensed by Dolby to incorporate
Dolby Digital technology in their products. In addition, certain
manufacturers, including Sony Corporation, incorporate compression
technologies other than Dolby Digital in certain audio products that compete
with products using the Company's integrated circuits. In the markets for
JPEG-based products for use in filmless digital cameras, color scanners and
color laser printers, the Company's principal competitors are Casio Computer
Co., Ltd. and Ricoh Co. Ltd. In the market for MPEG-based chip core
products, the Company's principal competitors are David Sarnoff Research
Center, Hyundai/Odeum and SICAN Microelectronics Corp. In the market for the
Company's MPEG-based software products, the Company's principal competitors
are Mediamatics Corporation, Oak and Xing Technology Corporation. The
Company believes that its ability to compete successfully in the rapidly
evolving markets for high performance video and audio compression technology
depends on a number of factors, including the price, quality and performance
of the Company's and its competitors' products, the timing and success of new
product introductions by the Company, its customers and its competitors, the
emergence of new industry standards, the Company's ability to obtain adequate
foundry capacity, the number and nature of the Company's competitors in a
given market and general market and economic conditions.
The markets in which the Company competes are intensely competitive and
are characterized by rapid technological change, declining average unit
selling prices ("ASPs") and rapid product obsolescence. The Company expects
competition to increase in the future from existing competitors and from
other companies that may enter the Company's existing or future markets with
solutions which may be less costly or provide higher performance or more
desirable features than the Company's products. For example, International
Business Machines Corporation ("IBM") has recently announced its intention to
offer integrated circuits incorporating compression technology for certain
video and audio applications. To date, IBM has not announced products
competitive with any of the Company's products. However, there can be no
assurance that IBM will not enter the Company's markets in the future.
The DVD market is in its infancy, and additional competitors are
expected to enter the market for DVD software in 1997 and 1998. The Company
believes that several large Japanese consumer electronics companies may be
planning to enter this market and may, accordingly, attempt to develop MPEG 2
hardware or software that may be competitive with the Company's products.
Certain of these potential competitors may develop captive implementations
for use only with their own PCs and consumer
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electronics products. It is also possible that application software vendors,
such as Microsoft, may attempt to enter the DVD application market in the
future. This increased competition may result in price reductions, reduced
margins and loss of market share.
Historically, ASPs in the semiconductor industry in general, and for the
Company's products in particular, have decreased over the life of a
particular product. The Company expects that the ASPs of its products will
continue to be subject to significant pricing pressures in the future. In
order to offset expected declines in the ASPs of its products, the Company
will likely need to reduce the cost of its products by implementing design
changes that lower the cost of manufacture, assembly or testing, negotiating
reduced charges by its foundries as and if volumes increase, and successfully
managing its manufacturing and subcontracting relationships. Since the
Company does not operate its own manufacturing, assembly or testing
facilities, it may not be able to reduce its costs as rapidly as companies
that operate their own facilities. The failure of the Company to introduce
lower cost versions of its products in a timely manner or to successfully
manage its manufacturing, assembly and testing relationships would have a
material adverse effect on its business, operating results and financial
condition.
PROPRIETARY RIGHTS AND LICENSES
The Company's ability to compete successfully is dependent in part upon
its ability to protect its proprietary technology and information. Although
the Company relies on a combination of patents, copyrights, trademarks, trade
secret laws and licensing arrangements to protect certain of its intellectual
property, the Company believes that factors such as the technological and
creative skills of its personnel and the success of its ongoing product
development efforts are more important in maintaining its competitive
position. The Company generally enters into confidentiality or license
agreements with its employees, distributors, customers and potential
customers and limits access to its proprietary information. The Company
currently holds several United States patents, and has additional patent
applications pending, that pertain to technologies and processes relating to
the Company's current business. There can be no assurance that the Company's
intellectual property rights, if challenged, will be upheld as valid, will be
adequate to prevent misappropriation of its technology or will prevent the
development of competitive products. Additionally, there can be no assurance
that the Company will be able to obtain patents or other intellectual
property protection in the future. In particular, patents relating to the
establishment, development and maintenance of the MPEG standard are unclear
and may be subject to continuing claims by numerous third parties.
Furthermore, the laws of certain foreign countries in which the Company's
products are or may be developed, manufactured or sold, including various
countries in Asia, may not protect the Company's products or intellectual
property rights to the same extent as do the laws of the United States and
thus make the possibility of piracy of the Company's technology and products
more likely in these countries.
The Company sells its Dolby Digital-based products under a perpetual
non-exclusive license from Dolby which permits the Company to incorporate
Dolby's Digital algorithm into its products. The Company's customers enter
into license agreements with Dolby pursuant to which they pay royalties
directly to Dolby. Under the Company's agreement with Dolby, the Company may
sell its Dolby Digital-based products only to customers who are licensees of
Dolby. To date, most potential customers for the Company's Dolby
Digital-based products are licensees of Dolby. However, the failure or
refusal of potential customers to enter into license agreements with Dolby in
the future could adversely affect the Company's business, operating results
or financial condition.
The color space converter, raster-to-block converter and integrated
converter sold by the Company under its name are manufactured by Fujifilm and
sold by the Company pursuant to a non-exclusive agreement which expires in
1999. This agreement entitles the Company to purchase these products from
Fujifilm under the most favorable terms and conditions granted by Fujifilm to
its customers.
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights, which have resulted in significant
and often protracted and expensive litigation. Although there is currently no
pending intellectual property litigation involving the Company, the Company
or its foundries may from time to time be notified of claims that the Company
may be infringing patents or other intellectual property rights owned by
third parties. In particular, given the uncertainty discussed above
regarding patents relating to the MPEG standard, it is difficult for the
Company to assess the possibility
17
<PAGE>
that its activities in MPEG field may give rise to future patent infringement
claims. Litigation by or against the Company relating to patent infringement
or other intellectual property matters could result in significant expense to
the Company and divert the efforts of the Company's technical and management
personnel, whether or not such litigation results in a determination
favorable to the Company. In the event of an adverse result in any such
litigation, the Company could be required to pay substantial damages, cease
the manufacture, use and sale of infringing products, expend significant
resources to develop non-infringing technology, discontinue the use of
certain processes or obtain licenses to the infringing technology. There can
be no assurance that licenses would be offered or that the terms of any
offered licenses would be acceptable to the Company. The failure to obtain a
license from a third party for technology used by the Company could cause the
Company to incur substantial liabilities and to suspend the manufacture of
products, or the use by the Company's foundries of certain processes.
EMPLOYEES
As of December 31, 1996, the Company had 115 full-time and 27 part-time
and contract employees, including 70 full-time and 15 part-time and contract
employees primarily involved in research and development activities, 25 in
marketing and sales, 21 in finance and administration and 11 in manufacturing
control and quality assurance. Fifty-nine of the Company's full-time
employees and 19 of its part-time and contract employees, including 55 of the
personnel who are primarily involved in engineering and research and
development, are based in Israel, with the remainder at the Company's
facilities in Santa Clara, California. The Company believes that its future
success will depend, in large part, on its ability to attract and retain
highly-skilled, engineering, managerial, sales and marketing personnel.
Competition for such personnel is intense. The Company's employees are not
represented by any collective bargaining unit, and the Company has never
experienced a work stoppage. The Company believes that its employee relations
are good.
ITEM 2. PROPERTIES.
The Company's executive offices and its principal administration,
marketing and sales operations are located in approximately 8,800 square feet
of leased space in Santa Clara, California under leases which expire in
September 1997. The Company occupies a second facility in Santa Clara,
California, consisting of approximately 8,000 square feet, under a lease
which expires in June 1997. The Company's principal research and development
and engineering facilities and the balance of its administration, marketing
and sales operations are located in approximately 14,000 square feet of
leased space in an industrial park in Haifa, Israel under a lease which
expires in 2002. The aggregate annual gross rent for the Company's facilities
was approximately $405,000 in 1996. See Note 7 of Notes to Consolidated
Financial Statements. The Company believes that its current facilities are
adequate for its needs for the foreseeable future and that, should it be
needed suitable additional space will be available to accommodate expansion
of the Company's operations on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any pending legal proceedings which it
believes will materially affect its financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At a special meeting held on December 27, 1996, the stockholders of the
Company approved the issuance of shares of the Company's Common Stock in
exchange for shares of Common Stock of CompCore pursuant to an Amended and
Restated Agreement and Plan of Reorganization, dated as of November 27, 1996,
which provided for, among other things, (i) the merger of CompCore with a
wholly-owned subsidiary of the Company and (ii) the conversion of each issued
and outstanding share of CompCore Common Stock into the right to receive
0.6408 of a share of the Company's Common Stock. At the special meeting,
holders of 3,772,528 shares of the Company's Common Stock voted in favor of
the proposal, holders of 15,090 shares voted against the proposal, and
holders of 7,852 shares abstained; no broker non-votes were recorded.
18
<PAGE>
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
Name Age Position
---- --- --------
Levy Gerzberg, Ph.D 52 President, Chief Executive Officer and Director
George T. Haber 45 Executive Vice President
Aharon Aharon 43 Vice President, Engineering-Haifa Operations
Paul R. Goldberg 51 Vice President, Systems Solutions
Ami Kraft 54 Vice President, Finance and Chief Financial Officer
Isaac Shenberg, Ph.D 46 Vice President, Sales and Marketing
Alex Sinar 48 Vice President, Operations
Dr. Gerzberg was a co-founder of the Company in 1981 and has served as
its President and Chief Executive Officer since December 1988 and as a
director since 1981. Dr. Gerzberg also served as the Company's President from
1981 to 1984 and as its Executive Vice President and Chief Technical Officer
from 1985 to 1988. Prior to co-founding the Company, Dr. Gerzberg was
Associate Director of Stanford University's Electronics Laboratory. Dr.
Gerzberg holds a Ph.D. in Electrical Engineering from Stanford University and
an M.S. in Medical Electronics and a B.S. in Electrical Engineering from the
Technion-Israel Institute of Technology (the "Technion") in Haifa, Israel.
Mr. Haber has served as Executive Vice President and a director of the
Company since December 1996. Mr. Haber was a founder of CompCore and served
as CompCore's President, Chief Executive Officer, Chief Financial Officer and
a director of CompCore from its founding in November 1993 until its
acquisition by Zoran in December 1996. Prior to founding CompCore, Mr. Haber
held engineering positions at Toshiba/SGI from January 1993 to August 1993
and Sun Microsystems, Inc. from 1990 to January 1993. Mr. Haber holds a B.A.
from the Technion.
Mr. Aharon joined the Company as Vice President, Engineering-Haifa
Operations in February 1997. From 1983 to February 1997, Mr. Aharon was
employed by International Business Machines Corporation in a variety of
engineering and management positions, including Senior Manager of VLSI Design
Tools from 1993 to February 1997 and Design Automation Manager from 1989 to
1993. Mr. Aharon holds a B.S. and M.S. in Electrical Engineering from The
Technion.
Mr. Goldberg joined Zoran as Vice President, Systems Solutions in June
1996. From April 1991 to June 1996, Mr. Goldberg was employed as film
products group leader at Dolby Laboratories, Inc. From 1988 to 1990, Mr.
Goldberg was Director of the Tandy Electronic Research Center. From 1979 to
1988, Mr. Goldberg was employed by Wavetek Incorporated and its spin-off,
Advanced Image Data ("AID"), most recently as Vice President of Research and
Development and Market Development of AID. Prior thereto, Mr. Goldberg was
employed by Smith Kline Instruments, most recently as Director of Biomedical
Research and Development. Mr. Goldberg holds a B.S. in Electrical
Engineering from the University of Minnesota.
Mr. Kraft joined the Company as Vice President, Finance and Chief
Financial Officer in March 1994. From 1972 to 1985 and again from 1987 to
February 1994, Mr. Kraft served as Deputy Managing Director of Finance and
Administration of Kulicke & Soffa (Israel), a semiconductor equipment
company. Mr. Kraft served as International Controller of Kulicke & Soffa USA
from 1985 to 1987. Mr. Kraft graduated from Haifa University with a major in
finance and accounting.
Dr. Shenberg has served as Vice President, Sales and Marketing of the
Company since January 1995. From August 1990 to January 1995, Dr. Shenberg
served as the Company's Product Line Business Manager. Dr. Shenberg holds a
Ph.D. in Electrical Engineering from Stanford University and a M.S. and B.S.
in Electrical Engineering from the Technion.
19
<PAGE>
Mr. Sinar has served as Vice President, Operations of the Company since
February 1997. From January 1995 to February 1997, Mr. Sinar served as the
Company's Director of Manufacturing. From 1992 to December 1994, Mr. Sinar
supervised the Company's Quality Assurance and Technology groups and from
1990 to 1992, he supervised the Company's Product Engineering group. From
1983 to 1990, Mr. Sinar held positions with the Company in the areas of
process development, product and test engineering, reliability and quality.
From 1977 to 1983, Mr. Sinar worked in the Microelectronics Laboratory at the
Technion developing process technology for infra-red detectors and
semiconductors. Mr. Sinar holds a M.S. in Electrical Engineering from the
Technion and a B.S. in Electrical Engineering Polytechnic Institute in Kiev.
20
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
The Company effected the initial public offering of its Common Stock on
December 15, 1995. Since that date, the Company's Common Stock has been
quoted on The Nasdaq National Market under the symbol "ZRAN." The following
table sets forth the high and low closing sales price of the Company's Common
Stock as reported as The Nasdaq National Market for the periods indicated:
High Low
---- ---
1995:
Fourth Quarter (from December 15)....... $20.75 $15.00
1996:
First Quarter........................... 40.00 18.75
Second Quarter.......................... 31.75 16.25
Third Quarter........................... 19.75 10.125
Fourth Quarter.......................... 22.50 15.25
As of December 31, 1996, there were 403 stockholders of record of the
Company's Common Stock.
The Company has never paid cash dividends on its capital stock. It is
the present policy of the Company to retain earnings to finance the growth
and development of its business and, therefore, the Company does not
anticipate paying any cash dividends in the foreseeable future.
21
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and the notes thereto
included elsewhere herein.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Product sales. . . . . . . . . . . . . . . . . $ 1,490 $ 2,044 $ 6,243 $ 18,086 $ 35,503
Development and licensing. . . . . . . . . . . 5,849 2,685 3,256 5,378 8,606
-------- -------- -------- -------- --------
Total revenues . . . . . . . . . . . . . . . 7,339 4,729 9,499 23,464 44,109
-------- -------- -------- -------- --------
Costs and expenses:
Cost of product sales. . . . . . . . . . . . . 1,469 2,601 4,677 9,306 20,262
Research and development . . . . . . . . . . . 4,638 5,002 4,887 5,916 8,954
Selling, general and
administrative. . . . . . . . . . . . . . . 3,601 4,558 4,376 6,748 10,739
Merger and related . . . . . . . . . . . . . . -- -- -- -- 2,153
-------- -------- -------- -------- --------
Total costs and expenses . . . . . . . . . . 9,708 12,161 13,940 21,970 42,108
-------- -------- -------- -------- --------
Operating income (loss). . . . . . . . . . . . . (2,369) (7,432) (4,441) 1,494 2,001
Interest and other income
(expense), net. . . . . . . . . . . . . . . . (88) (209) (225) (147) 1,027
-------- -------- -------- -------- --------
Income (loss) before income taxes. . . . . . . . (2,457) (7,641) (4,666) 1,347 3,028
Provision for income taxes . . . . . . . . . . . 173 48 229 399 665
-------- -------- -------- -------- --------
Net income (loss). . . . . . . . . . . . . . . . $ (2,630) $ (7,689) $ (4,895) $ 948 $ 2,363
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net income (loss) per share (1). . . . . . . . . $ (0.49) $ (1.21) $ (0.69) $ 0.11 $ 0.22
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Weighted average common shares and
equivalents (1). . . . . . . . . . . . . . . 5,339 6,348 7,136 8,397 10,661
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, equivalents and short-term investments. . . $ 1,086 $ 1,261 $ 1,743 $ 21,438 $ 23,419
Working capital (deficit). . . . . . . . . . . . (876) (222) (2,272) 19,753 24,673
Total assets . . . . . . . . . . . . . . . . . . 4,584 5,155 7,205 31,264 41,382
Long-term debt, less current portion . . . . . . 1,513 1,319 1,027 601 --
Accumulated deficit. . . . . . . . . . . . . . . (39,961) (47,650) (52,545) (51,697) (49,334)
Total stockholders' equity (deficit) . . . . . . 27 767 (1,176) 20,917 28,530
</TABLE>
- ----------------------------------------
(1) See Note 2 of Notes to Consolidated Financial Statements for a
description of the computation of the number of shares and net income
(loss) per share.
22
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
From the Company's inception in 1981 through 1991, the Company derived
the substantial majority of its revenue from DFPs and 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 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-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 manufacturers.
In December 1996, the Company acquired CompCore, a designer of cores for
video and audio decoder integrated circuits and a provider of software-based
compression products. Zoran issued approximately 2.0 million shares of Zoran
Common Stock in exchange for all of the outstanding Common Stock of CompCore.
Zoran 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.
No significant adjustments were required to conform the accounting policies of
Zoran and CompCore.
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 have
fluctuated substantially during the past three years, these fluctuations have
been driven principally by changes in customer mix (OEM sales versus sales to
distributors) and the transition from low-volume "test" sales to high-volume
production sales rather than by factors related to product life cycles.
During 1996, the Company experienced pricing pressure on certain of its first
generation multimedia products which adversely affected ASPs. The Company
believes that, as its multimedia product lines continue to mature and
competitive markets evolve, it is likely to experience further declines in
the ASPs of its multimedia products, although the timing and amount of such
future changes cannot be predicted with any certainty. There can be no
assurance that costs will decrease at the same rate as such declines in ASPs,
or at all.
The Company sells its products, either directly or through distributors or
independent sales representatives, to OEMs worldwide. Sales prices to
distributors are generally lower than 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, 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. 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.
23
<PAGE>
The Company is a party to certain research and development agreements
with the Chief Scientist and 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 and its development and
licensing revenue 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 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.
In October 1994, the Company contributed technology relating to its
ghost cancellation products to a newly-formed company (the "Joint Venture")
and to the Joint Venture's subsidiary, Oren Semiconductor, Ltd. ("Oren"), and
an unrelated third party contributed cash, each in exchange for a 50% equity
interest in the Joint Venture. Since the organization of the Joint Venture,
efforts relating to the development and marketing of ghost cancellation
products have been conducted by the Joint Venture, through Oren. In
September 1995, the Company approved the transfer of its interest in the
Joint Venture, and $100,000 in cash, to GC Holdings Corporation ("Holdings"),
a wholly-owned subsidiary of the Company, as Holdings' initial capital and
declared a dividend to its stockholders of all of its stock in Holdings.
24
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of
operations data as a percentage of total revenues for the periods indicated:
YEARS ENDED DECEMBER 31,
------------------------------
1994 1995 1996
-------- -------- --------
Revenues:
Product sales . . . . . . . . . . . . . . . 66 % 77 % 80 %
Development and licensing . . . . . . . . . 34 23 20
----- ----- -----
Total revenues. . . . . . . . . . . . . . 100 100 100
----- ----- -----
Costs and expenses:
Cost of product sales . . . . . . . . . . . 49 40 46
Research and development. . . . . . . . . . 52 25 20
Selling, general and administrative . . . . 46 29 24
Merger and related. . . . . . . . . . . . . -- -- 5
----- ----- -----
Total costs and expenses. . . . . . . . . 147 94 95
----- ----- -----
Operating income (loss). . . . . . . . . . . (47) 6 5
Interest and other income (expense), net . . (2) -- 2
----- ----- -----
Income (loss) before income taxes. . . . . . (49) 6 7
Provision for income taxes . . . . . . . . . 3 2 2
----- ----- -----
Net income (loss). . . . . . . . . . . . . . (52)% 4 % 5 %
----- ----- -----
----- ----- -----
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES. Product sales consist primarily of revenues from sales of the
Company's integrated circuits. Product sales increased to $35.5 million in
1996 from $18.1 million in 1995, an increase of 96%. The increases in
product sales resulted primarily from continued growth in unit sales of the
Company's Dolby Digital audio decoders, which are used in home audio
equipment and DVD players. Although sales of these products increased
substantially from 1995, there have been delays in the development of the DVD
market and there is still uncertainty regarding the timing of volume
production and shipping of DVD players. In addition, unit sales of the
Company's JPEG devices increased in 1996 compared to 1995. This increase
reflected development of the markets for video editing and digital filmless
cameras, although the market for consumer-oriented video editing equipment
has developed more slowly than had been anticipated. Unit sales increases in
these product lines were partially offset by lower ASPs due to volume pricing
and a higher proportion of sales to Fujifilm. Product sales for 1996 also
reflected revenue from an advance payment deferred in prior periods and
recognized in the third quarter of 1996 upon the completion of a multi-year
sales program with one of the Company's strategic partners. Sales to
Fujifilm, the Company's strategic partner and distributor in Japan, as well
as an OEM customer, accounted for 43% of the Company's product sales in 1996,
compared to 5% in 1995. The Company's next two largest customers accounted
for an aggregate of 26% of the Company's product sales in 1996, compared to
41% in 1995.
Development and licensing revenue consists primarily of revenue from
hardware design contracts that provide for license and milestone payments to
be made at specified times, and license and royalty revenues generated
primarily from the license of audio and video decoder software. License and
royalty
25
<PAGE>
agreements generally provide for the license of software for a specified period
of time for either a single fee or a fee based on the number of units
distributed by the licensee. Development and licensing revenue increased to
$8.6 million in 1996 from $5.4 million in 1995, an increase of 60%, due
primarily to an increase in the number of contracts under which CompCore earns
license and royalty revenue.
PRODUCT GROSS PROFIT. Product gross profit consists of product sales
less cost of product sales. Cost of product sales consists primarily of
fabrication costs, assembly and test costs, and the cost of materials and
overhead from operations. Product gross margin was 43% in 1996 compared to
49% in 1995. 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 decrease in product gross margin
from 1995 was primarily due to higher volume sales of relatively lower
priced, lower margin Dolby Digital-based products and certain JPEG-based
products sold to Fujifilm, the Company's strategic partner, customer and
distributor in Japan. The decrease in product gross margin in 1996 was
partially offset by revenues recognized upon completion of the multi-year
contract with a strategic partner. Without the benefit of these revenues,
product gross margin for 1996 would have been 41%. Product gross margin in
1995 was also positively impacted by sales of high-margin, "end-of-life" DFP
and VSP products, primarily in the first quarter. The Company expects
product and customer mix to continue to fluctuate in future quarters, causing
further fluctuations in margins.
RESEARCH AND DEVELOPMENT. Research and development ("R&D") expenses
consist of salaries and related costs of employees engaged in ongoing
research, design and development activities and costs of engineering
materials and supplies. R&D expenses increased to $9.0 million in 1996 from
$5.9 million in 1995, an increase of 51%. The increase in R&D expenses was
the result of planned growth in development activities and development
capabilities of both Zoran and CompCore. R&D expenses were net of
reimbursements in the amounts of $182,000 and $200,000 in 1996 and 1995,
respectively, under product development agreements with the Chief Scientist.
R&D expenses as a percentage of total revenues decreased to 20% in 1996 from
25% in 1995. 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 consist primarily of employee-related expenses, royalties,
sales commissions, product promotion and other professional services. SG&A
expenses increased to $10.7 million in 1996 from $6.7 million in 1995, an
increase of 59%. The increase in SG&A expenses was due primarily to increased
sales and marketing expenses to support increased sales levels, increased
royalties related to higher product sales and increased administrative
expenses associated with Zoran's status as a publicly-traded company. SG&A
expenses decreased as a percentage of total revenues to 24% in 1996 from 29%
in 1995. The Company expects that SG&A expenses will continue to increase in
order to support the growth of the Company.
MERGER AND RELATED EXPENSES. Total costs and expenses in 1996 include
non-recurring merger and related expenses of $2.2 million. These expenses
related to the merger of Zoran and CompCore in December 1996 and include
professional fees, other direct transaction costs and other merger-related
costs associated with combining the operations of the two companies.
OPERATING INCOME (LOSS). The Company's operating income increased to
$2.0 million in 1996 from $1.5 million in 1995. Excluding the non-recurring
merger and related expenses, the Company's operating income for 1996 would
have been $4.2 million.
INTEREST AND OTHER INCOME (EXPENSE), NET. Net interest and other income
and expense resulted in net other income of $1.0 million in 1996 compared to
net other expense of $147,000 in 1995. Interest expense decreased due to the
use of proceeds from the initial public stock offering of the Company's
Common Stock (the "IPO") in December 1995 to repay 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.
26
<PAGE>
PROVISION FOR INCOME TAXES. The provision for income taxes increased to
$665,000 for 1996 from $399,000 for 1995. The Company's tax provision for
1996 primarily reflects foreign withholding taxes, income taxes on CompCore's
earnings and alternative minimum tax on Zoran's domestic earnings.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
REVENUES. Product sales increased to $18.1 million in 1995 from $6.2
million in 1994, an increase of 190%. JPEG-based product sales increased
reflecting an increase in unit sales volume and a 19% increase in ASPs, which
resulted from an increase in the proportion of sales made directly to OEMs as
opposed to distributors and a shift in product mix toward higher priced chip
sets with greater functionality. During 1994, sales to Fujifilm, the
Company's principal distributor, accounted for 60% of the Company's
JPEG-based product sales. The Company made no sales of JPEG-based products
to Fujifilm in 1995. Sales of MPEG-based products, which the Company began
shipping in the third quarter of 1994, increased in 1995 as a result of an
increase in unit sales volume. Unit sales of audio products increased
substantially in 1995 as the Company expanded and improved its audio product
line, Dolby Digital gained increased acceptance as an audio compression
standard and the Company's customers moved from the development to the
production phase. Audio product ASPs decreased in 1995 due to volume pricing
and an increase in the proportion of sales made directly to Fujifilm.
Overall, sales to Fujifilm accounted for 10% of the Company's total revenues
in 1995, including 5% of product sales and 25% of development and license
revenue, compared to 48% of total revenues in 1994, including 44% of product
sales and 54% of development and license revenue. Sales of the Company's
discontinued DFP and VSP product lines were $1.5 million in 1995, most of
which occurred in the first quarter, compared to $1.2 million in 1994,
approximately half of which occurred in the fourth quarter, as a result of
"end of life" announcements with respect to these products resulting in
volume shipments.
Development and licensing revenue was $5.4 million for 1995 compared to
$3.3 million for 1994. The increase was primarily due to growth in the number
of development contracts to modify and integrate CompCore's MPEG 1 technology
for specific applications and an increase in the number of contracts under
which CompCore earns license and royalty revenue.
PRODUCT GROSS PROFIT. Product gross profit increased to $8.8 million in
1995 from $1.6 million in 1994, an increase of 461%. Product gross margin
improved to 49% in 1995 from 25% in 1994. The improved product gross margin
in 1995 resulted primarily from increased ASPs for JPEG-based products,
relatively stable overhead costs applied to substantially higher production
volumes, manufacturing yield improvements, continued cost reductions
resulting from volume purchases by the Company and increased high-margin "end
of life" sales of the Company's discontinued DFP and VSP products.
RESEARCH AND DEVELOPMENT. R&D expenses increased to $5.9 million in
1995 from $4.9 million in 1994, an increase of 21%. The increase in R&D
expenses was primarily due to the addition of personnel in connection with
CompCore's development of its MPEG 2 technology as well as the enhancement of
its existing MPEG 1 technology. This increase was partially offset by
personnel reductions related to the transfer of Zoran R&D personnel to Oren
and a decrease in the number of manufacturing engineers as Zoran increased
its reliance on independent contractors to perform manufacturing, engineering
and testing. R&D expenses were net of reimbursements in the amounts of
$200,000 and $549,000 in 1995 and 1994, respectively, under product
development agreements with the Chief Scientist. R&D expenses as a
percentage of total revenues decreased to 25% in 1995 from 52% in 1994.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses increased to $6.7
million in 1995 from $4.4 million in 1994, an increase of 54%. The increase
in SG&A expenses was due primarily to increased commissions and royalties
related to higher product sales. Employee-related expenses also increased in
1995 as the Company expanded its infrastructure to support increased sales.
SG&A expenses decreased as a percentage of total revenues to 29% in 1995 from
46% in 1994.
INTEREST AND OTHER INCOME (EXPENSE), NET. Net interest and other expense
decreased to $147,000 in 1995 from $225,000 in 1994, due to interest income
earned on the investment of the proceeds from warrant exercises in October
1995 and the IPO in December 1995 which more than offset increased interest
expense related to increased borrowings earlier in the year.
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PROVISION FOR INCOME TAXES. The provision for income taxes increased to
$399,000 in 1995 from $229,000 in 1994. The income tax provision for 1995
resulted from income taxes on CompCore's earnings, alternative minimum tax on
the Zoran's distribution of its stock in Holdings to Zoran's stockholders and
on its domestic earnings and foreign withholding taxes of both companies. The
income tax provision for 1994 resulted from income taxes on CompCore's
earnings.
LIQUIDITY AND CAPITAL RESOURCES
Until the IPO in December 1995, the Company had financed its operations
primarily through private placements of equity securities and, to a lesser
extent, borrowings from banks and its stockholders. Prior to the IPO, net
proceeds from the sale of the Company's equity securities aggregated $55.1
million. Net proceeds from the IPO and the exercise of certain warrants in
connection with the IPO totaled $17.5 million. In January 1996, the
Company's underwriters exercised their over-allotment option resulting in
additional IPO-related proceeds of $3.9 million. At December 31, 1996, the
Company had $11.2 million of cash and cash equivalents, $12.2 million of
short-term investments and $24.7 million of working capital.
The Company's operating activities used cash of $2.7 million in 1994
and provided cash of $1.2 million in 1995 and $1.4 million in 1996. Cash
used in operating activities for 1994 primarily reflected net losses,
partially offset by depreciation and amortization and changes to working
capital. Cash provided by operating activities in 1995 and 1996 reflected
net income and depreciation and amortization, partially offset by cash used
for working capital.
The Company's capital expenditures totaled $799,000 in 1994, $677,000 in
1995 and $3.5 million in 1996. Capital expenditures for 1997 are expected to
be approximately $2 million. The Company repaid its short-term bank
borrowings of $1.9 million in December 1995 and its long-term bank debt of
$973,000 in 1996 with the proceeds of the IPO and, as of December 31, 1996,
had no bank debt. In July 1996, CompCore borrowed $1.0 million from an
individual and issued a convertible promissory note in such amount. Under
the terms of the note, the entire principal balance and all accrued interest
was converted into Common Stock upon the consummation of the CompCore
acquisition.
The Company believes that its current balances of cash, cash equivalents
and short-term investments, together with existing sources of liquidity and
anticipated cash flow from operations, will satisfy the Company's anticipated
working capital and capital equipment requirements through 1997.
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
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. Sales of audio products
accounted for an increased percentage of product sales in 1996. The Company
expects that video editing 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
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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. See "Item 1. Business -- Strategy" and "Business --
Markets and Applications."
RELIANCE ON INDEPENDENT FOUNDRIES AND CONTRACTORS. The Company does not
operate any manufacturing facilities, and from time to time shortages of
foundry capacity develop for certain process technologies in the
semiconductor industry. The Company currently relies on independent
foundries to manufacture substantially all of its products. The Company's
independent foundries fabricate products for other companies and may also
produce products of their own design. The Company does not have a long-term
supply contract with either TSMC or Motorola, its principal suppliers, and,
therefore, neither TSMC nor Motorola is obligated to supply products to the
Company for any specific period, in any specific quantity or at any specified
price, except as may be provided in a particular purchase order. See "Item 1.
Business -- Manufacturing."
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 Company obtains foundry capacity through forecasts that are
generated in advance of expected delivery dates and places its purchase
orders up to three months prior to scheduled delivery. The Company's ability
to obtain the foundry capacity necessary to meet the future demand for its
products is based in part on its ability to accurately forecast future
demand. Due to periodic limitations on semiconductor foundry capacity, if
the Company fails to accurately forecast its future demand, the Company may
be unable to obtain adequate supplies of integrated circuits on a timely
basis. There can be no assurance that the Company will be able to accurately
forecast the future demand for its products or obtain sufficient foundry
capacity in the future. In addition, the Company's obligation to place
purchase orders in advance of delivery subjects the Company to inventory
risks, including the risk of obsolescence. While the Company has not
experienced any material disruptions in supply to date, there can be no
assurance that manufacturing problems will not occur in the future. In the
event that any of the Company's foundries are unable or unwilling to produce
sufficient supplies of the Company's products, in required volumes at
acceptable costs, the Company will be required to reallocate production among
its other existing foundries or to identify and qualify acceptable
alternative foundries. This qualification process could take six months or
longer, and no assurance can be given that any additional source would become
available to the Company or would be in a position to satisfy the Company's
production requirements on a timely basis. 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, ASAT and Anam, and tested by
those contractors or other independent contractors. See "Item 1. Business
- --Manufacturing." 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.
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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. The
development and introduction of new semiconductor products is a complex and
uncertain process requiring high levels of innovation, the accurate
anticipation of technological and market trends, the successful and timely
completion of product development, the ability of the Company to convince its
customers to incorporate the Company's products into the design of their own
products, the securing of sufficient foundry capacity and the achievement of
acceptable wafer yields by the Company's independent foundries. Development
of new product designs can often require significant expenditures by the
Company, which expenditures may precede volume sales of the new product, if
any, by a year or more. In addition, software products as complex as those
offered by the Company typically contain undetected errors or failures when
first introduced or as new versions are released. Accordingly, there can be
no assurance that, despite testing by the Company and by current and
potential customers, errors will not be found after commencement of
commercial shipments, resulting in loss of or delay in market acceptance
which, in turn, could have a material adverse effect upon the Company's
business, operating results and financial condition. The introduction of new
or enhanced products also requires the Company to manage the transition from
older products in order to minimize disruption in customer ordering patterns,
avoid excessive levels of older product inventories and ensure that adequate
supplies of new products can be delivered to meet customer demand. 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. See "Item 1. Business -- Industry Background" and "Business --
Research and Development."
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. 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. See "Item 1. Business -- Competition."
CUSTOMER CONCENTRATION; CHANGES IN CUSTOMER MIX. The Company's largest
customers have accounted for a substantial percentage of its revenues, and
sales to these large customers have varied materially from year to year. See
"Item 1. Business--Customers." 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.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS; NET OPERATING LOSS
CARRYFORWARDS. The Company's quarterly operating results have varied
significantly due to a number of factors, including the timing of new product
introductions by the Company and its competitors, market acceptance of new
and enhanced versions of the Company's products and products of its
customers, the timing of large customer orders, the availability of
development funding and the timing of development revenue, changes in the mix
of products sold, and competitive pricing pressures. The Company expects
that its operating results will fluctuate in
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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.
The Company's future net income and cash flow will also be affected by
its ability to apply its net operating losses ("NOLs"), which totaled
approximately $38.0 million and $500,000 for federal and state tax reporting
purposes as of December 31, 1996, against taxable income in future periods.
Under the Tax Reform Act of 1986, the utilization of NOLs may be impaired or
limited in certain circumstances, including a cumulative ownership change of
greater than 50% over a three-year period. The consummation of the IPO in
December 1995 resulted in a cumulative ownership change of greater than 50%.
Accordingly, the Company's NOLs incurred prior to the consummation of the IPO
that can be utilized to reduce future taxable income for federal tax purposes
will be limited to approximately $3 million per year. The Company does not
believe that its acquisition of CompCore in December 1996 adversely affected
its ability to utilize its NOLs. However, future changes of ownership could
further limit the Company's utilization of NOLs and could have an adverse
effect on the Company's net income and cash flow. Upon utilization of Israeli
NOLs, the Company's Israeli subsidiary will benefit from its status as an
"Approved Enterprise" pursuant to the Israeli Law for the Encouragement of
Capital Investments, 1959, as amended. There can be no assurance that
changes in tax laws in the United States or Israel or in the Company's status
will not limit the Company's ability to utilize its NOLs or its "Approved
Enterprise" status. Any limitation on the Company's ability to utilize its
NOLs or its "Approved Enterprise" status could have a material adverse effect
on the Company's business, operating results or financial condition. See
Note 9 of Notes to Consolidated Financial Statements.
RISKS ASSOCIATED WITH CUSTOMER FUNDED RESEARCH AND DEVELOPMENT. The
Company historically has 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. Under these contracts, the Company
receives payments upon reaching certain development milestones. See "Item 1.
Business - Research and Development." The Company intends to continue to
enter into development contracts with strategic partners, although it expects
development revenue to remain relatively constant or decrease, and to
decrease as a percentage of total revenues. The Company's failure to achieve
the milestones specified in its existing development contracts, the
termination of existing contracts or the Company's inability to secure future
development contracts could have an adverse effect on the Company's business,
operating results or financial condition.
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POSSIBLE TRANSACTIONS TO OBTAIN ADDITIONAL FOUNDRY CAPACITY. In order
to secure additional foundry capacity, the Company has considered and will
continue to consider various transactions, which could include, among other
things, equity investments from, option payments or other prepayments to,
nonrefundable deposits with or loans to foundries in exchange for capacity,
contracts that commit the Company to purchase specified quantities of wafers
over extended periods or joint ventures or other partnership relationships
with foundries. There can be no assurance that the Company will be able to
make any such arrangement in a timely fashion or at all or that such
arrangements, if any, will be on terms favorable to the Company. If the
Company were not able to obtain additional foundry capacity as required, its
business and operating results would be materially and adversely affected.
See "Item 1. Business - Manufacturing."
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING. The Company
may require substantial additional capital to finance its future growth,
secure additional foundry capacity and fund its ongoing research and
development activities beyond 1997. The Company's capital requirements will
depend on many factors, including, but not limited to, acceptance of and
demand for the Company's products, the types of arrangements that the Company
may enter into with its independent foundries and the extent to which the
Company invests in new technology and research and development projects. To
the extent that the Company's existing sources of liquidity and cash flow
from operations are insufficient to fund the Company's activities, the
Company may need to raise additional funds. If additional funds are raised
through the issuance of equity securities, the percentage ownership of the
Company's stockholders would be reduced. Further, such equity securities may
have rights, preferences or privileges senior to those of the Company's
Common Stock. No assurance can be given that additional financing will be
available when needed or that, if available, it will be available on terms
favorable to the Company.
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 its principal research and
development operations 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 INTELLECTUAL PROPERTY; LICENSED PRODUCTS; RISK OF DISPUTES
AND LITIGATION. The Company's ability to compete successfully is dependent
in part upon its ability to protect its proprietary technology and
information. Although the Company relies on a combination of patents,
copyrights, trademarks, trade secret laws and licensing arrangements to
protect certain of its intellectual property, the Company believes that
factors such as the technological and creative skills of its personnel and
the success of its ongoing product development efforts are more important in
maintaining its competitive position. The Company generally enters into
confidentiality or license agreements with its employees, distributors,
customers and potential customers and limits access to its proprietary
information. The Company currently holds several United States patents, and
has additional patent applications pending, that pertain to technologies and
processes relating to the Company's current business. There can be no
assurance that the Company's intellectual property rights, if challenged,
will be upheld as valid, will be adequate to prevent misappropriation of its
technology or will prevent the development of competitive products.
Additionally, there can be no assurance that the Company will be able to
obtain patents or other intellectual property protection in the future.
Furthermore, the laws of certain foreign countries in which the Company's
products are or may be developed, manufactured or sold, including various
countries in Asia, may not protect the Company's products or intellectual
property rights to the same extent as do the laws of the United States and
thus make the possibility of piracy of the Company's technology and products
more likely in these countries.
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The Company sells its Dolby Digital-based products under a perpetual,
non-exclusive license from Dolby which permits the Company to incorporate
Dolby's Digital algorithm into its products. The Company's customers enter
into license agreements with Dolby pursuant to which they pay royalties
directly to Dolby. Under the Company's agreement with Dolby, the Company may
sell its Dolby Digital-based products only to customers who are licensees of
Dolby. To date, most potential customers for the Company's Dolby Digital-
based products are licensees of Dolby. However, the failure or refusal of
potential customers to enter into license agreements with Dolby in the future
could adversely affect the Company's business, operating results or financial
condition.
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights, which have resulted in significant
and often protracted and expensive litigation. Although there is currently
no pending intellectual property litigation involving the Company, the
Company or its foundries may from time to time be notified of claims that the
Company may be infringing patents or other intellectual property rights owned
by third parties. Litigation by or against the Company relating to patent
infringement or other intellectual property matters could result in
significant expense to the Company and divert the efforts of the Company's
technical and management personnel, whether or not such litigation results in
a determination favorable to the Company. In the event of an adverse result
in any such litigation, the Company could be required to pay substantial
damages, cease the manufacture, use and sale of infringing products, expend
significant resources to develop non-infringing technology, discontinue the
use of certain processes or obtain licenses to the infringing technology.
There can be no assurance that licenses would be offered or that the terms of
any offered licenses would be acceptable to the Company. The failure to
obtain a license from a third party for technology used by the Company could
cause the Company to incur substantial liabilities and to suspend the
manufacture of products, or the use by the Company's foundries of certain
processes. See "Item 1. Business -- Proprietary Rights and Licenses."
DEPENDENCE ON KEY PERSONNEL; POTENTIAL DIVERSION OF MANAGEMENT
ATTENTION. 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.
Levy Gerzberg, the Company's President and Chief Executive Officer, and
Ami Kraft, the Company's Vice President, Finance and Chief Financial Officer,
currently serve on the Boards of Directors of Oren and Holdings and act as
managers of the Joint Venture, and the Company believes that they will
continue to serve in these capacities for the foreseeable future. Dr.
Gerzberg also is currently acting as co-Chief Executive Officer of Oren and
the Joint Venture and as Chief Executive Officer of Holdings. Currently,
these responsibilities are not requiring a material amount of the time and
attention of Dr. Gerzberg or Mr. Kraft. Oren intends to hire a full-time
chief executive officer prior to commencement of volume product shipments.
However, should Oren experience delays in identifying and hiring a permanent
chief executive officer, or should Oren, Holdings or the Joint Venture
require the attention of senior management or the Board of Directors, Dr.
Gerzberg or Mr. Kraft may be required to devote substantial time to the
affairs of such company. Such a diversion of the attention of Dr. Gerzberg
or Mr. Kraft 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. Sales to non-U.S. customers in and 1994, 1995 and 1996 accounted
for 68%, 63% and 74%, respectively, of the Company's total revenues, and the
Company anticipates that international sales will continue to represent a
significant portion of total revenues. In addition, substantially all of the
Company's semiconductor products are manufactured, assembled and tested
outside of the United States by independent foundries and subcontractors.
The Company is subject to the risks of doing business internationally,
including unexpected changes in regulatory requirements, fluctuations in
exchange rates, imposition of tariffs and
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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 and, as of December 31,
1996, 59 of the Company's 115 full-time employees were located in Israel,
including a majority of the Company's research and development personnel.
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.
In the past, the Company has obtained royalty-bearing grants from the Chief
Scientist and BIRDF to fund research and development. The terms of the
grants from the Chief Scientist prohibit the transfer of technology developed
pursuant to the terms of these grants to any person without the prior write
to consent of the Chief Scientist. The Company may apply for additional
grants for new or existing products, although there can be no assurance that
these grants will be available in the future or that the royalty rates
payable by the Company, or other terms of such grants, will not be less
favorable to the Company than the terms of previous grants. See "Item 1.
Business -- Research and Development."
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.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . 36
Consolidated Balance Sheets as of December 31, 1995 and 1996 . . . . . 37
Consolidated Statements of Operations for the Years Ended
December 31, 1994, 1995 and 1996. . . . . . . . . . . . . . . . . 38
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1994, 1995 and 1996. . . . . . . . . . . . . . . . . 39
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1994, 1995 and 1996. . . . . . . . . . . . . . . . . 40
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . 41
Supplemental Data: Quarterly Financial Data (Unaudited). . . . . . . . 54
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Zoran Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Zoran
Corporation and its subsidiaries at December 31, 1995 and 1996, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
San Jose, California
January 31, 1997
36
<PAGE>
ZORAN CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31,
-------------------------
1995 1996
---------- ----------
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . $ 21,438 $ 11,176
Short-term investments. . . . . . . . . . . . . . . - 12,243
Accounts receivable, net. . . . . . . . . . . . . . 5,273 11,088
Inventory . . . . . . . . . . . . . . . . . . . . . 2,255 1,799
Prepaid expenses and other current assets . . . . . 533 1,219
---------- ----------
Total current assets. . . . . . . . . . . . . . . 29,499 37,525
Property and equipment, net. . . . . . . . . . . . . 1,765 3,857
---------- ----------
Total assets. . . . . . . . . . . . . . . . . . . $ 31,264 $ 41,382
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . $ 3,553 $ 5,868
Accrued expenses and other liabilities. . . . . . . 5,821 6,984
Current portion of long-term debt . . . . . . . . . 372 -
---------- ----------
Total current liabilities . . . . . . . . . . . . 9,746 12,852
---------- ----------
Long-term debt . . . . . . . . . . . . . . . . . . . 601 -
---------- ----------
Commitments and contingencies (Notes 4, 6 and 7) . . - -
Stockholders' equity:
Common Stock, $0.001 par value; 20,000,000
shares authorized; 8,409,346 and
9,029,365 shares issued and outstanding. . . . . . 8 9
Additional paid-in capital. . . . . . . . . . . . . 72,606 77,855
Accumulated deficit . . . . . . . . . . . . . . . . (51,697) (49,334)
---------- ----------
Total stockholders' equity. . . . . . . . . . . . 20,917 28,530
---------- ----------
Total liabilities and stockholders' equity. . . . $ 31,264 $ 41,382
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
37
<PAGE>
ZORAN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Years Ended December 31,
--------------------------------
1994 1995 1996
-------- --------- ---------
Revenues:
Product sales . . . . . . . . . . . . . . . $ 6,243 $ 18,086 $ 35,503
Development and licensing . . . . . . . . . 3,256 5,378 8,606
--------- --------- ---------
Total revenues. . . . . . . . . . . . . . 9,499 23,464 44,109
--------- --------- ---------
Costs and expenses:
Cost of product sales . . . . . . . . . . . 4,677 9,306 20,262
Research and development. . . . . . . . . . 4,887 5,916 8,954
Selling, general and administrative . . . . 4,376 6,748 10,739
Merger and related. . . . . . . . . . . . . - - 2,153
--------- --------- ---------
Total costs and expenses. . . . . . . . . 13,940 21,970 42,108
--------- --------- ---------
Operating income (loss). . . . . . . . . . . (4,441) 1,494 2,001
Interest expense . . . . . . . . . . . . . . (282) (320) (146)
Interest and other income. . . . . . . . . . 57 173 1,173
--------- --------- ---------
Income (loss) before income taxes. . . . . . (4,666) 1,347 3,028
Provision for income taxes . . . . . . . . . 229 399 665
--------- --------- ---------
Net income (loss). . . . . . . . . . . . . . $ (4,895) $ 948 $ 2,363
--------- --------- ---------
--------- --------- ---------
Net income (loss) per share. . . . . . . . . $ (0.69) $ 0.11 $ 0.22
--------- --------- ---------
--------- --------- ---------
Weighted average common shares and
equivalents. . . . . . . . . . . . . . . . 7,136 8,397 10,661
--------- --------- ---------
--------- --------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
38
<PAGE>
ZORAN CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock Additional
---------------------- ---------------------- Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 . . . 2,027 $ 2 1,096 $ 1 $ 48,414 $ (47,650) $ 767
Conversion of 9% convertible
promissory notes, plus accrued
interest, to Series L Preferred
Stock, net. . . . . . . . . . . . 1,283 1 - - 1,890 - 1,891
Issuance of Series L Preferred
Stock, net. . . . . . . . . . . . 722 1 - - 1,064 - 1,065
Issuance of Common Stock . . . . . - - 20 - 2 2
Repurchases of unvested
Common Stock. . . . . . . . . . . - - (184) - (6) - (6)
Net loss . . . . . . . . . . . . . - - - - - (4,895) (4,895)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1994 . . . 4,032 4 932 1 51,364 (52,545) (1,176)
Exercise of Series K and L
Preferred Stock Warrants. . . . . 875 1 - - 4,144 - 4,145
Issuance of Common Stock
pursuant to public offering,
net of expenses . . . . . . . . . - - 1,429 1 17,039 - 17,040
Conversion of Preferred
Stock to Common Stock . . . . . . (4,907) (5) 4,907 5 - - -
Issuance of Common Stock, net. . . - - 1,142 1 9 - 10
Amortization of deferred
compensation. . . . . . . . . . . - - - - 50 - 50
Declaration of dividend. . . . . . - - - - - (100) (100)
Net income . . . . . . . . . . . . - - - - - 948 948
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1995 . . . - - 8,410 8 72,606 (51,697) 20,917
Issuance of Common Stock . . . . .
pursuant to public offering . . .
over-allotment, net of expenses . - - 308 1 3,531 - 3,532
Issuance of Common stock, net. . . 183 - 468 - 468
Conversion of note payable . . . . - - 128 - 1,032 - 1,032
Amortization of deferred
compensation. . . . . . . . . . . - - - - 218 - 218
Net income . . . . . . . . . . . . - - - - - 2,363 2,363
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1996 . . . - $ - 9,029 $ 9 $ 77,855 $ (49,334) $ 28,530
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
39
<PAGE>
ZORAN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . $ (4,895) $ 948 $ 2,363
Adjustments:
Depreciation, amortization, and other. . . . . . . . . . . . . 932 1,035 1,420
Amortization of deferred compensation. . . . . . . . . . . . . - 50 218
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . 391 467 (1,758)
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . (1,435) (2,853) (5,815)
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . (352) (1,471) 456
Prepaid expenses and other current assets . . . . . . . . . . 32 (398) (686)
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . 1,387 1,310 2,315
Accrued expenses and other liabilities. . . . . . . . . . . . 1,252 2,082 2,921
------------ ------------ ------------
Net cash provided by (used in) operating activities . . . . (2,688) 1,170 1,434
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures for property and equipment . . . . . . . . (799) (677) (3,480)
Purchase of short-term investments, net . . . . . . . . . . . . - - (12,243)
Other investing activities. . . . . . . . . . . . . . . . . . . 53 - -
------------ ------------ ------------
Net cash used in investing activities . . . . . . . . . . . (746) (677) (15,723)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds of debt. . . . . . . . . . . . . . . . . . . . . . . . 3,264 208 1,000
Repayments of debt. . . . . . . . . . . . . . . . . . . . . . . (410) (2,101) (973)
Proceeds from issuance of Common Stock, net . . . . . . . . . . (4) 17,050 4,000
Proceeds from issuance of Preferred Stock, net. . . . . . . . . 1,066 4,145 -
Dividends paid. . . . . . . . . . . . . . . . . . . . . . . . . - (100) -
------------ ------------ ------------
Net cash provided by financing activities . . . . . . . . . 3,916 19,202 4,027
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents . . . . . . 482 19,695 (10,262)
Cash and cash equivalents at beginning of period . . . . . . . . 1,261 1,743 21,438
------------ ------------ ------------
Cash and cash equivalents at end of period . . . . . . . . . . . $ 1,743 $ 21,438 $ 11,176
------------ ------------ ------------
------------ ------------ ------------
Supplemental disclosures:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . $ 283 $ 319 $ 145
------------ ------------ ------------
------------ ------------ ------------
Taxes paid. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2 $ 259 $ 468
------------ ------------ ------------
------------ ------------ ------------
Noncash transaction:
Conversion of debt to Common Stock. . . . . . . . . . . . . . . $ - $ - $ 1,032
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
40
<PAGE>
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY:
Zoran Corporation ("Zoran" or the "Company") was incorporated in
California in December 1981 and reincorporated in Delaware in November 1986.
On December 27, 1996, the Company completed its merger with CompCore
Multimedia, Inc. ("CompCore"), a developer of decompression technology for
digital video and audio applications (see Note 3). Zoran develops and
markets integrated circuits and software for digital video and audio
applications enabled by compression. The Company's integrated circuits and
software are used in a variety of video and audio products addressing
evolving multimedia markets. Current applications for Zoran products include
professional and consumer video editing systems, filmless digital cameras,
PC-based stand-alone Video-CD and DVD players and professional and consumer
digital audio systems. The Company operates predominantly in one industry
segment.
The Company's performs research and development and generates a
substantial portion of its sales from its operations located in the State of
Israel. A significant number of the Company's full-time employees are
located in Israel, including a majority of the Company's research and
development personnel. Therefore, the Company is directly affected by the
political, economic and military conditions to which that country is subject.
The semiconductor business is highly cyclical and has been subject to
significant downturns at various times that have been characterized by
diminished product demand, production, overcapacity, and accelerated erosion
of average selling prices. During the past year, the market for certain
semiconductor devices has experienced an excess of supply relative to demand
which has resulted in a significant downward trend in prices. As such, the
selling price that the Company is able to command for its products is highly
dependent on industry-wide production capacity and demand, both of which
factors could result in rapid deviations in product pricing and therefore
could adversely effect the Company's operating results.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES:
Zoran has adopted accounting policies which are generally accepted in the
industry in which it operates. The following is a summary of the Company's
significant accounting policies:
USE OF ESTIMATES
The preparation of these financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates, although such differences are not expected to be material to the
financial statements.
BASIS OF PRESENTATION
The consolidated financial statements include the financial statements of
the Company and its wholly-owned subsidiaries, Zoran Microelectronics Ltd.
("ZML") and CompCore. See Note 3. All significant intercompany transactions
and accounts have been eliminated.
REVERSE STOCK SPLIT
Share information for all periods has been retroactively adjusted to
reflect a 1-for-3 reverse stock split of Common Stock and Preferred Stock
effected on December 14, 1995.
41
<PAGE>
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TRANSLATION OF FOREIGN CURRENCIES
ZML, an Israeli subsidiary, treats the U.S. dollar as its functional
currency. In accordance with Statement of Financial Accounting Standards No.
52 (SFAS 52), gains and losses resulting from translation of accounts
designated in other than the functional currency are reflected in results of
operations and to date have been insignificant.
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 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.
REVENUE RECOGNITION
Revenue from product sales is generally recognized upon shipment. A
provision for estimated future returns and potential warranty liability is
recorded at the time revenue is recognized. Development revenue under
development contracts is recognized on the percentage-of-completion method.
Amounts received in advance of performance under contracts are recorded as
deferred revenue and are generally recognized within one year from receipt.
Estimates are reviewed and revised periodically throughout the lives of the
contracts. Any revisions are recorded in the accounting period in which the
revisions are made. Costs associated with development revenues are included
primarily in research and development expenses. Revenue resulting from the
licensing of the Company's technology is recognized when significant
contractual obligations have been fulfilled. The Company does not provide
customers with product return or exchange rights in connection with the sale
of software licenses. Periodic service and maintenance fees received provide
customers access to technical support and minor enhancements to licensed
releases and are recognized ratably over the service or maintenance period.
Royalty revenue is recognized in the period licensed sales are reported to
the Company.
RESEARCH AND DEVELOPMENT COSTS
Costs related to the conceptual formation and design of internally
developed software are expensed as research and development as incurred. It
is the Company's policy that certain internal software development costs
incurred after technological feasibility has been demonstrated and which meet
recoverability test are capitalized and amortized over the estimated economic
life of the product. To date, the Company has incurred no significant
internal software development costs which meet the criteria for
capitalization.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
All highly liquid investments purchased with an original maturity of 90
days or less are considered to be cash and cash equivalents.
The Company accounts for investments in accordance with Statement of
Financial Accounting Standards No. 115 (SFAS 115). The Company's portfolio
is classified as available-for-sale and, therefore, is reported at fair value
with unrealized gains and losses, net of related tax, if any, as a separate
component of shareholder's equity. At December 31, 1996, the fair value of
the Company's marketable securities approximates cost.
42
<PAGE>
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONCENTRATION OF CREDIT RISK OF FINANCIAL INSTRUMENTS
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash
equivalents, short-term investments and trade accounts receivable. The
Company places its cash in banks and cash equivalents primarily in auction
rate preferred, certificates of deposit and commercial paper. The Company,
by policy, limits the amount of credit exposure through diversification and
highly-rated securities. The Company has not experienced any significant
losses on its cash equivalents or short-term investments.
The Company markets integrated circuits and technology to manufacturers and
distributors of electronic equipment primarily in the Pacific Rim, North
America and Europe. The Company performs ongoing credit evaluations of its
customers' financial condition and limits the amount of credit extended when
deemed necessary, but generally does not require collateral. Management
believes that any risk of loss is significantly reduced due to the diversity of
its customers and geographic sales areas. The Company maintains a provision
for potential credit losses, and write-offs of accounts receivable were
insignificant in each of the three years in the period ended December 31, 1996.
INVENTORY
Inventory is stated at the lower of standard cost (which approximates
actual cost on a first-in, first-out basis) or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed on
the straight-line method using estimated lives of three to five years.
Leasehold improvements are amortized on a straight-line basis over the
shorter of the estimated useful lives of the assets or the remaining term of
the lease.
NET INCOME (LOSS) PER SHARE
Net income (loss) 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
through the date of its initial public offering.
STOCK COMPENSATION
The Company accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25 (APB
25), "Accounting for Stock Issued to Employees" and related interpretations.
The Company provides additional pro forma disclosures as required under
Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting
for Stock-Based Compensation." See Note 8.
WARRANTS
Warrants issued under certain agreements are accounted for in accordance
with SFAS 123. The costs associated with warrants granted are amortized over
the period of the expected benefit. Where warrant costs are in excess of
expected future benefit, these costs are recognized immediately. To date,
the costs associated with warrants granted have been nominal. See Note 8.
43
<PAGE>
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - ACQUISITION OF COMPCORE:
On December 27, 1996, the Company completed its merger with CompCore. The
Company issued 1,957,308 shares of Common Stock in connection with the merger.
This transaction was accounted for as a pooling of interests; therefore, prior
financial statements have been restated to reflect this merger. CompCore
prepared its financial statements on a September 30 fiscal year end.
CompCore's fiscal year has been changed to December 31 to conform to the
Company's year end.
Revenues and net income (loss) included in the Company's consolidated
statements of operations are as follows:
Years Ended December 31,
----------------------------------
1994 1995 1996
-------- ------- ------
(in thousands)
Revenues:
Zoran . . . . . . . . . . . . . . . $ 8,058 $ 20,067 $ 37,371
CompCore. . . . . . . . . . . . . . 1,441 3,397 6,738
-------- -------- --------
$ 9,499 $ 23,464 $ 44,109
-------- -------- --------
-------- -------- --------
Net income (loss):
Zoran . . . . . . . . . . . . . . . $ (5,235) $ 686 $ 2,856
CompCore. . . . . . . . . . . . . . 340 262 (493)
-------- -------- --------
$ (4,895) $ 948 $ 2,363
-------- -------- --------
-------- -------- --------
Net income (loss) for 1996 includes $2,153,000 of merger costs and expenses
which were incurred and have been charged to merger and related expenses in
the Company's fourth quarter of 1996. The charge includes professional fees,
costs associated with merging the companies and other direct transaction
costs associated with the merger.
In July 1996, CompCore issued a Convertible Promissory Note to an
individual in the amount of $1.0 million. The entire outstanding principal
and accrued interest automatically converted into 128,469 shares of Common
Stock upon consummation of the merger.
CompCore granted 1,244,434 shares of Common Stock and stock options for
735,157 shares which were considered to have been issued below fair market
value during the years ended December 31, 1995 and 1996, respectively. The
Company will amortize approximately $201,000 of compensation expense over
their vesting periods of two and four years, respectively.
NOTE 4 - BALANCE SHEET COMPONENTS:
December 31,
---------------------------
1995 1996
-------- --------
(in thousands)
Accounts receivable:
Trade . . . . . . . . . . . . . . . . . . . $ 4,272 $ 10,950
Unbilled. . . . . . . . . . . . . . . . . . 1,151 1,088
--------- ---------
5,423 12,038
Less: allowances. . . . . . . . . . . . . . (150) (950)
--------- ---------
$ 5,273 $ 11,088
--------- ---------
--------- ---------
44
<PAGE>
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unbilled accounts receivable consists of both development revenue
recognized, but not yet billed and research and development funding not yet
received. Unbilled development revenue represents revenue recognized under
the percentage-of-completion method prior to achievement of the related
contract milestones. The Company bills development revenue when contract
milestones are achieved. The Company recognizes research and development
funding as reimbursable expenses, under research and development agreements,
are incurred. This funding is offset against research and development
expenses.
December 31,
---------------------------
1995 1996
-------- --------
(in thousands)
Inventory:
Work-in-process . . . . . . . . . . . . . . $ 942 $ 382
Finished goods. . . . . . . . . . . . . . . 1,313 1,417
-------- --------
$ 2,255 $ 1,799
-------- --------
-------- --------
Property and equipment:
Computer equipment. . . . . . . . . . . . . $ 4,860 $ 7,704
Office equipment and furniture. . . . . . . 326 413
Machinery and equipment . . . . . . . . . . 473 550
Leasehold improvements. . . . . . . . . . . 263 188
-------- --------
5,922 8,855
Less: accumulated depreciation and
amortization. . . . . . . . . . . . . . . (4,157) (4,998)
-------- --------
$ 1,765 $ 3,857
-------- --------
-------- --------
Accrued expenses and other liabilities:
Accrued payroll and related expenses. . . . . $ 1,587 $ 2,195
Accrued royalties . . . . . . . . . . . . . . 296 905
Accrued merger and related expenses . . . . . - 1,073
Other accrued liabilities . . . . . . . . . . 1,837 2,468
Deferred revenue. . . . . . . . . . . . . . . 2,101 343
-------- --------
$ 5,821 $ 6,984
-------- --------
-------- --------
In December 1994, the Company received $1.0 million from a customer as a
nonrefundable advance for certain of the Company's products sold over a
three-year period. The Company recognized $76,000 during the year ended
December 31, 1995 based upon product shipments to the customer. The Company
recognized the remainder of the nonrefundable advance in 1996 upon completion
of the sales program.
NOTE 5 - RESEARCH AND DEVELOPMENT ARRANGEMENTS:
The Company is a party to certain research and development agreements with
the Chief Scientist in Israel's Ministry of Industry and Trade 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. The Company is not obligated to repay funding regardless of the
outcome of its development efforts; however, these agreements require the
Company to use its best efforts to achieve specified results and require the
Company to pay royalties at rates of 22% to 5% of resulting products sales,
and up to 30% of resulting license revenues, up to a maximum of 100% to 150%
of the total funding received. Reported research and development expenses
are net of these grants, which fluctuate from period to period.
45
<PAGE>
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Gross research and development expenses and the related grants are as
follows:
Years Ended December 31,
-----------------------------------
1994 1995 1996
-------- ------- -------
(in thousands)
Research and development expenses:
Gross research and
development expenses . . . . . . $ 5,436 $ 6,116 $ 9,136
Less: grants earned . . . . . . . (549) (200) (182)
--------- -------- --------
$ 4,887 $ 5,916 $ 8,954
--------- -------- --------
--------- -------- --------
Royalty expenses related to these grants were $166,000, $450,000, and
$1,248,000 in 1994, 1995 and 1996, respectively.
In 1994, the Company entered into an agreement with another company to
operate a Delaware limited liability company ("LLC"). The Company
contributed certain technology in part to the LLC and in part to a
wholly-owned Israeli corporate subsidiary of the LLC that conducts the
day-to-day operations of the LLC. The other company contributed $4 million
in cash to the LLC. In exchange for their contributions, each company
received a 50% equity interest in the LLC. The Company has no further
obligations to the LLC. The purpose of the LLC is to perform research and
development and develop and market products based on proprietary, general
purpose and application-specific integrated circuits. The technology
contributed by the Company had no consolidated book basis and there was
significant uncertainty with regard to the realizability of the Company's
investment. Accordingly, no investment was recorded on the Company's books
at the date of the contribution.
In September 1995, the Company approved the transfer of its interest in the
LLC, together with $100,000 in cash, to GC Holdings Corporation ("Holdings"),
a 100%-owned subsidiary of Zoran, as Holdings' initial capital and declared a
dividend to its stockholders of all of the stock of Holdings. As the book
value of Holdings is $100,000, this transaction is reflected as a cash
dividend of $100,000.
NOTE 6 - DEVELOPMENT CONTRACTS:
The Company has generated a portion 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. The Company classifies costs related to these development
contracts as research and development expenses. The Company is not obligated
to repay funding regardless of the outcome of its development efforts;
however, the agreements require the Company to use its best efforts to
achieve specified results as per the agreements. The Company retains
ownership of the intellectual property developed under the contracts;
however, some contracts limit the product markets in which the Company may
directly sell the developed product. Revenues generated under these
contracts were $3,021,000, $3,732,000 and $3,698,000 in 1994, 1995 and 1996,
respectively.
46
<PAGE>
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - COMMITMENTS:
The Company rents facilities and equipment under various lease agreements
expiring through 2006. Rent expense for 1994, 1995 and 1996 totaled
approximately $393,000, $429,000 and $405,000, respectively. Future minimum
lease payments required under noncancelable leases at December 31, 1996 are
as follows:
Operating
Leases
--------------
(in thousands)
Year ending December 31:
1997. . . . . . . . . . . . . . . . . . . . . . . . $ 500
1998. . . . . . . . . . . . . . . . . . . . . . . . 335
1999. . . . . . . . . . . . . . . . . . . . . . . . 356
2000. . . . . . . . . . . . . . . . . . . . . . . . 401
2001. . . . . . . . . . . . . . . . . . . . . . . . 401
Thereafter. . . . . . . . . . . . . . . . . . . . . 1,790
--------------
Total minimum lease payments. . . . . . . . . . . . $ 3,783
--------------
--------------
NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT):
COMMON STOCK
In December 1995, the Company issued 1,428,847 shares of Common Stock at
$13.50 per share in conjunction with the Company's initial public offering
("IPO"). Proceeds, net of discounts, commissions and offering expenses,
totaled approximately $17 million. In January 1996, the underwriters
exercised their over-allotment option to purchase 307,500 additional shares
of Common Stock for total net proceeds of approximately $3.5 million. In
December 1996, the Company acquired CompCore through a merger which was
accounted for as a pooling of interest (see Note 3).
WARRANTS
In 1993 the Company granted a total of 569,322 warrants to purchase Series
K Convertible Preferred Stock ("Series K") at an exercise price of $9.00 per
share. These warrants were granted in conjunction with Series K and
convertible debt issued in 1993. In October 1995, the Company offered Series
K warrant holders a 10% discount on the $9.00 exercise price for a limited
time. In response to this offer, warrants were exercised to purchase 374,967
shares of Series K for aggregate proceeds to the Company of approximately $3
million. In conjunction with the IPO, 47,563 Series K warrants were
exercised and converted to Common Stock on a one-for-one basis. An
additional 8,951 warrants were exercised and converted into Common Stock in
the year ended December 31, 1996 on a one-for-one basis. The remaining
137,841 warrants are convertible into Common Stock on a one-for-one basis and
expire in 1998.
In 1994, the Company granted a total of 505,079 warrants to purchase
Convertible Preferred Stock ("Series L") at an exercise price of $1.50 per
share. These warrants were granted in connection with the Series L and
convertible debt issued in 1994. In 1995, warrants to purchase 452,220
shares of Series L were exercised for aggregate proceeds to the Company of
$678,000. In conjunction with the IPO, 233 Series L warrants were exercised
and converted to Common Stock on a one-for-one basis. The remaining 52,626
warrants were exercised and converted into Common Stock on a one-for-one
basis in the year ended December 31, 1996.
47
<PAGE>
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In December 1995, the Company committed to enter into a four-year purchase
agreement with Tower Semiconductor Ltd. ("Tower") pursuant to which Tower
would supply specified minimum quantities of wafers to the Company. In
conjunction with Tower's commitment, the Company agreed to grant to Tower a
four-year warrant to purchase up to 100,000 shares of the Company's Common
Stock, at a purchase price of $10.20 per share. As of December 31, 1996, the
purchase agreement with Tower had not been concluded and no portion of the
warrant had been exercised.
STOCK OPTION PLANS
1993 STOCK OPTION PLAN
The Company's 1993 Stock Option Plan (the "1993 Option Plan") was adopted
by the Board of Directors of the Company and approved by the stockholders of
the Company in July 1993. This plan replaces the 1984 Incentive Stock Option
Plan and the 1986 Supplemental Stock Option Plan. A total of 1,490,000
shares of Common Stock have been reserved for issuance under the 1993 Option
Plan. The 1993 Option Plan provides for grants of options to employees,
non-employee directors and consultants. The 1993 Option Plan is currently
being administered by the Compensation Committee of the Board of Directors of
the Company, which determines the optionees and the terms of the options
granted, including the exercise price, number of shares subject to the option
plan and the exercisability thereof. The 1993 Option Plan will terminate in
July 2003, unless sooner terminated by the Board of Directors.
Generally, options granted under the 1993 Option Plan are fully exercisable
on and after the date of grant, subject to the Company's right to repurchase
from an optionee, at the optionee's original per share exercise price, any
unvested shares which the optionee has purchased and holds in the event of
the termination of the Optionee's employment, with or without cause. The
Company's right lapses as shares subject to the option become vested. Such
shares generally vest in monthly installments over two or four years
following the date of grant (as determined by the Compensation Committee of
the Board of Directors), subject to the optionee's continuous service.
Options expire ten years from the date of grant and an option shall generally
terminate three months after termination of employment.
On December 1, 1994, the Board of Directors approved a proposal under which
option holders could elect to cancel certain options in exchange for grants
of new options with exercise prices equal to the fair market value of the
Company's Common Stock on the date of board approval. Options for the
purchase of a total of 412,230 shares were canceled in exchange for newly
issued options for the purchase of 412,230 shares.
1995 OUTSIDE DIRECTORS STOCK OPTION PLAN
The Company's Outside Directors Stock Option Plan (the "Directors Plan")
was adopted by the Company's Board of Directors in October 1995, and was
approved by its stockholders in December 1995. A total of 200,000 shares of
Common Stock have been reserved for issuance under the Directors Plan. The
Directors Plan provides for the grant of nonstatutory stock options to
nonemployee directors of the Company. The Directors Plan provides that each
new nonemployee director will automatically be granted an option to purchase
20,000 shares on the date the optionee first becomes a nonemployee director
(the "Initial Grant"). Thereafter, on the date immediately following each
annual stockholders' meeting, each nonemployee director who is reelected at
the meeting to an additional term shall be granted an additional option to
purchase 4,800 shares of Common Stock if, on such date, he or she shall have
served on the Company's Board of Directors for at least six months (the
"Annual Grant"). The Initial Grant is exercisable in four equal annual
installments, and each Annual Grant shall become exercisable in full one year
after the date of grant, subject to the director's continuous service. The
exercise price of all stock options granted under the Directors Plan is equal
to the fair market value of the Company's Common Stock on the date of grant.
Options granted under the Directors Plan have a term of ten years.
48
<PAGE>
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of activity follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
1994 1995 1996
----------------------- -------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- ---------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
period . . . . . . . . . . . 524,835 $ 0.90 1,011,944 $ 0.15 1,328,084 $ 2.09
Granted . . . . . . . . . . . 1,047,277 0.18 391,465 6.74 980,546 2.24
Exercised . . . . . . . . . . (868) 0.90 (41,433) 0.15 (140,253) 0.17
Canceled . . . . . . . . . . (559,300) 0.90 (33,892) 0.15 (4,169) 0.29
---------- ---------- ----------
Outstanding at period end . . 1,011,944 0.15 1,328,084 2.09 2,164,208 2.30
---------- ---------- ----------
---------- ---------- ----------
Options vested at period end . 1,100,548 0.80
----------
----------
</TABLE>
The following table summarizes information about employee and director
stock options outstanding at December 31, 1996:
Options Outstanding
------------------------
Average
Remaining
Number Contractual Options
Exercise Price Outstanding Life (years) Vested
--------------- ----------- ------------ ---------
$ 0.13. . . . . . . . . . . . 356,279 9.32 146,423
$ 0.15. . . . . . . . . . . . 1,276,781 8.12 868,828
$ 0.60. . . . . . . . . . . . 36,247 8.50 24,352
$ 1.57. . . . . . . . . . . . 96,120 9.49 -
$ 4.69. . . . . . . . . . . . 38,448 9.54 -
$ 9.37. . . . . . . . . . . . 58,952 9.67 -
$ 10.63. . . . . . . . . . . . 116,666 8.78 34,028
$ 11.25. . . . . . . . . . . . 61,515 9.56 1,917
$ 13.50. . . . . . . . . . . . 80,000 8.95 25,000
$ 18.88. . . . . . . . . . . . 4,000 9.81 -
$ 23.25. . . . . . . . . . . . 39,200 9.25 -
--------- ---------
2,164,208 1,100,548
--------- ---------
--------- ---------
The Company has granted stock options for 52,000 shares during the year
ended December 31, 1995 which were considered to have been granted below fair
market value, excluding those options issued in connection with the CompCore
acquisition (see Note 3). The Company will amortize approximately $150,000
of compensation expense over the vesting period of four years.
49
<PAGE>
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The weighted average fair value of options granted during the years ended
December 31, 1995 and 1996, as defined by SFAS 123, were $4.99 and $7.05 per
share, respectively. Included in the grants in 1996 were options issued by
CompCore and assumed by Zoran at exercise prices below market prices of the
Company's Common Stock at the date of grant, of which their weighted average
fair value was $6.41 per share (see Note 3).
1995 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1995 Employee Stock Purchase Plan ("ESPP") was adopted by the
Company's Board of Directors in October 1995, and approved by its
stockholders in December 1995. The ESPP will enable employees to purchase
shares through payroll deductions at approximately 85% of the lesser of the
fair value of Common Stock at the beginning of a 24-month offering period or
the end of each six-month segment within such offering period. The ESPP is
intended to qualify as an "employee stock purchase plan" under Section 423 of
the U.S. Internal Revenue Code. During the year ended December 31, 1996,
24,197 shares were purchased by employees under the terms of the plan
agreements at a weighted average price of $11.55 per share. At December 31,
1996, 125,803 shares were reserved and available for issuance under this
plan. No shares were issued during 1995.
The weighted average fair value of rights granted during the year ended
December 31, 1996, as defined by SFAS 123, was $5.46 per share.
FAIR VALUE DISCLOSURES
Had compensation cost for the Company's option and stock purchase plans
been determined based on the fair value at the grant dates, as prescribed in
FAS 123, the Company's net income and net income per share for each of the
two years ended December 31, 1996 would have been as follows (in thousands,
except per share data):
Year Ended December 31,
---------------------------
1995 1996
--------- ----------
Net income:
As reported . . . . . . . . . $ 948 $ 2,363
Pro forma . . . . . . . . . . 919 1,749
Net income per share:
As reported . . . . . . . . . $ 0.11 $ 0.22
Pro forma . . . . . . . . . . 0.11 0.16
The fair value of each option grant is estimated on the date of grant
using the Black Scholes model with the following assumptions used for options
and purchase grants during the applicable period.
Year Ended December 31,
--------------------------
1995 1996
------------ -----------
Dividend rate . . . . . . . . . 0.0% 0.0%
Risk-free interest rates. . . .5.1% to 7.0% 5.3% to 6.6%
Volatility. . . . . . . . . . . 67.0% 67.0%
Expected life
-- option plans . . . . . 5 years 5 years
-- purchase plan. . . . . 0.5 years 0.5 years
50
<PAGE>
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The pro forma amounts reflect compensation expense related to stock options
and purchase rights granted during the year ended December 31, 1995 and 1996.
In future years, the annual compensation expense will increase relative to
the fair values of stock options granted in those years.
NOTE 9 - INCOME TAXES:
The components of income (loss) before income taxes are as follows:
Years Ended December 31,
----------------------------------------
1994 1995 1996
--------- ---------- ----------
(in thousands)
U.S. . . . . . . . . . . . . . . $ (2,246) $ 2,206 $ (783)
Israel . . . . . . . . . . . . . (2,420) (859) 3,811
--------- ---------- ----------
$ (4,666) $ 1,347 $ 3,028
--------- ---------- ----------
--------- ---------- ----------
The components of the provision for income taxes are as follows:
Years Ended December 31,
----------------------------------------
1994 1995 1996
---------- ---------- ----------
(in thousands)
Current:
U.S.. . . . . . . . . . . . . . $ 178 $ 151 $ 103
State . . . . . . . . . . . . . 51 33 66
Foreign . . . . . . . . . . . . - 215 496
---------- ---------- ----------
$ 229 $ 399 $ 665
---------- ---------- ----------
---------- ---------- ----------
For the years ended December 31, 1994 and 1996, the income tax benefit
determined by applying the U.S. statutory income tax rate differs from the
provisions recorded due to state income taxes, foreign withholding taxes and
valuation allowances for NOL benefits generated in each period. For the year
ended December 31, 1995, the income tax provision determined by applying the
U.S. statutory rate differs from the provision recorded due to utilization of
NOLs, taxable income due to the declaration of a dividend to its stockholders
of all of the stock of Holdings, foreign withholding taxes and an alternative
minimum tax liability.
Deferred income tax assets comprise the following:
Years Ended December 31,
----------------------------------------
1994 1995 1996
---------- ---------- ----------
(in thousands)
Federal and state net operating
loss carryforwards . . . . . . . $ 15,250 $ 13,751 $ 13,176
Capitalized research and
development expenses . . . . . . 310 555 392
Nondeductible reserves and
accruals . . . . . . . . . . . . 910 1,088 1,051
---------- ---------- ----------
Deferred tax assets. . . . . . . 16,470 15,394 14,619
Less valuation allowance . . . . (16,470) (15,394) (14,619)
---------- ---------- ----------
Net deferred tax asset. . . . .$ - $ - $ -
---------- ---------- ----------
---------- ---------- ----------
As of December 31, 1996, the Company has NOLs of approximately $38 million
and $.5 million for federal and state tax reporting purposes, respectively.
The differences between the federal and state NOLs is attributed to research
and development expenditures capitalized for state tax purposes, and
California's statutory limitation on the amount of
51
<PAGE>
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
net operating losses which may be carried forward to subsequent years. The
federal NOLs expire on various dates between 2000 and 2009. The state NOLs
expire in 2009. Management has recorded a full valuation allowance against
all U.S. deferred tax assets on the basis that significant uncertainty exists
regarding the realizability of the assets.
Pursuant to the Tax Reform Act of 1986, the amounts of and the benefit
from NOLs that can be carried forward may be impaired or limited in certain
circumstances, including a cumulative stock ownership change of more than 50%
over a three-year period. The Company's IPO resulted in a cumulative change
of ownership of greater than 50%. Accordingly, the Company's NOLs incurred
prior to the completion of the IPO that can be utilized to reduce future
taxable income for federal tax purposes will be limited to approximately $3.0
million per year.
The Company's Israeli subsidiary has been granted the status of an "Approved
Enterprise" pursuant to the Israeli law for the Encouragement of Capital
Investments, 1959, as amended. The Company has three approved programs
pursuant to this law. The first program was approved in 1984. Income
subject to this program is taxed at an annual rate of 10% from the first year
in which the enterprise generates taxable income (net of NOLs). Benefits
under the first program expire in 1997. The second program was approved in
1991. Income subject to this program is exempt from tax for two years from
the first year in which the Company has taxable income (net of NOLs) and is
taxed at a rate of 10% thereafter. Benefits under the second program expire
in 2003. The third program was approved in 1995. Income subject to this
program is exempt from tax for four years from the first year in which the
Company has taxable income (net of NOLs) and is taxed at a rate of 10%
thereafter. Management has not reflected the Israeli NOLs as deferred tax
assets on the basis that these NOLs are to be utilized as a reduction of
income which would otherwise be exempt from tax under the Company's "Approved
Enterprise" status.
NOTE 10 - GEOGRAPHIC REPORTING AND CUSTOMER CONCENTRATION:
SALES TO CUSTOMERS BY GEOGRAPHICAL AREAS ARE AS FOLLOWS:
United Pacific
States Rim Europe Total
-------- ------- -------- -------
(in thousands)
Revenues from third parties:
Year ended December 31, 1994
U.S.. . . . . . . . . . . . . $ 3,009 $ 3,414 $ 1,357 $ 7,780
Israel. . . . . . . . . . . . - 1,710 9 1,719
-------- ------- -------- -------
$ 3,009 $ 5,124 $ 1,366 $ 9,499
-------- ------- -------- -------
-------- ------- -------- -------
Year ended December 31, 1995
U.S.. . . . . . . . . . . . . $ 8,149 $ 2,680 $ 4,264 $15,093
Israel. . . . . . . . . . . . 495 2,596 5,280 8,371
-------- ------- -------- -------
$ 8,644 $ 5,276 $ 9,544 $23,464
-------- ------- -------- -------
-------- ------- -------- -------
Year ended December 31, 1996
U.S.. . . . . . . . . . . . . $11,397 $ 6,191 $ 2,602 $20,190
Israel. . . . . . . . . . . . 220 15,183 8,516 23,919
-------- ------- -------- -------
$11,617 $21,374 $11,118 $44,109
-------- ------- -------- -------
-------- ------- -------- -------
52
<PAGE>
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Reporting by geographical areas are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1994 1995 1996
----------- ------------ ----------
(in thousands)
<S> <C> <C> <C>
Operating income (loss):
U.S. . . . . . . . . . . . . . . . . . . . $ (2,261) $ 2,052 $ (2,021)
Israel . . . . . . . . . . . . . . . . . . (2,180) (558) 4,022
--------- -------- ---------
Total . . . . . . . . . . . . . . . . . . $ (4,441) $ 1,494 $ 2,001
--------- -------- ---------
--------- -------- ---------
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------------------
1995 1996
----------- ----------
(in thousands)
<S> <C> <C>
Identifiable assets:
U.S. . . . . . . . . . . . . . . . . . . . $ 24,251 $ 28,711
Israel . . . . . . . . . . . . . . . . . . 7,013 12,671
-------- --------
Total . . . . . . . . . . . . . . . . . . $ 31,264 $ 41,382
-------- --------
-------- --------
</TABLE>
Significant customers are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1994 1995 1996
----------- ------------ ----------
<S> <C> <C> <C>
Customers comprising 10% or more of the Company's
total revenues for the period indicated:
A . . . . . . . . . . . . . . . . . . . . . . 48% 10% 38%
B . . . . . . . . . . . . . . . . . . . . . . - 27% -
C . . . . . . . . . . . . . . . . . . . . . . - - 16%
</TABLE>
53
<PAGE>
ZORAN CORPORATION
SELECTED QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)
<TABLE>
<CAPTION>
Quarters Ended
---------------------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec.31,
1995 1995 1995 1995 1996 1996 1996 1996
--------- -------- -------- --------- --------- -------- --------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product sales . . . . . . . $ 3,415 $ 3,662 $ 5,322 $ 5,687 $ 6,381 $ 8,721 $10,067 $10,334
Development and licensing . 1,246 980 1,367 1,785 1,187 2,306 2,302 2,811
--------- -------- -------- --------- --------- -------- --------- -------
Total revenues . . . . . 4,661 4,642 6,689 7,472 7,568 11,027 12,369 13,145
--------- -------- -------- --------- --------- -------- --------- -------
Costs and expenses:
Cost of product sales . . . 1,755 1,903 2,610 3,038 3,425 5,290 5,563 5,984
Research and development . 1,326 1,370 1,528 1,692 1,580 1,720 2,785 2,869
Selling, general and
administrative . . . . . 1,221 1,622 1,938 1,967 2,063 3,152 2,961 2,563
Merger and related . . . . - - - - - - - 2,153
--------- -------- -------- --------- --------- -------- --------- -------
Total costs and
expenses . . . . . . . 4,302 4,895 6,076 6,697 7,068 10,162 11,309 13,569
--------- -------- -------- --------- --------- -------- --------- -------
Operating income (loss) . . . 359 (253) 613 775 500 865 1,060 (424)
Interest and other income
(expense), net . . . . . . (78) (64) (30) 25 244 297 208 278
--------- -------- -------- --------- --------- -------- --------- -------
Income (loss) before taxes . 281 (317) 583 800 744 1,162 1,268 (146)
Provision for income taxes . 109 (133) 213 210 83 149 136 297
--------- -------- -------- --------- --------- -------- --------- -------
Net income (loss) . . . . . . $ 172 $ (184) $ 370 $ 590 $ 661 $ 1,013 $ 1,132 $ (443)
--------- -------- -------- --------- --------- -------- --------- -------
--------- -------- -------- --------- --------- -------- --------- -------
Net income (loss) per share . $ 0.02 $ (0.02) $ 0.04 $ 0.07 $ 0.06 $ 0.10 $ 0.10 $ (0.04)
--------- -------- -------- --------- --------- -------- --------- -------
--------- -------- -------- --------- --------- -------- --------- -------
Weighted average common
shares and equivalents . . 8,410 8,395 8,284 8,501 10,175 10,600 10,851 11,020
--------- -------- -------- --------- --------- -------- --------- -------
--------- -------- -------- --------- --------- -------- --------- -------
</TABLE>
54
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
55
<PAGE>
PART III
Certain information required by Part III is omitted from this report in
that the Company intends to file its definitive proxy statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end
of the fiscal year covered by this report, and certain information therein is
incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item is incorporated by reference to
information set forth in the Proxy Statement under the heading "Proposal No. 1
- - Election of Directors" and in Part I of this Report under the heading
"Executive Officers of the Registrant."
The information required by this Item with respect to compliance with
Section 16(a) of the Securities Exchange Act of 1934 is incorporated by
reference to information set forth in the Proxy Statement under the heading
"Executive Compensation."
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to
information set forth in the Proxy Statement under the heading "Executive
Compensation and Other Matters."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated by reference to
information set forth in the Proxy Statement under the heading "Principal
Stockholders and Share Ownership of Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference to
information set forth in the Proxy Statement under the heading "Certain
Transactions."
56
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
(1) Financial Statements.
See Index to Consolidated Financial Statements at page 35 of
this report.
(2) Financial Statement Schedules.
All financial statement schedules are omitted because they
are not applicable or not required, or because the required
information is included in the Consolidated Financial
Statements and Notes thereto which are included herein.
(3) Exhibits.
The exhibits listed on the accompanying Exhibit Index are
filed as part of, or are incorporated by reference into,
this report.
(b) Reports on Form 8-K during the quarter ended December 31,
1996:
On October 24, 1996, the Company filed a Report on Form 8-K,
pursuant to Item 5 thereof, reporting that it had agreed to
acquire CompCore pursuant to the Agreement and Plan of
Reorganization dated October 20, 1996 among the Company,
CompCore and See Acquisition Corporation, a wholly-owned
subsidiary of the Company.
57
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ZORAN CORPORATION
By: /s/ Levy Gerzberg
------------------------------------------
Levy Gerzberg, President and
Chief Executive Officer
Dated: March 31, 1997.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Levy Gerzberg and Ami Kraft, or either
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities to sign any and all amendments to this report on Form
10-K, and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purpose as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or either of them, or their or
his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Security Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Levy Gerzberg President, Chief Executive Officer and Director March 31, 1997
- ---------------------- (Principal Executive Officer)
Levy Gerzberg
/s/ Ami Kraft Vice President, Finance and Chief Financial Officer March 31, 1997
- ---------------------- (Principal Financial and Accounting Officer)
Ami Kraft
/s/ Uzia Galil Chairman of the Board of Directors March 31, 1997
- ----------------------
Uzia Galil
/s/ George T. Haber Director March 31, 1997
- ----------------------
George T. Haber
/s/ Arie Kahana Director March 31, 1997
- ----------------------
Arie Kahana
/s/ James D. Meindl Director March 31, 1997
- ----------------------
James D. Meindl
/s/ Arthur B. Stabenow Director March 31, 1997
- ----------------------
Arthur B. Stabenow
/s/ Philip M. Young Director March 31, 1997
- ---------------------
Philip M. Young
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit Title
-------------
Exhibit
Number
- ---------
2.1(1) Agreement and Plan of Reorganization dated October 20, 1996 among the
Registrant, See Acquisition Corporation and CompCore Multimedia, Inc.
(the "CompCore Acquisition Agreement").
3.1(2) Form of Restated Certificate of Incorporation of the Registrant.
3.2(3) Bylaws of the Registrant, as amended.
4.1(4) Amended and Restated Stock Rights Agreement dated July 30, 1993 among
the Registrant and certain of its stockholders, as amended.
*10.1(4) 1993 Stock Option Plan, as amended.
*10.2(4) 1995 Outside Directors Stock Option Plan.
*10.3(5) Amended and Restated 1995 Employee Stock Purchase Plan.
*10.4(4) Form of Indemnity Agreement for officers and directors.
+10.5(4) Agreement dated June 28, 1991 between the Registrant and Fujifilm
Microdevices Co., Ltd. ("Fujifilm"), as amended.
+10.6(4) Agreement dated July 27, 1992 between the Registrant and Fujifilm.
10.7(4) Letter Agreement dated December 16, 1991 between the Registrant and
Dolby Laboratories Licensing Corporation, as amended.
10.10(4) Office Leases dated August 4, 1995 between the Registrant and
Koll/Intereal Bay Area.
10.11(4) Lease Agreement dated October 1, 1992 between the Registrant's
subsidiary, Zoran Microelectronics Ltd. ("ZML"), and Matam-Haifa
Scientific Industries Center Ltd.
+10.12(4) License Agreement for ZR33891 Digital Filter Processor dated June 8,
1995 between the Registrant and Atmel Corporation ("Atmel").
+10.13(4) License Agreement for ZR34325 Vector Signal Processor dated June 8,
1995 between the Registrant and Atmel.
+10.14(4) Cooperation and Project Funding Agreement dated June 16, 1991 between
ZML and the Israel-United States Binational Industrial Research and
Development Foundation ("BIRDF").
+10.15(4) Cooperation and Project Funding Agreement dated June 9, 1992 between
ZML and BIRDF.
59
<PAGE>
10.16(4) Note of Approval No. 17391 dated September 5, 1994 issued to ZML by
the Office of Chief Scientist, Head of the Industrial Research and
Development Administration of the Israeli Ministry of Industry and
Trade (the "Chief Scientist"), together with ZML's Letter of
Undertaking dated September 4, 1994.
10.17(4) Note of Approval No. 17337 dated September 5, 1994 issued to ZML by
the Chief Scientist, together with ZML's Letter of Undertaking dated
September 4, 1994.
10.18(4) Loan Agreements dated July 25, 1995, August 1, 1995, August 15, 1995,
August 31, 1995 and November 1, 1995 between ZML and the Israel
Discount Bank.
10.20(4) Form of Stock Purchase Warrant issued to purchasers of 10% Senior
Convertible Promissory Notes.
10.21(4) Form of Stock Purchase Warrant issued to purchasers of Series K
Preferred Stock.
+10.28(4) Agreement dated December 13, 1995 between the Registrant and Tower
Semiconductor Ltd.
10.29(6) Summary of Discussion dated April 23, 1996 between ZML and Matam
regarding Lease Agreement dated October 1, 1992 between ZML and
Matam.
10.30(7) Memorandum of Understanding Dated April 23, 1996 between ZML and IBM
Israel Ltd. regarding Lease Agreement dated October 1, 1992 between
ZML and Matam.
10.31 CompCore Acquisition Agreement. Reference is made to Exhibit 2.1.
*10.32 Employment Agreement dated October 20, 1996 between the Registrant
and George T. Haber, effective December 27, 1996 (included as Exhibit
B-1 to the CompCore Acquisition Agreement).
11.1 Computation of Net Income (Loss) Per Share.
16.1(4) Letter from Ernst & Young LLP re change in certifying accountant.
60
<PAGE>
21.1 List of subsidiaries of the Registrant.
23.1 Consent of Price Waterhouse LLP.
24.1 Power of Attorney. Reference is made to Page 58 of this Report on
Form 10-K.
27 Financial Data Schedule.
- -------------------
* Constitutes a management contact or compensatory plan required to be filed
pursuant to Item 14(c) of Form 10-K.
+ Confidential treatment has been granted as to a portion of this Exhibit.
(1) Incorporated by reference to identically numbered exhibit to Registrant's
Form S-4 Registration Statement (No. 333-16081), which became effective on
December 4, 1996.
(2) Incorporated by reference to Exhibit 3.2 to Registrant's Form SB-2
Registration Statement (No. 33-98630-LA), which became effective on
December 14, 1995 (the "1995 Registration Statement").
(3) Incorporated by reference to Exhibit 3.3 to the 1995 Registration
Statement.
(4) Incorporated by reference to identically numbered exhibit to the 1995
Registration Statement.
(5) Incorporated by reference to identically numbered exhibit to Registrant's
Form 10-K Annual Report for the year ended December 31, 1995.
(6) Incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q
Quarterly Report for the quarter ended June 30, 1996 (the "June 1996
Form 10-Q").
(7) Incorporated by reference to Exhibit 10.2 to the June 1996 Form 10-Q.
61
<PAGE>
EXHIBIT 11.1
ZORAN CORPORATION
COMPUTATION OF NET INCOME PER SHARE (1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Weighted average common shares outstanding 1,015 2,391 8,802
Convertible Preferred Stock (2) 2,027 1,520 -
Dilutive effect of stock options and warrants
based on the treasury stock method (2) - 1,724 1,859
Cheap stock (2) 4,094 2,762 -
-------- -------- --------
Weighted average common shares and
equivalents 7,136 8,397 10,661
-------- -------- --------
-------- -------- --------
Net income (loss) $ (4,895) $ 948 $ 2,363
-------- -------- --------
-------- -------- --------
Net income (loss) per share $ (0.69) $ 0.11 $ 0.22
-------- -------- --------
-------- -------- --------
</TABLE>
(1) This exhibit should be read in conjunction with "Significant Accounting
Policies - Net income (loss) per share" in Note 2 of the Notes to the
Consolidated Financial Statements.
(2) 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.
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
The subsidiaries of Zoran Corporation are the following:
1. Zoran Microelectronics Ltd., a corporation organized under the laws of
the State of Israel; and
2. CompCore Multimedia, Inc., a California corporation.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-2414 and No. 333-20225) of Zoran Corporation
of our report dated January 31, 1997 appearing on page 36 of the Annual
Report on Form 10-K.
PRICE WATERHOUSE LLP
San Jose, California
March 31, 1997
<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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 11,176
<SECURITIES> 12,243
<RECEIVABLES> 12,038
<ALLOWANCES> 950
<INVENTORY> 1,799
<CURRENT-ASSETS> 37,525
<PP&E> 8,855
<DEPRECIATION> 4,998
<TOTAL-ASSETS> 41,382
<CURRENT-LIABILITIES> 12,852
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 28,521
<TOTAL-LIABILITY-AND-EQUITY> 41,382
<SALES> 35,503
<TOTAL-REVENUES> 44,109
<CGS> 20,262
<TOTAL-COSTS> 20,262
<OTHER-EXPENSES> 21,846
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 146
<INCOME-PRETAX> 3,028
<INCOME-TAX> 665
<INCOME-CONTINUING> 2,363
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,363
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.22
</TABLE>