<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from__________ to__________
Commission File Number: 0-27246
ZORAN CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-2794449
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3112 SCOTT BOULEVARD, SANTA CLARA, CALIFORNIA 95054
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 919-4111
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
The number of outstanding shares of the registrant's Common Stock, $.001 par
value, as of August 4, 1997 was 9,485,381.
<PAGE>
ZORAN CORPORATION
INDEX
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
June 30, 1997 and December 31, 1996 3
Condensed Consolidated Income Statements
Three and Six Months Ended June 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
2
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ZORAN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,491 $ 11,176
Short-term investments 12,908 12,243
Accounts receivable, net 11,299 11,088
Inventory 736 1,799
Prepaid expenses and other current assets 1,335 1,219
--------- ---------
Total current assets 34,769 37,525
Property and equipment, net 4,957 3,857
--------- ---------
Total assets $ 39,726 $ 41,382
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,758 $ 5,868
Accrued expenses and other liabilities 6,486 6,984
--------- ---------
Total current liabilities 9,244 12,852
--------- ---------
Stockholders' equity:
Common Stock, $0.001 par value;
20,000,000 shares authorized;
9,467,088 and 9,029,365 shares
issued and outstanding 9 9
Additional paid-in capital 78,114 77,855
Accumulated deficit (47,641) (49,334)
--------- ---------
Total stockholders' equity 30,482 28,530
--------- ---------
Total liabilities and stockholders' equity $ 39,726 $ 41,382
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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ZORAN CORPORATION
CONDENSED CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ------------------------
1997 1996 1997 1996
------------------------- ------------------------
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 6,216 $ 8,721 $ 12,532 $ 15,102
Software, licensing and development 3,036 2,306 6,787 3,493
------------------------- ------------------------
Total revenues 9,252 11,027 19,319 18,595
------------------------- ------------------------
Costs and expenses:
Cost of product sales 2,478 5,290 6,004 8,715
Research and development 3,203 1,720 6,515 3,300
Selling, general and administrative 2,567 3,152 5,171 5,215
------------------------- ------------------------
Total costs and expenses 8,248 10,162 17,690 17,230
------------------------- ------------------------
Operating income 1,004 865 1,629 1,365
Interest and other income, net 350 297 628 541
------------------------- ------------------------
Income before income taxes 1,354 1,162 2,257 1,906
Provision for income taxes 338 149 564 232
------------------------- ------------------------
Net income $ 1,016 $ 1,013 $ 1,693 $ 1,674
------------------------- ------------------------
------------------------- ------------------------
Net income per share $ 0.09 $ 0.10 $ 0.15 $ 0.16
------------------------- ------------------------
------------------------- ------------------------
Weighted average common shares
and equivalents 11,036 10,600 11,053 10,388
------------------------- ------------------------
------------------------- ------------------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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ZORAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
1997 1996
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,693 $ 1,674
Adjustments:
Depreciation and amortization 777 584
Changes in assets and liabilities:
Accounts receivable (211) (6,738)
Inventory 1,063 368
Prepaid expenses and other current assets (116) (400)
Accounts payable (3,110) (93)
Accrued expenses and other liabilities (498) 872
--------- --------
Net cash used in operating activities (402) (3,733)
--------- --------
Cash flows from investing activities:
Purchases of short-term investments, net (665) (16,577)
Expenditures for property and equipment (1,857) (1,331)
--------- --------
Net cash used in investing activities (2,522) (17,908)
--------- --------
Cash flows from financing activities:
Repayment of debt - (165)
Proceeds from issuance of Common Stock, net 239 3,740
--------- --------
Net cash provided by financing activities 239 3,575
--------- --------
Net decrease in cash and cash equivalents (2,685) (18,066)
Cash and cash equivalents at beginning of period 11,176 21,438
--------- --------
Cash and cash equivalents at end of period $ 8,491 $ 3,372
--------- --------
--------- --------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
ZORAN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
contain all adjustments (consisting only of normal recurring adjustments) which,
in the opinion of management, are necessary to present fairly the financial
information included therein. While the Company believes that the disclosures
are adequate to make the information not misleading, it is suggested that these
financial statements be read in conjunction with the audited consolidated
financial statements and accompanying notes included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996. Financial statements
for the three and six months ended June 30, 1996 have been restated to reflect
the acquisition of CompCore Multimedia, Inc. ("CompCore") in December 1996 which
was accounted for as a pooling of interests. Results for the interim periods
presented are not necessarily indicative of the results to be expected for the
full year.
2. BALANCE SHEET COMPONENTS
June 30, December 31,
1997 1996
---------- -------------
Inventories (in thousands):
Work-in-process $ 218 $ 382
Finished goods 518 1,417
---------- ----------
$ 736 $ 1,799
---------- ----------
---------- ----------
3. INCOME TAXES
The provision for income taxes reflects the estimated annualized effective
tax rate applied to earnings for the interim periods. The effective tax rate
differs from the U.S. statutory rate due to utilization of net operating losses
and State of Israel tax benefits on foreign earnings. The provision includes
primarily taxes on income in excess of net operating loss carryover limitations
and foreign withholding taxes.
4. NET INCOME PER SHARE
Net income per share is computed using the weighted average number of
common and common equivalent shares outstanding during the period. Common
equivalent shares consist of shares issuable upon exercise of stock options and
warrants (using the treasury stock method).
5. FAS 128 SAB 74 REQUIREMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share." This Statement
is effective for periods ending after December 15, 1997 and redefines earnings
per share under generally accepted accounting principles. Under the new
standard, primary earnings per share is replaced by basic earnings per share and
fully diluted earnings per share is replaced by diluted earnings per share. If
the Company had adopted this Statement for the periods ended June 30, 1997, the
Company's earnings per share would have been as follows:
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- -------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
Basic earnings per share $0.11 $0.12 $0.18 $0.19
Diluted earnings per share 0.09 0.10 0.15 0.16
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT
TO THE COMPANY'S FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE CURRENTLY ANTICIPATED DEPENDING UPON A VARIETY OF
FACTORS, INCLUDING THOSE DESCRIBED BELOW UNDER THE SUB-HEADING, "FUTURE
PERFORMANCE AND RISK FACTORS" AND DISCUSSED MORE FULLY IN THE COMPANY'S
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996.
OVERVIEW
From the Company's inception in 1981 through 1991, the Company derived
the substantial majority of its revenue from digital filter processors
("DFPs") and vector signal processors ("VSPs") used principally in military,
industrial and medical applications. In 1989, the Company repositioned its
business to develop and market data compression products for the evolving
multimedia markets and discontinued development of DFP and VSP products. In
1994, the Company discontinued production of these products which are not
expected to contribute significant revenues in future periods. The Company's
current lines of multimedia compression products include JPEG-based products
used in video editing systems and filmless digital cameras, MPEG-based
products used in video playback and Dolby Digital-based audio products used
in movie and home theater systems and DVD players which have been recently
introduced by several manufacturers.
In December 1996, the Company acquired CompCore, a provider of
software-based compression products and a designer of cores for video and
audio decoder integrated circuits. The Company issued approximately 2.0
million shares of Zoran Common Stock in exchange for all of the outstanding
Common Stock of CompCore. The Company also assumed all outstanding options
to purchase CompCore Common Stock which were exchanged for options to
purchase approximately 900,000 shares of Zoran Common Stock. The acquisition
was accounted for as a pooling of interests, and the financial statements of
the Company and the information herein have been restated to include the
results of CompCore for all periods.
Historically, average selling prices ("ASPs") in the semiconductor
industry in general, and for the Company's products in particular, have
decreased over the life of a particular product. Although ASPs have
fluctuated substantially from period to period, these fluctuations have been
driven principally by changes in customer mix (original equipment
manufacturer ("OEM") sales versus sales to distributors) and the transition
from low-volume to high-volume production sales rather than by factors
related to product life cycles. During 1996 and 1997, the Company reduced
its ASPs on certain products in order to better penetrate the consumer
market. The Company believes that, as its product lines continue to mature
and competitive markets evolve, it is likely to experience further declines
in the ASPs of its products, although the timing and amount of such future
changes cannot be predicted with any certainty. There can be no assurance
that costs will decrease at the same rate as such declines in ASPs, or at all.
The Company sells its products, either directly or through distributors
or independent sales representatives, to OEMs worldwide. Sales prices to
distributors are generally lower than prices for direct sales, as
distributors are responsible for certain sales and marketing expenses,
maintenance of inventories and customer support and training. Lower gross
margins on sales to distributors are partially offset by reduced selling and
marketing expenses related to such sales. Product sales in Japan are
primarily made through Fujifilm Microdevices Co., Ltd. ("Fujifilm"), the
Company's strategic partner and distributor in Japan. Fujifilm provides more
sales and marketing support than Zoran's other distributors.
7
<PAGE>
Zoran has historically generated a significant percentage of its total
revenues from development contracts, primarily with key customers. These
development contracts have provided the Company with partial funding for the
development of certain of its products. Payments received by the Company
under these development contracts are recorded as development revenue. The
Company classifies all development costs, including costs related to these
development contracts, as research and development expenses. The Company
retains ownership of the intellectual property developed by it under these
development contracts. While the Company intends to continue to enter into
development contracts with certain strategic partners, it expects development
revenue to decrease as a percentage of total revenues.
The Company conducts a substantial portion of its research and
development and certain sales and marketing and administrative operations in
Israel through its wholly-owned Israeli subsidiary. As a result, certain
expenses are incurred in Israeli shekels. Until May 1995, substantially all
of the Company's product sales were made from the Company's U.S. facility.
In May 1995, the Company restructured its manufacturing and sales
organizations and began selling a portion of its products directly from its
facility in Israel. To date, substantially all of the Company's revenues
have been denominated in U.S. dollars and most costs of product sales have
been incurred in U.S. dollars. The Company expects that most of its revenues
and costs of product sales will continue to be denominated and incurred in
U.S. dollars for the foreseeable future. The Company has not experienced
material losses or gains as a result of currency exchange rate fluctuations
and has not engaged in hedging transactions to reduce its exposure to such
fluctuations. The Company intends to actively monitor its foreign exchange
exposure and to take appropriate action to reduce its foreign exchange risk,
if such risk becomes material.
RESULTS OF OPERATIONS
REVENUES
Total revenues for the quarter and six months ended June 30, 1997 were
$9.3 million and $19.3 million, respectively, a decrease of 16% and increase
of 4% compared to the same periods in 1996. Product sales of $6.2 million
and $12.5 million for the current quarter and six months, respectively,
decreased by 29% and 17%, respectively, compared to the same periods last
year. The decreases in product sales resulted from unit sales and revenue
decreases for the Company's Dolby Digital audio compression ICs sold through
Fujifilm due to delays in the development of the DVD market and uncertainty
regarding the timing of volume production and shipment of DVD players. These
decreases were partially offset by unit sales and revenue increases for the
Company's JPEG-based products used in desktop video editing and digital
filmless cameras. Software, licensing and development revenue of $3.0
million and $6.8 million for the quarter and six months ended June 30, 1997,
respectively, increased by 32% and 94% compared to the same periods last year
due to significant new development and licensing contracts and the higher
unit volume of software and hardware products sold by the Company's customers.
Customers comprising a significant portion of the Company's total revenue
for the respective periods were as follows:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1997 1996 1997 1996
---- ---- ---- ----
A 23% 4% 18% 3%
B 13% 38% 12% 28%
C 9% 15% 15% 21%
D -- 6% -- 11%
8
<PAGE>
PRODUCT GROSS PROFIT
Product gross margin was 60% for the quarter ended June 30, 1997,
compared to 44% for the prior quarter ended March 31, 1997 and 39% for the
quarter ended June 30, 1996. Product gross margin was 52% for the six months
ended June 30, 1997, compared to 42% for the six months ended June 30, 1996.
The increases for the current quarter and six months were due to a product
sales mix that included an increased percentage of higher margin product, an
increased percentage of products sold directly to OEM customers and lower
manufacturing costs during the current quarter. The Company's product gross
margin is dependent on product mix and on the percentage of products sold
directly to the Company's OEM customers versus indirectly through its
marketing partners who purchase the Company's products at lower prices but
absorb most of the associated marketing and sales support expenses. The
Company expects product and customer mix to continue to fluctuate in future
quarters, causing further fluctuations in margins.
RESEARCH AND DEVELOPMENT
Research and development ("R&D") expenses of $3.2 million and $6.5
million for the quarter and six months ended June 30, 1997, respectively,
were 86% and 97% above the comparable periods in 1996. The increases were a
result of the planned enhancement of the Company's technology and development
capabilities in conjunction with the Company's growth in general and its
increased software, licensing and development revenue. R&D expenses during
the current quarter and six month periods increased as a percentage of total
revenues compared to the same periods last year due to the above factors and
the decrease in product sales. The Company continues to believe that
significant investments in R&D are required for it to remain competitive, and
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 decreased 19% from
the second quarter of 1996 to $2.6 million for the current quarter and
decreased slightly compared to last year as a percentage of total revenues.
SG&A expenses for the six months ended June 30, 1997 decreased slightly
compared to last year in amount and as a percentage of total revenues. The
decrease for the current quarter was due primarily to certain expenses at
non-recurring levels in the prior year and lower sales related expenses in
the current quarter. The Company expects that future SG&A expenses will
increase in order to support the anticipated growth of the Company.
INTEREST AND OTHER INCOME, NET
Net interest and other income of $350,000 and $628,000 for the quarter
and six months ended June 30, 1997, respectively, represented increases of
18% and 16% compared to the same periods last year. The increase resulted
primarily from decreased interest expense as a result of the repayment of the
Company's remaining debt during 1996.
PROVISION FOR INCOME TAXES
The Company's estimated effective tax rate increased to 25% for the
current year from 11% last year. The increase was primarily due to taxes on
income in excess of the net operating loss carryover limitation and foreign
withholding taxes.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Net proceeds from the initial public offering of the Company's Common
Stock (the "IPO") in December 1995 and the exercise of certain warrants in
connection with the IPO totaled $17.5 million. The Company also received net
proceeds of $3.5 million in January 1996 upon the exercise of the
underwriters' over-allotment option. At June 30, 1997, the Company had $21.4
million of cash, cash equivalents and short-term investments.
The Company's operating activities used cash of $402,000 in the six
months ended June 30, 1997. Cash used in operating activities reflected
changes in working capital, partially offset by net income and depreciation
and amortization. The principal change in working capital during the six
months was a decrease in accounts payable and accrued expenses of $3.6
million due partially to payments of expenses related to the acquisition of
CompCore in December 1996. In addition, inventory decreased by $1.1 million
due primarily to the continued high level of shipments at the end of the
period, planned reductions of inventory levels of certain older products and
higher than anticipated demand for certain new products. During the six
months ended June 30, 1997, the Company's capital expenditures were $1.9
million. The Company had no bank debt at December 31, 1996 or at June 30,
1997.
The Company believes that its current balances of cash, cash equivalents
and short-term investments and anticipated cash flow from operations, will
satisfy the Company's anticipated working capital and capital equipment
requirements through at least the next twelve months.
FUTURE PERFORMANCE AND RISK FACTORS
THE COMPANY'S FUTURE BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION
ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES, INCLUDING THOSE DESCRIBED
BELOW.
PRODUCT CONCENTRATION; EVOLVING MARKETS. Since the Company's markets are
still evolving, only a limited number of commercial and consumer products
that incorporate the Company's integrated circuits are currently in volume
production. Current applications for the Company's products include
professional and consumer video editing systems, PC-based and stand-alone
video CD and DVD players, digital audio systems, filmless digital cameras and
video conferencing systems. During 1994 and 1995, the Company derived a
majority of its product revenues from the sale of integrated circuits for
video editing applications. While sales of audio products accounted for an
increased percentage of product revenues in 1996, video editing applications
continued to account for the largest percentage of the Company's product
sales. Delays in the development of the DVD market have resulted in
decreased sales of the Company's audio products in 1997 compared to 1996.
The Company expects that sales of its devices for video capture and editing
applications and digital audio applications will continue to account for a
significant portion of its revenues for the near future. Over the longer
term, the Company's ability to generate increased revenues will be dependent
on the expansion of sales of its products for use in other existing
applications, as well as the development and acceptance of new applications
for the Company's technologies and products. The potential size of the
markets for new applications and the timing of their development and
acceptance is uncertain. The Company's future success will depend upon
whether manufacturers select the Company's integrated circuits and software
for incorporation into their products, and upon the successful marketing of
these products by the manufacturers. There can be no assurance that demand
for existing applications will be sustained, that new markets will develop or
that manufacturers developing products for any of these markets will design
the Company's integrated circuits into their products or successfully market
them. The failure of existing and new markets to develop or to be receptive
to the Company's products would have a material adverse effect on the
Company's business, operating results and financial condition.
10
<PAGE>
The emergence of markets for the Company's integrated circuits will be
affected by a variety of factors beyond the Company's control. In
particular, the Company's products are designed to conform with certain
current industry standards. There can be no assurance that manufacturers
will continue to follow these standards or that competing standards will not
emerge which will be preferred by manufacturers. The emergence of markets
for the Company's products is also dependent in part upon third-party content
providers developing and marketing content for end-user systems, such as
video and audio playback systems, in a format compatible with the Company's
products. There can be no assurance that these or other factors beyond the
Company's control will not adversely affect the development of markets for
the Company's products.
RELIANCE ON INDEPENDENT FOUNDRIES AND CONTRACTORS. The Company does not
operate any manufacturing facilities, and from time to time shortages of
foundry capacity develop for certain process technologies in the
semiconductor industry. The Company currently relies on independent foundries
to manufacture substantially all of its products. The Company's independent
foundries fabricate products for other companies and may also produce
products of their own design. The Company does not have a long-term supply
contract with two of its principal foundries and, therefore, neither of these
suppliers is obligated to supply products to the Company for any specific
period, in any specific quantity or at any specified price, except as may be
provided in a particular purchase order.
The Company's reliance on independent foundries involves a number of
risks, including the inability to obtain adequate capacity, the
unavailability of or interruption in access to certain process technologies,
reduced control over delivery schedules, quality assurance, manufacturing
yields and cost, and potential misappropriation of the Company's intellectual
property. The loss of any of the Company's foundries as a supplier, the
inability of the Company in a period of increased demand for its products to
expand supply or the Company's inability to obtain timely and adequate
deliveries from its current or future suppliers could reduce or delay
shipments of the Company's products. Any of these developments could damage
relationships with the Company's current and prospective customers and have a
material adverse effect on the Company's business, operating results or
financial condition.
All of the Company's semiconductor products are currently being assembled
by one of two independent contractors and tested by those contractors or
other independent contractors. The Company's reliance on independent assembly
and testing houses limits its control over delivery schedules, quality
assurance and product cost. Disruptions in the provision of services by the
Company's assembly or testing houses or other circumstances that would
require the Company to seek alternative sources of assembly or testing could
lead to supply constraints or delays in the delivery of the Company's
products. These constraints or delays could damage relationships with
current and prospective customers and have a material adverse effect on the
Company's business, operating results or financial condition.
RECENTLY COMPLETED ACQUISITION. On December 27, 1996, the Company
acquired CompCore. The managements of the Company and CompCore have
completed the merger with the expectation that the merger will result in
beneficial synergies for the companies. Achieving the anticipated benefits
of the merger will depend in part upon whether the integration of the two
companies' businesses is accomplished in an efficient and effective manner,
and there can be no assurance that this will occur. The combination of the
two companies will require, among other things, integration of the companies'
respective product offerings and technology and coordination of their
research and development, sales and marketing, and financial reporting
efforts. There can be no assurance that such integration will be
accomplished smoothly or successfully. If significant difficulties are
encountered in the integration of the existing product lines and technology,
resources could be diverted from new product development, resulting in delays
in new product introductions. The difficulties of such integration may be
increased by the necessity of coordinating geographically separated
organizations with distinct cultures. The integration of certain operations
following the merger will require the dedication of management and other
personnel resources which may temporarily distract from the day-to-day
business of the combined company. In addition, certain former key employees
of CompCore are no longer with the Company or are working a reduced amount of
time. There is no assurance that this will not continue to occur. Failure
to successfully accomplish the integration of the two companies' operations
could have a material adverse effect on the combined company's business,
financial condition or results of operations.
11
<PAGE>
NEW PRODUCT DEVELOPMENT AND TIMELY INTRODUCTION OF NEW AND ENHANCED
PRODUCTS. The markets for the Company's products are characterized by
rapidly changing technologies, evolving industry standards, frequent new
product introductions and short product life cycles. The Company expects to
increase its expenses relating to product development, and its future success
will depend to a substantial degree upon its ability to develop and
introduce, on a timely and cost-effective basis, new and enhanced products
that meet changing customer requirements and industry standards. There can
be no assurance that the Company will successfully develop, introduce or
manage the transition to new products. Future delays in the introduction or
shipment of new or enhanced products, the inability of such products to gain
market acceptance or problems associated with new product transitions could
adversely affect the Company's business, operating results and financial
condition.
COMPETITION; PRICING PRESSURES. The Company's existing and potential
competitors include large domestic and international companies that have
substantially greater financial, manufacturing, technical, marketing,
distribution and other resources, broader product lines and longer standing
relationships with customers than the Company. The markets in which the
Company competes are intensely competitive and are characterized by rapid
technological change, declining ASPs and rapid product obsolescence.
CUSTOMER CONCENTRATION; CHANGE IN CUSTOMER MIX. The Company's largest
customers have accounted for a substantial percentage of its revenues, and
sales to these large customers have varied materially from year to year.
There can be no assurance that the Company will be able to retain its key
customers or that such customers will not cancel purchase orders or
reschedule or decrease their level of purchases. In addition, sales to these
key customers may fluctuate significantly from quarter to quarter. Any
development that would result in a substantial decrease or delay in sales to
one or more key customers, including actions by competitors or technological
changes, could have a material adverse effect on the Company's business,
operating results or financial condition. In addition, any development that
would affect the collectibility of account balances from one or more key
customers could have a material adverse effect on the Company's business,
operating results or financial condition.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS. The Company's quarterly
operating results have varied significantly due to a number of factors,
including the timing of new product introductions by the Company and its
competitors, market acceptance of new and enhanced versions of the Company's
products and products of its customers, the timing of large customer orders, the
availability of development funding and the timing of licensing and development
revenue, changes in the mix of products sold and the mix of distribution
channels employed and competitive pricing pressures. The Company expects that
its operating results will fluctuate in the future as a result of these factors
and a variety of other factors, including the availability of adequate foundry
capacity, fluctuations in manufacturing yields, the emergence of new industry
standards, product obsolescence, changes in pricing policies by the Company, its
competitors or its suppliers, the cyclical nature of the semiconductor industry,
the evolving and unpredictable nature of the markets for products incorporating
the Company's integrated circuits and software and the amount of research and
development expenses associated with new product introductions. The Company's
operating results could also be adversely affected by economic conditions
generally or in various geographic areas where the Company or its customers do
business, other conditions affecting the timing of customer orders, a downturn
in the markets for its customers' products, particularly the consumer
electronics market, or order cancellations or reschedulings. These factors are
difficult or impossible to forecast, and these or other factors could materially
affect the Company's quarterly or annual operating results. The Company places
orders to purchase its products from independent foundries several months in
advance of the scheduled delivery date, often in advance of receiving
non-cancelable orders from its customers. If anticipated shipments or licensing
or development revenue in any quarter are canceled or do not occur as quickly as
expected, expense and inventory levels could be disproportionately high. A
significant portion of the Company's expenses is relatively fixed, and the
timing of increases in expenses is based in large part on the Company's forecast
of future revenues. As a result, if revenues do not meet the Company's
expectations it may be unable to quickly adjust expenses to levels appropriate
to actual revenues, which could have a material adverse effect on the Company's
business, operating results or financial condition. 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
12
<PAGE>
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.
MANAGEMENT OF GROWTH. The Company has recently experienced rapid growth
and expansion which has placed, and will continue to place, a significant
strain on its administrative, operational and financial resources and has
resulted, and will continue to result, in a continuing increase in the level
of responsibility for both existing and new management personnel. The
Company anticipates that future growth, if any, will require it to recruit
and hire a substantial number of new engineering, managerial, sales and
marketing personnel. The Company's ability to manage its growth successfully
will also require the Company to continue to expand and improve its
administrative, operational, management and financial systems and controls.
Many of the Company's key operations, including the major portion of its
research and development and a significant portion of its sales and
administrative operations, are located in Israel, while a majority of its
sales and marketing and certain of its research and development and
administrative personnel, including its President and Chief Executive Officer
and other officers, are based in the United States. The geographic
separation of these operations is likely to place additional strain on the
Company's resources and its ability to effectively manage its growth. If the
Company's management is unable to manage growth effectively, the Company's
business, operating results or financial condition could be materially and
adversely affected.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a
significant degree upon the continuing contributions of its senior
management. The loss of key management personnel could delay product
development cycles or otherwise have a material adverse effect on the
Company's business, operating results or financial condition. There can be
no assurance that the Company will be able to retain the services of any of
its key employees. The Company believes that its future success will also
depend in large part on its ability to attract and retain highly-skilled
engineering, managerial, sales and marketing personnel, both in the United
States and in Israel. Competition for such personnel is intense, and there
can be no assurance that the Company will be successful in attracting,
integrating and retaining such personnel. Failure to attract and retain key
personnel could have a material adverse effect on the Company's business,
operating results or financial condition.
RELIANCE ON INTERNATIONAL SALES AND OPERATIONS; RELIANCE ON OPERATIONS IN
ISRAEL. The Company anticipates that international sales will continue to
represent a significant portion of total revenues. In addition,
substantially all of the Company's products are manufactured, assembled and
tested outside of the United States by independent foundries and
subcontractors. The Company is subject to the risks of doing business
internationally, including unexpected changes in regulatory requirements,
fluctuations in exchange rates, imposition of tariffs and other barriers and
restrictions and the burdens of complying with a variety of foreign laws. The
Company is also subject to general geopolitical risks, such as political and
economic instability and changes in diplomatic and trade relationships, in
connection with its international operations.
A substantial portion of the Company's research and development and sales
operations are located in the State of Israel. Therefore, the Company is
directly affected by the political, economic and military conditions to which
that country is subject. In addition, many of the Company's expenses in
Israel are paid in Israeli shekels, thereby subjecting the Company to the
risk of foreign currency fluctuations and to economic pressures resulting
from Israel's generally high rate of inflation. There can be no assurance
that such factors will not have a material adverse effect on the Company's
business, operating results or financial condition.
VOLATILITY OF STOCK PRICE. The market price of the Company's Common
Stock has fluctuated significantly since the IPO and is subject to material
fluctuations in the future in response to announcements concerning the
Company or its competitors or customers, quarterly variations in operating
results, announcements of technological innovations, the introduction of new
products or changes in product pricing policies by the Company or its
competitors, proprietary rights or other litigation, changes in analysts'
earnings estimates, general conditions in the semiconductor industry,
developments in the financial markets and other factors. In addition, the
stock market has, from time to time, experienced extreme price and volume
fluctuations that have particularly affected the market prices for technology
companies and which have been unrelated to the operating performance of the
affected companies. Broad market fluctuations of this type may adversely
affect the future market price of the Common Stock.
13
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's 1997 Annual Meeting of Stockholders was held on June 6, 1997.
At the meeting the following seven persons nominated by management were elected
to serve as directors of the Company:
Shares
-----------------------
Nominee Voted For Withheld
-------------------- --------- --------
Levy Gerzberg 8,512,123 22,551
Uzia Galil 8,521,405 13,269
George T. Haber 8,521,405 13,269
Arie Kahana 8,521,405 13,269
James D. Meindl 8,521,525 13,149
Arthur B. Stabenow 8,521,525 13,149
Philip M. Young 8,521,525 13,149
The following additional items were voted upon at the meeting:
1. A proposal to amend the Company's 1993 Stock Option Plan to (i)
increase the number of shares of Common Stock reserved for issuance
thereunder by 650,000 shares, (ii) limit the aggregate number of
shares of Common Stock subject to options that may be granted to any
employee of the Company during any fiscal year and (iii) make certain
other modifications was approved by a vote of: 5,858,245 shares for;
261,263 shares against; 27,689 shares abstaining; and 2,387,477 broker
non-votes.
2. A proposal to amend the Company's 1995 Employee Stock Purchase Plan to
increase the number of shares of Common Stock reserved for issuance
thereunder by 150,000 shares was approved by a vote of 6,185,279
shares for; 152,071 shares against; 27,047 shares abstaining; and
2,170,277 broker non-votes.
3. A proposal to ratify the appointment of Price Waterhouse LLP as the
independent accountants of the Company for the fiscal year ending
December 31, 1997 was approved by a vote of 8,324,273 for; 7,201
against; 24,229 abstaining; and 178,971 broker non-votes.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 Statement re: Computation of Net Income Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
June 30, 1997.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZORAN CORPORATION
Date: August 11, 1997 /s/ Levy Gerzberg
-------------------------------
Levy Gerzberg
President
Chief Executive Officer
Date: August 11, 1997 /s/ Ami Kraft
-------------------------------
Ami Kraft
Vice President, Finance
Chief Financial Officer
15
<PAGE>
EXHIBIT 11.1
ZORAN CORPORATION
COMPUTATION OF NET INCOME PER SHARE
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -----------------------
1997 1996 1997 1996
------------------------- -----------------------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 9,301 8,733 9,202 8,718
Dilutive effect of stock options and warrants
based on the treasury stock method 1,735 1,867 1,851 1,670
------------------------- -----------------------
Weighted average common shares and
equivalents 11,036 10,600 11,053 10,388
------------------------- -----------------------
------------------------- -----------------------
Net income $ 1,016 $ 1,013 $ 1,693 $ 1,674
------------------------- -----------------------
------------------------- -----------------------
Net income per share $ 0.09 $ 0.10 $ 0.15 $ 0.16
------------------------- -----------------------
------------------------- -----------------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED INCOME STATEMENTS, THE CONSOLIDATED BALANCE SHEETS AND THE
ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 8,491
<SECURITIES> 12,908
<RECEIVABLES> 12,324
<ALLOWANCES> 1,025
<INVENTORY> 736
<CURRENT-ASSETS> 34,769
<PP&E> 9,464
<DEPRECIATION> 4,507
<TOTAL-ASSETS> 39,726
<CURRENT-LIABILITIES> 9,244
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 30,473
<TOTAL-LIABILITY-AND-EQUITY> 39,726
<SALES> 12,532
<TOTAL-REVENUES> 19,319
<CGS> 6,004
<TOTAL-COSTS> 6,004
<OTHER-EXPENSES> 11,686
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,257
<INCOME-TAX> 564
<INCOME-CONTINUING> 1,693
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,693
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</TABLE>
