<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, 1998
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 July 30, 1998 was 10,069,873.
<PAGE>
ZORAN CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
June 30, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations
Three and Six Months Ended June 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
</TABLE>
2
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ZORAN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash & equivalents $ 6,552 $ 9,903
Short-term investments 9,634 12,473
Accounts receivable, net 10,978 16,509
Inventories 9,094 4,123
Other current assets 1,909 2,232
-------- --------
Total current assets 38,167 45,240
Property & equipment, net 5,794 5,704
-------- --------
$ 43,961 $ 50,944
-------- --------
-------- --------
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,523 $ 5,656
Accrued expenses and other liabilities 6,037 11,002
-------- --------
Total current liabilities 9,560 16,658
Stockholder's equity:
Common Stock, $0.001 par value;
20,000,000 shares authorized; 10,033,870
and 9,800,679 shares issued and outstanding 10 10
Additional paid-in capital 79,136 78,664
Warrants outstanding 717 717
Accumulated deficit (45,462) (45,105)
-------- --------
Total stockholders' equity 34,401 34,286
-------- --------
$ 43,961 $ 50,944
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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ZORAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 4,610 $ 6,216 $13,244 $12,532
Software, licensing and development 2,465 3,036 4,999 6,787
-------- -------- -------- --------
Total revenues 7,075 9,252 18,243 19,319
Costs and expenses:
Cost of product sales 2,940 2,478 7,597 6,004
Research and development 2,944 3,203 6,178 6,515
Selling, general and administrative 2,686 2,567 5,434 5,171
-------- -------- -------- --------
Total costs and expenses 8,570 8,248 19,209 17,690
Operating income (loss) (1,495) 1,004 (966) 1,629
Interest & other income (expense), net 275 350 520 628
-------- -------- -------- --------
Income (loss) before income taxes (1,220) 1,354 (446) 2,257
Provision (benefit) for income taxes (244) 338 (89) 564
-------- -------- -------- --------
Net income (loss) $ (976) $ 1,016 $(357) $ 1,693
-------- -------- -------- --------
-------- -------- -------- --------
Basic net income (loss) per share $ (0.10) $ 0.11 $ (0.04) $ 0.18
-------- -------- -------- --------
-------- -------- -------- --------
Diluted net income (loss) per share $ (0.10) $ 0.09 $ (0.04) $ 0.15
-------- -------- -------- --------
-------- -------- -------- --------
Shares used to compute basic net income
(loss) per share 9,975 9,301 9,916 9,203
-------- -------- -------- --------
-------- -------- -------- --------
Shares used to compute diluted net income
(loss) per share 9,975 11,036 9,916 11,053
-------- -------- -------- --------
-------- -------- -------- --------
</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, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (357) $ 1,693
Adjustments to reconcile net income to net cash
used by operations:
Depreciation, amortization and other 1,046 777
Changes in current assets and liabilities:
Accounts receivable, net 5,531 (211)
Inventory (4,971) 1,063
Other current assets 278 (116)
Accounts payable (2,133) (3,110)
Accrued expenses and other liabilities (4,965) (498)
-------- --------
Net cash used by operating activities (5,571) (402)
-------- --------
Cash flows from investing activities:
Property and equipment (1,091) (1,857)
Sales/Purchases of short-term investments, net 2,839 (665)
-------- --------
Net cash provided (used) in investing activities 1,748 (2,522)
Cash flows from financing activities:
Proceeds from issuance of Common Stock, net 472 239
-------- --------
Net cash provided by financing activities 472 239
-------- --------
Net decrease in cash and cash equivalents (3,351) (2,685)
Cash and cash equivalents at beginning of period 9,903 11,176
-------- --------
Cash and cash equivalents at end of period $ 6,552 $ 8,491
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
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ZORAN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements contain all adjustments (consisting only of normal recurring
adjustments) which, in the opinion of management, are necessary to present
fairly the financial information included therein. While the Company
believes that the disclosures are adequate to make the information not
misleading, it is suggested that these financial statements be read in
conjunction with the audited consolidated financial statements and
accompanying notes included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997. Results for the interim periods presented
are not necessarily indicative of the results to be expected for the full
year.
2. BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------- -------
<S> <C> <C>
Inventory:
Work-in-process $ 2,354 $ 1,860
Finished goods 6,740 2,263
------- -------
$ 9,094 $ 4,123
------- -------
------- -------
</TABLE>
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. EARNINGS PER SHARE
A reconciliation of the numerators and the denominators of the basic
and diluted per share computation is as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30,
1998 1997
----------------------------------------- ----------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ---------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income available
to common stockholders $ (976) 9,975 $ (0.10) $ 1,016 9,301 $ 0.11
-------- ------
-------- ------
Effects of Dilutive Securities:
Stock Options 1,618
Warrants 117
Diluted EPS:
Income available to
common stockholder $ (976) 9,975 $ (0.10) $ 1,016 11,036 $ 0.09
-------- ------
-------- ------
---------------------------------------------------------------------------------
<CAPTION>
Six Months Ended June 30,
1998 1997
----------------------------------------- ----------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ---------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income available
to common stockholders $ (357) 9,916 $ (0.04) $ 1,693 9,202 $ 0.18
-------- ------
-------- ------
Effects of Dilutive Securities:
Stock Options 1,731
Warrants 121
Diluted EPS:
Income available to
common stockholder $ (357) 9,916 $ (0.04) $ 1,693 11,054 $ 0.15
-------- ------
-------- ------
</TABLE>
6
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5. RECENTLY ISSUED ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). FAS 133 establishes a new
model for accounting for derivatives and hedging activities and supercedes
and amends a number of existing accounting standards. SFAS 133 requires that
all derivatives be recognized in the balance sheet at their fair market
value, and the corresponding derivative gains or losses be either reported in
the statement of operations or as a deferred item depending on the type of
hedge relationship that exists with respect to such derivative. Adopting the
provisions of SFAS 133 are not expected to have a material effect on the
Company's consolidated financial statements, which will be effective for the
Company's fiscal 2000.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO
THE COMPANY'S FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE CURRENTLY ANTICIPATED DEPENDING UPON A VARIETY OF
FACTORS, INCLUDING THOSE DESCRIBED BELOW UNDER THE SUB-HEADING, "FUTURE
PERFORMANCE AND RISK FACTORS" AND DISCUSSED MORE FULLY IN THE COMPANY'S
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997.
OVERVIEW
Zoran Corporation ("Zoran" or the "Company") develops and markets
integrated circuits ("ICs"), integrated circuit cores and software for digital
video and audio applications enabled by compression. The Company's product
lines address the PC and consumer multimedia market and include JPEG-based
codecs, MPEG-based video decoders including DVD, Dolby Digital and MPEG-based
audio decoders and real-time video CD and DVD decoder software for PC
applications. The Company's software is bundled by PC and graphic systems
manufactures for software-only or hardware-assisted video CD, DVD and JPEG
compressed video playback on the PC. Current applications for the Company's
IC products include professional and consumer video editing systems, filmless
digital cameras, PC-based or stand-alone video CD and DVD players and digital
audio systems.
Historically, average selling prices ("ASPs") in the semiconductor
industry in general, and for the Company's products in particular, have
decreased over the life of a particular product. Although ASPs for the
Company's hardware products have fluctuated substantially from period to
period, these fluctuations have been driven principally by changes in
customer mix (original equipment manufacturer ("OEM") sales versus sales to
distributors) and the transition from low-volume to high-volume production
sales rather than by factors related to product life cycles. During 1996 and
1997, the Company reduced its ASPs on certain products 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 to OEMs worldwide, either directly or
through distributors or independent sales representatives. 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.
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 activities in Israel through its
wholly-owned Israeli subsidiary. As a result, certain expenses are incurred
in Israeli shekels. 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
8
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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 were $7.1 million and $18.2 million for the three and six
month periods ended June 30, 1998, compared to $9.3 million and $19.3 million
for the same periods of the prior fiscal year, representing a decrease of
23.5% and 5.6% for the respective periods. For the three and six month
periods ended June 30, 1998 the corresponding product revenues were $4.6
million and $13.2 million compared to $6.2 million and $12.5 million for the
same periods in 1997, a decrease of 25.8% and an increase of 5.6%,
respectively. For the current quarter decreased unit sales in the JPEG and
MPEG product families were partially offset by increased unit sales in the
audio product family. Software, licensing and development revenues were $2.5
million and $5.0 million for the three and six month periods ended June 30,
1998, compared to $3.0 million and $6.8 million for the same periods of the
prior fiscal year, representing a decrease of 18.8% and 26.3% for the
respective periods. This decrease was primarily due to the timing of
significant new contracts for software and hardware design and as well as the
timing of revenue recognition on long-term development contracts.
Product sales consist of revenues from sales of the Company's integrated
circuits. Software, licensing and development revenue consists of revenue
from license and royalty agreements, primarily for audio and video decoder
software, that 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 revenue is derived from hardware
design contracts that provide for license and milestone payments to be made
at specified times.
PRODUCT GROSS MARGIN
Product gross margins were 36.2% and 42.6% of product revenues for the
three and six month periods ended June 30, 1998, compared to 60.1% and 52.1%
for the same periods of the prior fiscal year, a decrease of 39.8% and 18.2%,
respectively. The decrease was due to a product sales mix that included a
decreased percentage of higher-margin products, a reduced percentage of
products sold directly to OEM customers and higher manufacturing costs
compared to the same periods in 1997.
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 periods, causing further fluctuations in margins.
RESEARCH AND DEVELOPMENT
Research and development ("R&D") expenses were $2.9 million and $6.2
million for the three and six month periods ended June 30, 1998 compared to
$3.2 million and $6.5 million for the same periods of the prior fiscal year.
As a percentage of revenues R&D expenses increased to 41.6% and 33.9% for the
three and six month periods ended June 30, 1998, compared to 34.6% and 33.7%
for the same periods of the prior fiscal year. The increase in R&D expenses
as a percentage of revenues for the current quarter compared to the same
period in 1997 was primarily due to reduced revenues quarter to quarter
The Company continues to believe that significant investments in R&D are
required for it to remain competitive and expects to continue to devote
significant resources to product development, although such expenses as a
percentage of total revenues may fluctuate.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expenses were $2.7 million and
$5.4 million for the three and six month periods ended June 30, 1998,
compared to $2.6 million and $5.2 million for the same periods of the prior
fiscal year. As a percentage of revenues, SG&A expenses were 38.0% and 29.8%
for the
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three and six month periods ended June 30, 1998, compared to 27.8% and 26.8%
for the same periods of the prior fiscal year. The increase as a percent of
revenues was due to SG&A expenses remaining flat while revenues decreased
from period to period.
INTEREST AND OTHER INCOME, NET
Net interest and other income for the three and six month periods ended
June 30, 1998 was $275,000 and $520,000, respectively, a decrease of 21.4%
and 17.2% compared to the same periods in 1997. The decrease resulted
primarily from decreased interest income due to lower cash balances during
the current periods as compared to the same periods of the prior fiscal year.
PROVISION FOR INCOME TAXES
The Company's estimated effective tax rate decreased to 20% for the
current quarter from 25% for the same quarter last year. The decrease was
primarily due to the tax benefits derived from revenue and net income
attributable to the Company's operations in Israel, which receives favorable
tax treatment.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had $6.6 million of cash and cash
equivalents, $9.6 million of short-term investments and $28.6 million of
working capital. Cash used in operations for the first six months of 1998
was $5.6 million contrasted with $.4 million for the comparable period in
1997. Cash used primarily reflects changes in inventory, accounts
receivable and accrued liabilities. The Company's capital expenditures for
six months ended June 30, 1998 totaled $1.1 million. The Company had no bank
debt at June 30, 1998 or at December 31, 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 12 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. Video editing applications continued to account
for the largest percentage of the Company's product sales in 1996 and 1997.
Delays in the development of the DVD market 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
10
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failure of existing and new markets to develop or to be receptive to the
Company's products would have a material adverse effect on the Company's
business, operating results and financial condition.
The emergence of markets for the Company's integrated circuits will be
affected by a variety of factors beyond the Company's control. In
particular, the Company's products are designed to conform with certain
current industry standards. There can be no assurance that manufacturers
will continue to follow these standards or that competing standards will not
emerge which will be preferred by manufacturers. The emergence of markets
for the Company's products is also dependent in part upon third-party content
providers developing and marketing content for end user systems, such as
video and audio playback systems, in a format compatible with the Company's
products. There can be no assurance that these or other factors beyond the
Company's control will not adversely affect the development of markets for
the Company's products.
RELIANCE ON INDEPENDENT FOUNDRIES AND CONTRACTORS. The Company does not
operate any manufacturing facilities, and from time to time shortages of
foundry capacity develop for certain process technologies in the
semiconductor industry. The Company currently relies on independent
foundries to manufacture substantially all of its products. The Company's
independent foundries fabricate products for other companies and may also
produce products of their own design. The Company does not have a long-term
supply contract with either TSMC or Motorola Inc., 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.
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.
At present, all of the Company's semiconductor products are assembled by
one of two independent contractors, ASAT, Inc. and Anam Industrial, and
tested by those contractors or other independent contractors. The Company's
reliance on independent assembly and testing houses limits its control over
delivery schedules, quality assurance and product cost. Disruptions in the
provision of services by the Company's assembly or testing houses or other
circumstances that would require the Company to seek alternative sources of
assembly or testing could lead to supply constraints or delays in the
delivery of the Company's products. These constraints or delays could damage
relationships with current and prospective customers and have a material
adverse effect on the Company's business, operating results or financial
condition.
NEW PRODUCT DEVELOPMENT AND TIMELY INTRODUCTION OF NEW AND ENHANCED
PRODUCTS. The markets for the Company's products are characterized by
rapidly changing technologies, evolving industry standards, frequent new
product introductions and short product life cycles. The Company expects to
increase its expenses relating to product development, and its future success
will depend to a substantial degree upon its ability to develop and
introduce, on a timely and cost-effective basis, new and enhanced products
that meet changing customer requirements and industry standards. There can be
no assurance that the Company will successfully develop, introduce or manage
the transition to new products. Future delays in the introduction or
shipment of new or enhanced products, the inability of such products to gain
market acceptance or problems associated with new product transitions could
adversely affect the Company's business, operating results and financial
condition.
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.
11
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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 and
quarter to quarter. 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 adversely affect the collectability of account
balances from one or more key customers could have a material adverse effect
on the Company's business, operating results or financial condition.
FLUCTUATIONS IN OPERATING RESULTS; 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 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 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.
MANAGEMENT OF GROWTH. Over the past three years, the Company has
experienced 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. Some of the Company's key operations, including the major portion
of its research and development operations and a 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
12
<PAGE>
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 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 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 of the Company's
business, operating results or financial condition.
VOLATILITY OF STOCK PRICE. The market price of the Company's Common
Stock has fluctuated significantly since the Company's 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.
RISKS RELATED TO YEAR 2000 PROBLEM. In the next two years, most
companies could face a potentially serious information systems problem
because many software applications and operational programs written in the
past were designed to handle date formats with two-digit years and thus may
not properly recognize calendar dates beginning in the Year 2000. This
problem could result in computers either outputting incorrect data or
shutting down altogether when attempting to process a date such as
"01/01/00." The Company has examined all of its critical software and
operational applications as well as the software products it has sold and
found no potential problems related to the Year 2000 issue. In addition,
however, the Company could be exposed to a potential adverse impact resulting
from the failure of financial institutions and other third parties to
adequately address the Year 2000 problem. The Company intends to devote the
necessary resources to identify and resolve Year 2000 issues that may exist
with third parties. However, the Company cannot estimate the cost of this
effort at this time, nor can any assurance be given that the Year 2000
problem will not have a material adverse effect on the Company's business,
operating results or financial condition.
MARKET RISK DISCLOSURE. The Company has an investment portfolio of
securities that are classified as "available-for-sale". These securities are
subject to interest rate risk and will fall in value if market interest rates
increase. The Company attempts to limit this exposure by investing primarily
in short-term securities.
13
<PAGE>
From time to time, the Company makes certain capital equipment or other
purchases denominated in foreign currencies. As a result, cash flows and
earnings are exposed to fluctuations in interest rates and foreign currency
exchange rates. The Company attempts to limit these exposures through
operational strategies and generally has not hedged currency exposures.
14
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a vote of Security Holders
The Company's 1998 Annual Meeting of Stockholders was held on June
10, 1998. At the meeting the following six persons nominated by
management were elected to serve as directors of the Company:
<TABLE>
<CAPTION>
Shares
----------------------------
Nominee Voted For Withheld
------------- ----------------------------
<S> <C> <C>
Levy Gerzberg 9,385,807 55,953
Uzia Galil 9,385,820 55,940
George T. Haber 9,386,020 55,740
James D. Meindl 9,385,820 55,940
Arthur B Stabenow 9,386,020 55,740
Philip M. Young 9,386,020 55,740
</TABLE>
The following additional items were voted upon at the meeting:
1. A proposal to amend the Company's 1993 Stock Option Plan to increase
the number of shares of Common Stock reserved for issuance thereunder by
450,000 shares was approved by a vote of 8,615,243 shares for; 709,204
shares against; 117,313 shares abstaining.
2. A proposal to ratify the appointment of Price Waterhouse LLP as the
independent accountants of the Company for the fiscal year ending
December 31, 1998 was approved by a vote of 9,311,785 for; 31,620
against; 98,355 abstaining.
15
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the six months
ended June 30, 1998.
16
<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 13, 1998 /s/ Levy Gerzberg
---------------------------
Levy Gerzberg
President
Chief Executive Officer
/s/ Karl Schneider
---------------------------
Karl Schneider
Vice President of Finance
Chief Financial Officer
17
<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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 6,552
<SECURITIES> 9,634
<RECEIVABLES> 10,978
<ALLOWANCES> 0
<INVENTORY> 9,094
<CURRENT-ASSETS> 38,167
<PP&E> 11,825
<DEPRECIATION> 6,031
<TOTAL-ASSETS> 43,961
<CURRENT-LIABILITIES> 9,560
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 34,401
<TOTAL-LIABILITY-AND-EQUITY> 43,961
<SALES> 13,244
<TOTAL-REVENUES> 18,243
<CGS> 7,597
<TOTAL-COSTS> 7,597
<OTHER-EXPENSES> 6,178
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (446)
<INCOME-TAX> (89)
<INCOME-CONTINUING> (357)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (357)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
