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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, 1997
[ ] 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)
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DELAWARE 94-2794449
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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3112 SCOTT BOULEVARD, SANTA CLARA, CALIFORNIA
95054 (Address of principal executive offices) (Zip code)
(408) 919-4111
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class Name of Exchange on which registered
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NONE NONE
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
(Title of Class)
Indicate by check mark whether 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. [ ]
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 19, 1998, as reported on the Nasdaq National Market,
was approximately $105,000,000. 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 19, 1998: 9,899,771
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the definitive proxy statement for registrant's 1998 Annual Meeting
of Stockholders 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, integrated
circuit cores and software for digital video and audio compression applications.
The Company's products are used in a variety of video and audio products
addressing PC and consumer multimedia markets. Current applications for Zoran
integrated circuit products include professional and consumer video editing
systems, filmless digital cameras, PC-based and stand-alone video CD and digital
video disc ("DVD") players, and digital audio systems. The Company's software is
bundled by PC and graphic system manufacturers for video CD, DVD and compressed
video playback on the PC.
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 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.
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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. The MPEG 2 standard is used in digital satellite and
cable TV systems. The first consumer application of the MPEG 2 standard is the
DVD player and the DVD ROM, used in the personal computer. The first commercial
DVD players were introduced in Japan in late 1996 and early 1997. The first DVD
ROMs were introduced in the United States in the summer of 1997. Over 800 movie
titles are now available in DVD format, and new DVD players and DVD ROMs aimed
at existing and new markets (including Europe, China and Australia) are
continuing to be introduced.
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 Digital 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 forms. 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,
integrated circuit manufacturers and software developers can differentiate their
products through the quality of their compression solution, image enhancement
capabilities and audio effects.
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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. 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 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 PROGRAMMABLE 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 programmable
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
customers 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 customers' total system
cost and allowing the customer to concentrate on differentiating its products
from those of its competitors. For example, the Company offers a software
navigator which is used in conjunction with an IC decoder to decode DVD video
and audio on the PC. However, if the Company's customer is using a more powerful
processor to implement this function, the Company can provide either audio or
both audio and video decoding capability in a cost-effective software-only
solution, using the same navigator and graphical user interface.
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:
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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. The Company's SoftDVD was the first software product available
for DVD decoding and has enabled PC manufacturers to offer DVD ROM drives
without hardware decoding, significantly reducing the cost of including the DVD
in the PC. 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. 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. 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 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,
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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 computers' 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"), Digital Processing Systems, Inc., Fast Multimedia, Inc. ("Fast"),
Matrox Electronic Systems Ltd. ("Matrox"), Pinnacle Systems GmbH ("Pinnacle")
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 $200. The availability of these
low cost systems has created a new category of users in the corporate, education
and government markets. Add-in boards incorporating the Company's JPEG-based
products are offered by several manufacturers, including Avid, Iomega
Corporation ("Iomega"), Matrox and Pinnacle.
The availability of universal serial bus ("USB") connectors on most PCs
currently being manufactured creates an opportunity for the development of
low-cost external video capture and editing accessories that can be easily
installed by consumers. The Company has developed a reference design
demonstrating the capture of high-quality video using a small external box based
on the Company's JPEG and software technologies. The Company believes that
enhanced support of the USB port by the Windows 98 operating system will
encourage the development of products of this type.
VIDEO PLAYBACK SYSTEMS
COMPUTER APPLICATIONS. Almost all desktop personal computers now on the
market have accelerated graphics capability, and the Company believes that most
of the PCs sold in 1997 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, three types of
video playback systems are available for consumer video applications: video
CD players, laser disc players and DVD 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 formerly sold MPEG 1-based products to manufacturers
of stand-alone video CD players but is no longer selling these products for this
market.
High quality playback of audio and video is 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
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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 Corporation ("Denon"), Kenwood Corporation
("Kenwood"), Pioneer Electronic Corporation ("Pioneer") and Yamaha Corporation
("Yamaha").
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. DVD players are sold as stand-alone
products and are also included in some new personal computers (where they are
referred to as DVD ROMs) in place of CD-ROM drives. DVD ROMs are also sold as
upgrade products. The Company believes that most currently available DVD players
use Dolby Digital audio compression technology for storage and playback of the
audio soundtrack. Although the MPEG standards and various competitors prescribe
alternate 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 production ramp-up 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. A number of additional models were introduced
during 1997. For example, Toshiba Corporation ("Toshiba"), one of the Company's
customers, has introduced four models, including a portable DVD player. In late
1997, the first of the second generation DVD players, based on an integrated
audio/video decoder device, was introduced in Japan. The Company anticipates
that additional second generation models will be introduced in 1998. During
1997, several PC manufacturers began to ship PCs with DVD ROM drives. A number
of these manufacturers use the Company's SoftDVD for full software decoding,
while others, primarily in Japan, use hardware decoding. Also, in the second
half of 1997, DVD ROM upgrade kits, including a DVD ROM drive and a
hardware-based decoding board, were introduced. The Company is currently selling
Dolby Digital-based audio compression products for use by manufacturers of DVD
systems, which include Pioneer, Samsung Electronics Co., Ltd. ("Samsung") and
Toshiba. The Company is selling an audio/video DVD decoder IC to Sharp
Corporation ("Sharp"), the first manufacturer to introduce a second generation
DVD player. The Company's ICs are also being used in DVD-enabled PCs offered by
Toshiba and its OEM customers and in DVD upgrade kits manufactured by Toshiba
and other companies, including HiVal, Inc. and Quadrant International, Inc. In
the third quarter of 1997, several PC manufacturers began shipping PCs with DVD
ROM drives using the Company's SoftDVD decoding software, and others began using
certain components of SoftDVD for decoding or navigation. These manufacturers
include Compaq Computer Corp., Hewlett-Packard Company, International Business
Machines Corporation ("IBM") and Packard Bell.
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 increasingly 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 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.
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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 $500 to $5,000
price range. Recently, several manufacturers announced filmless digital cameras
with list prices below $300. 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 Samsung and Sony Corporation ("Sony").
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.
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, Data Experts, Media Forte, Tekram 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,
digital security cameras, and color laser printers and scanners. 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 and software 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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INITIAL
COMMERCIAL PRINCIPAL
MARKET PRODUCTS SHIPMENT APPLICATIONS
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JPEG codec (ZR36050) April 1993
Motion JPEG controller (ZR36055) July 1994
JPEG PCI multimedia controller (ZR36057) June 1996 PC video editing
JPEG codec (ZR36060) February 1997
JPEG JPEG PCI multimedia controller (ZR36067) September 1997
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Color space converter (ZR36011) December 1993 PC video editing
Raster-to-block converter (ZR36015)* September 1993 Filmless digital cameras
Integrated converter (ZR36016)* February 1995 Color scanners and printers
- -------------------------------------------------------------------------------------------------------------
MPEG 1 decoder (ZR36100) July 1994
SoftPEG 1, MPEG 1 decoder software (ZR5SPEG1) June 1995 PC-based and standalone
MPEG 1 decoder core (ZR4MPEG1) January 1996 video CD players
MPEG 1 decoder (ZR36110) February 1996
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MPEG PCI multimedia controller (ZR36120) January 1996 CD players
PCI multimedia controller (ZR36125) March 1997 Video conferencing systems
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MPEG 2 decoder core (ZR4MPEG2) November 1996
SoftPEG 2, MPEG 2/Dolby Digital decoder software March 1997 DVD players
(ZR5SPEG2) PC-based entertainment
SoftDVD decoder software (ZR5SDVD1) September 1997
Vaddis DVD decoder (ZR36700) December 1997
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6-channel Dolby Digital decoder (ZR38500) December 1994
2-channel Dolby Digital audio decoder (ZR38501) February 1995 Home theater
Audio 2-channel Dolby Digital/MPEG 2 audio decoder February 1995 DVD players
(ZR38521) Television set-top boxes
Integrated Dolby Digital decoder (ZR38600) December 1996
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Programmable audio processor (ZR38001) November 1994 Programmable audio effects
SoundPEG audio decoder software (ZRSNDPG) May 1995 PC-based CD players
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* 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."
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
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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 can be installed in a chipset that includes
the ZR36055 or ZR36057 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. The latest additions to the Company's JPEG IC
product family are the ZR36060 JPEG processor -- which integrates the functions
of the ZR36050, the ZR36015 and an additional SRAM device in a single chip --
and the ZR36067 enhanced PCI controller.
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.
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 can be used in DVD players.
ZORAN MPEG TECHNOLOGY. During 1997, the Company established itself as a
leading provider of MPEG 2 technology for DVD applications. In 1997, the Company
introduced the first integrated DVD decoder device used in a stand-alone DVD
system, as well as SoftDVD, the first real-time software for DVD decoding on the
PC, and new MPEG 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.
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MPEG-BASED PRODUCTS. In 1997, the Company introduced the first member
of the Company's Vaddis line of DVD decoders, the ZR36700. The ZR36700 performs
all the audio/video decoding requirements of the DVD specification, including
MPEG 2 video and audio decoding, Dolby Digital audio decoding, on-screen display
("OSD"), decryption required for copyright protection ("CSS") and presentation
of graphics information (sub-picture). The ZR36700 has additional computation
power that can be utilized for customer differentiation features. For example,
it can incorporate virtual surround sound algorithms without the addition of
hardware. This allows the user to enjoy the "theater-like" sound obtained from
six speakers using a system that includes only two speakers and the ZR36700. The
Company's ZR36100 and ZR36110 are single-chip MPEG 1 system and video decoders
optimized for use in video CD playback applications. The ZR36120 PCI multimedia
controller enables the cost-effective integration of high performance multimedia
functions in 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 and its latest version the ZR36125
provide 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. These products are currently being used in PCI
DVD decoding boards. The Company also 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, 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. During 1997, the Company introduced SoftDVD, a full DVD decoding
software package designed for use with an Intel Pentium processor supporting
multimedia extension ("MMX") technology. SoftDVD supports new PC entertainment
applications without the need for specialized hardware. SoftDVD includes MPEG 2
video and Dolby Digital audio decoding, tamper-resistant software, a DVD
navigator, a user-friendly graphical user interface and full support of DVD
features. SoftDVD is licensed as a complete package or in modules that are used
by customers in conjunction with hardware decoders manufactured by the Company
or other suppliers. The Company also offers a motion compensation VLSI core that
is licensed to graphics IC companies. This core, when integrated in graphics
chips, enables SoftDVD to run significantly faster on the PC, thus enhancing the
quality of the DVD decoding.
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 12,000 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 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
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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."
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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, 1997 through December 31, 1997:
<TABLE>
<CAPTION>
PRODUCT FAMILY CUSTOMERS
- -------------------------- ------------------------------------------------------------------------------------------
<S> <C>
JPEG-based Products Avex Electronics, Inc. Matrox Electronic Systems Ltd.
Axis Components Matrox Graphics Ltd.
Edge Electronics Co. Pinnacle Systems GmbH
Electronics for Imaging Solectron Washington, Inc.
Fast Multimedia, Inc. Topas Electronics GmbH
Fujifilm Microdevices Co. Ltd. Truevision, Inc.
Iomega Corporation Virtual Integration
Manufacturers' Services
MPEG-based Products Animation Technologies Matrox Graphics, Ltd.
ATI Technologies, Inc. NEC Corporation
Axis Components Oak Technology, Inc.
Compaq Computer Corp. Packard Bell NEC, Inc.
Cirrus Logic Pagg Corporation
Diamond Multimedia Quadrant International, Inc.
Digital Vision Rendition
Edge Electronics Co. Samsung Aerospace Industries
ELSA GmbH SCI Manufacturing Inc.
Fujifilm Microdevices Co. Ltd. Siemens AG
Fujitsu Limited Silicon Integrated Systems
Hitachi Ltd. Tekram Technology Co. Ltd.
Imedia Trident Microsystems Inc.
Lirix Ltd. Wearnes Peripherals Int'l Ltd.
Audio Products Amega Technology Fujifilm Microdevices Co. Ltd.
Edge Electronics Co. Kasan Electronics Co. Ltd.
Dolby Laboratories, Inc. NEC Technologies
Dooin Electric Co. Ltd. Sigma Designs
</TABLE>
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 most 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, Kenwood, Marantz,
Pioneer, Sharp, Sony, Toshiba and Yamaha. See "Sales and Marketing."
During 1995, sales to Fujifilm Microdevices Co. Ltd. ("Fujifilm")
accounted for 10% of the Company's total revenues, including 5% of product sales
and 25% of software, licensing and development revenue. In 1995, Fast accounted
for 27% of the Company's total revenues, including 35% of product sales. During
1996, sales to Fujifilm accounted for 38% of the Company's total 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 1997, sales to Matrox accounted for 15% of
the Company's total revenues, including 14% of product sales, sales to Pinnacle
accounted for 15% of revenues, including 21% of product sales, and sales to
Iomega accounted for 15% of revenues, including 20% of product sales. During
1995, 1996, and 1997 the Company's four largest customers accounted for
approximately 47%, 61% and 54% of its revenues, respectively.
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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 into the manufacturer's 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% 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 funding
received. Reported research and development expenses are net of these grants,
which fluctuate from period to period. Total grants earned during 1995 and 1996
were $200,000 and $182,000, respectively. No grants were earned in 1997. 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, 1997, the Company had a staff of 90 full-time and 21
part-time research and development personnel, 69 of whom are based in Israel.
During 1995, 1996 and 1997, the Company's net research and development expenses
were approximately $5.9 million, $9.0 million and $13.8 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
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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 12-person direct sales staff, of whom
nine are located in the United States and three 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 23 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. During 1997, the Company opened an
office in Tokyo to help promote its products in Japan and to manage the sale of
products not sold through Fujifilm. 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 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.
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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 1995,
1996 and 1997, these three foundries manufactured substantially all of the
Company's products. Fujifilm is currently manufacturing the Company's JPEG
codec, 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 oxide 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 was developed jointly with Fujifilm and is
currently manufactured by Fujifilm pursuant to an agreement that grants Fujifilm
the right to manufacture up to 80% of the Company's requirements for this
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.
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, INCLUDING THOSE DESCRIBED IN "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 markets for PCI
multimedia controllers, the Company's principal competitors are Auravision
Corporation, Brooktree Corporation and Philips Semiconductor. Motorola, SGS
Thomson Microelectronics, NV and Yamaha are currently shipping Dolby
Digital-based audio compression products, and several other companies, including
Crystal Semiconductor, have announced their intention to introduce such
products. C-Cube has introduced integrated audio and video devices for DVD
applications, and other
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manufacturers have developed prototypes of such products
or 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, 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, 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 and SICAN Microelectronics Corp. In the market
for the Company's MPEG-based software products, the Company's principal
competitors are Mediamatics Corporation, Oak Technology, Inc. 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, IBM has announced its intention to offer
integrated circuits incorporating compression technology for certain video and
audio applications. To date, IBM has not announced products that compete to a
significant extent with 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 1998 and 1999. 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 electronics products. It is also
possible that application software vendors, such as Microsoft Corporation, may
attempt to enter the DVD application market in the future. This increased
competition may result in price reductions, reduced profit 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
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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 from time to are 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
that its activities in the 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 3l, 1997, the Company had 152 full-time and 29 part-time
and contract employees, including 90 full-time and 21 part-time and contract
employees primarily involved in research and development activities, 33 in
marketing and sales, 21 in finance and administration and 16 in manufacturing
control and quality assurance. Seventy-four of the Company's full-time employees
and 21 of its part-time and contract employees, including 69 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.
18
<PAGE>
ITEM 2. PROPERTIES.
The Company's executive offices and its principal administration,
marketing and sales operations and a portion of its research and development
operations are located in approximately 24,000 square feet of leased space in
Santa Clara, California under a lease which expires in March 2000. 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 $748,000 in 1997. 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.
No matter was submitted to a vote of the Company's security holders
during the fourth quarter of the Company's fiscal year ended December 31, 1997.
EXECUTIVE OFFICERS.
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Levy Gerzberg, Ph.D. 53 President, Chief Executive Officer and Director
Aharon Aharon 44 Vice President, Engineering
Paul R. Goldberg 52 Vice President, Systems Solutions
Ami Kraft 55 Vice President, Finance and Chief Financial Officer
Ronald Richter 46 Vice President, Worldwide Sales
Isaac Shenberg, Ph.D. 47 Vice President, Sales and Marketing
Alex Sinar 49 Vice President, Operations
</TABLE>
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. Aharon joined the Company as Vice President,
Engineering-Haifa Operations in February 1997 and was elected Vice
President, Engineering in August 1997. From 1983 to February 1997, Mr.
Aharon was employed by IBM 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,
19
<PAGE>
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.
Mr. Richter has served as Vice President, Worldwide Sales of the
Company since October 1997. From December 1996 to October 1997, Mr. Richter
served as the Company's Director of North American Sales. Mr. Richter was
employed as Vice President of Sales of Marketing of CompCore Multimedia, Inc.
("CompCore") from July 1995 to December 1996, when CompCore was acquired by the
Company. From January 1994 to June 1995, Mr. Richter was employed as Director of
Technology Licensing at DSP Group. From January 1990 to December 1994, he was
employed as Business Manager at Adobe Systems Incorporated. Mr. Richter holds a
B.S. in Electrical Engineering and a M.B.A. from the University of Southern
California.
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 B.S. and M.S. in Electrical Engineering from the Technion.
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
B.S. in Electrical Engineering Polytechnic Institute in Kiev and an M.S. in
Electrical Engineering from the Technion.
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:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
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
1997:
First Quarter.................................30.75 15.75
Second Quarter................................26.50 12.75
Third Quarter................................28.625 17.50
Fourth Quarter...............................26.625 11.50
</TABLE>
As of December 31, 1997, there were 352 holders 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,
-----------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Product sales................................ $ 2,044 $ 6,243 $18,086 $35,503 $32,717
Software, licensing and development.......... 2,685 3,256 5,378 8,606 12,210
--------- --------- --------- --------- --------
Total revenues............................. 4,729 9,499 23,464 44,109 44,927
--------- --------- --------- --------- --------
Costs and expenses:
Cost of product sales........................ 2,601 4,677 9,306 20,262 16,032
Research and development..................... 5,002 4,887 5,916 8,954 13,787
Selling, general and administrative.......... 4,558 4,376 6,748 10,739 11,209
Merger and related........................... -- -- -- 2,153 --
--------- --------- --------- --------- --------
Total costs and expenses................... 12,161 13,940 21,970 42,108 41,028
--------- --------- --------- --------- --------
Operating income (loss)........................ (7,432) (4,441) 1,494 2,001 3,899
Interest and other income
(expense), net............................ (209) (225) (147) 1,027 1,258
--------- --------- --------- --------- --------
Income (loss) before income taxes.............. (7,641) (4,666) 1,347 3,028 5,157
Provision for income taxes..................... 48 229 399 665 928
--------- --------- --------- --------- --------
Net income (loss).............................. $(7,689) $(4,895) $ 948 $ 2,363 $ 4,229
--------- --------- --------- --------- --------
--------- --------- --------- --------- --------
Basic net income (loss) per share (1).......... $(24.18) $ (4.82) $ 0.40 $ 0.27 $ 0.45
--------- --------- --------- --------- --------
--------- --------- --------- --------- --------
Diluted net income (loss) per share (1)........ $(24.18) $ (4.82) $ 0.11 $ 0.22 $ 0.38
--------- --------- --------- --------- --------
--------- --------- --------- --------- --------
Shares used to compute basic net income (loss)
per share (1)............................. 318 1,015 2,391 8,802 9,412
--------- --------- --------- --------- --------
--------- --------- --------- --------- --------
Shares used to compute diluted net income (loss)
per share (1).............................. 318 1,015 8,397 10,661 11,072
--------- --------- --------- --------- --------
--------- --------- --------- --------- --------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, equivalents and short-term investments... $ 1,261 $ 1,743 $ 21,438 $ 23,419 $ 22,376
Working capital (deficit)...................... (222) (2,272) 19,753 24,673 28,582
Total assets................................... 5,155 7,205 31,264 41,382 50,944
Long-term debt, less current portion........... 1,319 1,027 601 -- --
Accumulated deficit............................ (47,650) (52,545) (51,697) (49,334) (45,105)
Total stockholders' equity (deficit)........... 767 (1,176) 20,917 28,530 34,286
</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 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.
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. In the acquisition, the Company issued
approximately 2.0 million shares of its Common Stock in exchange for all of the
outstanding Common Stock of CompCore. The Company also assumed all outstanding
options to purchase CompCore Common Stock, which were exchanged for options to
purchase approximately 900,000 shares of Zoran Common Stock. The acquisition was
accounted for as a pooling of interests, and the financial statements of the
Company and the information herein have been restated to include the results of
CompCore for all periods.
Historically, average selling prices ("ASPs") in the semiconductor
industry in general, and for the Company's products in particular, have
decreased over the life of a particular product. Although ASPs for the Company's
hardware products have fluctuated substantially from period to period, these
fluctuations have been driven principally by changes in customer mix (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, 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, 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 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% to 5% of resulting product
sales, and up to 30% of resulting license revenues, up to a
23
<PAGE>
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 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 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.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of
operations data as a percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Revenues:
Product sales................................................ 77% 80% 73%
Software, licensing and development.......................... 23 20 27
--- --- ---
Total revenues............................................. 100 100 100
--- --- ---
Costs and expenses:
Cost of product sales........................................ 40 46 36
Research and development..................................... 25 20 31
Selling, general and administrative.......................... 29 24 25
Merger and related........................................... -- 5 --
--- --- ---
Total costs and expenses................................... 94 95 92
--- --- ---
Operating income............................................. 6 5 8
Interest and other income, net............................... -- 2 3
--- --- ---
Income before income taxes................................... 6 7 11
Provision for income taxes................................... 2 2 2
--- --- ---
Net income .................................................. 4% 5% 9%
--- --- ---
--- --- ---
</TABLE>
24
<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES. Total revenues increased by 1.8% to $44.9 million in 1997
from $44.1 million in 1996. Product sales decreased by 7.8% to $32.7 million in
1997 from $35.5 million in 1996. The decreases in product sales resulted
primarily from unit sales and revenue decreases for the Company's Dolby Digital
audio compression ICs due to delays in the development of the DVD market. These
decreases were partially offset by unit sales and revenue increases for the
Company's JPEG-based products used in desktop video editing. Software, licensing
and development revenues increased by 41.9% to $12.2 million in 1997 from $8.6
million in 1996. This increase was due to significant new licensing contracts
for software and hardware design as well as progress on long-term development
contracts in place from the prior year.
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 PROFIT. Product gross margin increased by 18.9% to 51.0%
in 1997, compared to 42.9% in 1996. The increase was due to a product sales mix
that included an increased percentage of higher margin products, an increased
percentage of products sold directly to OEM customers and lower manufacturing
costs during 1997.
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. 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
increased by 53.9% to $13.8 million in 1997 from $8.9 million in 1996. The
increase was 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 in 1996
were net of reimbursements in the amounts of $182,000 under product development
agreements with the Chief Scientist. There were no such reimbursements during
1997. R&D expenses increased as a percentage of total revenues to 30.7% in 1997,
compared to 20.3% in 1996.
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. 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 increased by 4.4% to $11.2 million in 1997 from
$10.7 million in 1996. The increase was primarily due to increased sales and
marketing expenses related to product market development and to support planned
revenue growth.
SG&A expenses consist primarily of employee-related expenses,
royalties, sales commissions, product promotion and other professional services.
The Company expects that SG&A expenses will continue to increase to support the
anticipated growth of the Company.
25
<PAGE>
INTEREST AND OTHER INCOME, NET. Net interest and other income increased
by 22.5% to $1.3 million in 1997 from $1.0 million in 1996. 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
decreased to 18.0% for 1997 from 22.0% in 1996. The decrease was primarily due
the tax benefits derived from revenue and net income attributable the Company's
operations in Israel which receives favorable tax treatment.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES. Total revenues increased by 88.0% to $44.1 million in 1997
from $23.5 million in 1995. Product sales increased to $35.5 million in 1996
from $18.1 million in 1995, an increase of 96.0%. 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 were
delays during 1996 in the development of the DVD market. 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
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. Software, licensing and development revenue
increased by 60% to $8.6 million in 1996 from $5.4 million in 1995. This
increase was due primarily to an increase in software licensing contracts.
PRODUCT GROSS PROFIT. Product gross margin decreased by 12.2% to 43% in
1996 from 49% in 1995. The decrease in product gross margin 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.
RESEARCH AND DEVELOPMENT. R&D expenses increased by 51.3% to $9.0
million in 1996 from $5.9 million in 1995. 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.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses increased by 59.1%
to $10.7 million in 1996 from $6.7 million in 1995. 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.
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 by
33.9% 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.
26
<PAGE>
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 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.
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 reflected foreign withholding taxes, income taxes on CompCore's
earnings and alternative minimum tax on Zoran's domestic 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 and net proceeds from the exercise of the underwriters'
over-allotment option in January 1996 totaled $21.0 million. At December 31,
1997, the Company had $9.9 million of cash and cash equivalents, $12.5 million
of short-term investments and $28.6 million of working capital.
The Company's operating activities provided cash of $1.2 million in
1995, $1.4 million in 1996 and $1.8 million in 1997. Cash provided by operating
activities reflected net income excluding charges for depreciation and
amortization, partially offset by cash used for working capital.
The Company's capital expenditures totaled $3.5 million in 1996 and
$3.6 million in 1997. Capital expenditures for 1998 are expected to be
approximately $4.5 million. The Company had no bank debt at December 31, 1996 or
at December 31, 1997.
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 1998.
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
27
<PAGE>
for any of these markets will design the Company's
integrated circuits into their products or successfully market them. The failure
of existing and new markets to develop or to be receptive to the Company's
products would have a material adverse effect on the Company's business,
operating results and financial condition.
The emergence of markets for the Company's integrated circuits will be
affected by a variety of factors beyond the Company's control. In particular,
the Company's products are designed to conform with certain current industry
standards. There can be no assurance that manufacturers will continue to follow
these standards or that competing standards will not emerge which will be
preferred by manufacturers. The emergence of markets for the Company's products
is also dependent in part upon third-party content providers developing and
marketing content for end user systems, such as video and audio playback
systems, in a format compatible with the Company's products. There can be no
assurance that these or other factors beyond the Company's control will not
adversely affect the development of markets for the Company's products. See
"Item 1. Business -- Strategy" and "--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.
28
<PAGE>
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. 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 " -- 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 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
29
<PAGE>
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.
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 $36.0 million for federal tax reporting purposes as of December
31, 1997, 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. Beginning in 1997, the Company's Israeli subsidiary has
benefitted 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
30
<PAGE>
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.
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 1998. 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 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 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 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.
RECENTLY COMPLETED ACQUISITION. On December 27, 1996, the Company
acquired CompCore. The managements of the Company and CompCore undertook the
merger with the expectation that the merger would result in beneficial synergies
for the companies. Achieving the anticipated benefits of the merger will depend
in part upon whether the integration of the two companies' businesses is
accomplished in an efficient and effective manner. The combination of the two
companies has required, among other things, integration of the companies'
respective product offerings and technology and coordination of their research
and development, sales and marketing, and financial reporting efforts. Certain
aspects of the integration are still in process, and there can be no assurance
that it will be completed smoothly or successfully. If significant difficulties
are encountered in the integration of the existing product lines and technology,
resources could be diverted from new product development, resulting in delays in
new product introductions. The difficulties of such integration have been
increased by the necessity of coordinating geographically separated
organizations with distinct cultures. The
31
<PAGE>
integration of certain operations continue to require the dedication of
management and other personnel resources which may temporarily distract from
the day-to-day business of the Company. In addition, certain former officers
and key employees of CompCore are no longer with the Company. There can be no
assurance that other former CompCore employees will remain employed by the
Company. Failure to successfully complete the integration of the two
companies' operations could have a material adverse effect on the Company's
business, financial condition or results of operations.
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.
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 are 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. 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
32
<PAGE>
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. Sales to non-U.S. customers in 1995, 1996 and 1997 accounted for 63%,
74% and 43%, 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 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,
1997, 74 of the Company's 152 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 written 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.
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 Comnpany 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.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants......................................................................... 35
Consolidated Balance Sheets as of December 31, 1996 and 1997.............................................. 36
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997................................................................. 37
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1995, 1996 and 1997................................................................. 38
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997................................................................. 39
Notes to Consolidated Financial Statements................................................................ 49
Supplemental Data: Selected Quarterly Financial Information (Unaudited).................................. 59
</TABLE>
34
<PAGE>
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, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Zoran Corporation and its subsidiaries at December 31, 1996 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, 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.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
San Jose, California
January 23, 1998
35
<PAGE>
ZORAN CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1997
--------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 11,176 $ 9,903
Short-term investments 12,243 12,473
Accounts receivable, net 11,088 16,509
Inventory 1,799 4,123
Prepaid expenses and other current assets 1,219 2,232
--------- ----------
Total current assets 37,525 45,240
Property and equipment, net 3,857 5,704
--------- ----------
Total assets $ 41,382 50,944
--------- ----------
--------- ----------
CURRENT LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 6,421 $ 9,572
Accrued expenses and other liabilities 6,431 7,086
--------- ----------
Total current liabilities 12,852 16,658
--------- ----------
Commitments and Contingencies (Note 4, 6 and 7)
stockholders' equity
Common Stock: $0.001 par value; 20,000,000
shares authorized; 9,029,365 and 9,800,679 shares
issued and outstanding 9 10
Additional paid-in capital 77,855 78,664
Warrants - 717
Accumulated deficit (49,334) (45,105)
--------- ----------
Total stockholders' equity 28,530 34,286
--------- ----------
Total liabilites and stockholders' equity $ 41,382 $ 50,944
--------- ----------
--------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
36
<PAGE>
ZORAN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1995 1996 1997
-------------- ------------- --------------
<S> <C> <C> <C>
Revenues:
Product sales $ 18,086 $ 35,503 $ 32,717
Software, licensing and development 5,378 8,606 12,210
-------------- ------------- -------------
Total revenues 23,464 44,109 44,927
-------------- ------------- -------------
Cost and expenses:
Cost of product sales 9,306 20,262 16,032
Research and development 5,916 8,954 13,787
Selling, general and administrative 6,748 10,739 11,209
Merger and related - 2,153 -
-------------- ------------- -------------
Total costs and expenses 21,970 42,108 41,028
-------------- ------------- -------------
Operating income 1,494 2,001 3,899
Interest expense (320) (146) -
Interest and other income 173 1,173 1,258
-------------- ------------- -------------
Income before income taxes 1,347 3,028 5,157
Provision for income taxes 399 665 928
-------------- ------------- -------------
Net income $ 948 $ 2,363 $ 4,229
-------------- ------------- -------------
-------------- ------------- -------------
Basic net income per share $ 0.35 $ 0.27 $ 0.45
-------------- ------------- -------------
-------------- ------------- -------------
Diluted net income per share $ 0.11 $ 0.22 $ 0.38
-------------- ------------- -------------
-------------- ------------- -------------
Shares used to compute basic net income per share 2,391 8,802 9,412
-------------- ------------- -------------
-------------- ------------- -------------
Shares used to compute diluted net income per share 8,397 10,661 11,072
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
37
<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 Warrant Deficit Total
-------- -------- -------- -------- ---------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 4,032 $ 4 932 $ 1 $51,364 $ -- $(52,545) $(1,176)
Excercise of Series K and L
Preferred Stock Warrants 875 1 -- -- 4,144 -- -- 4,145
Issuance of Common Stock
pursuant to public offering,
net 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 -- -- 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
Issuance of Common Stock, net -- -- 772 1 769 -- -- 770
Issuance of Warrant -- -- -- -- -- 717 -- 717
Amortization of deferred
compensation -- -- -- -- 40 -- -- 40
Net income -- -- -- -- -- -- 4,229 4,229
------- -------- ------- ------ -------- --------- --------- --------
Balance at December 31, 1997 -- $ -- 9,801 $ 10 $78,664 $ 717 $(45,105) $34,286
------- -------- ------- ------ -------- --------- --------- --------
------- -------- ------- ------ -------- --------- --------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
38
<PAGE>
ZORAN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1995 1996 1997
--------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 948 $ 2,363 $ 4,229
Adjustments:
Depreciation, amortization and other 1,035 1,420 1,862
Amortization of deferred compensation 50 218 40
Deferred revenue 467 (1,758) 121
Changes in current assets and liabilities:
Accounts receivable (2,853) (5,815) (5,421)
Inventory (1,471) 456 (2,324)
Prepaid expenses and other current assets (398) (686) (356)
Accounts payable 1,310 2,868 3,151
Accrued expenses and other liabilties 2,082 2,368 534
-------- -------- --------
Net cash provided by operating activities 1,170 1,434 1,836
-------- -------- --------
Cash flows from investing activities:
Capital expenditures for property and equipment (677) (3,480) (3,649)
Purchase of short-term investments, net -- (12,243) (230)
-------- -------- --------
Net cash used in investing activities (677) (15,723) (3,879)
-------- -------- --------
Cash flows from financing activites:
Proceeds from debt 208 1,000 --
Repayments of debt (2,101) (973) --
Proceeds from issuance of Common Stock, net 17,050 4,000 770
Proceeds from issuance of Preferred Stock, net 4,145 -- --
Dividends paid (100) -- --
-------- -------- --------
Net cash provided by financing activites 19,202 4,027 770
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 19,695 (10,262) (1,273)
Cash and cash equivalents at beginning of period 1,743 21,438 11,176
-------- -------- --------
Cash and cash equivalents at end of period $ 21,438 $ 11,176 $ 9,903
-------- -------- --------
-------- -------- --------
Supplemental disclosures:
Interest paid $ 319 $ 145 $ --
-------- -------- --------
-------- -------- --------
Taxes paid $ 259 $ 468 $ 368
-------- -------- --------
-------- -------- --------
Noncash transaction:
Conversion of debt to Common Stock $ -- $ 1,032 $ --
-------- -------- --------
-------- -------- --------
Issuance of Warrant $ -- $ -- $ 717
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
39
<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 products for digital video and audio applications enabled by
compression. The Company's integrated circuits and software products 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 DVD
players and digital audio systems, filmless digital cameras and video
conferencing 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. 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. Certain prior year amounts have been adjusted
to conform to current year presentation.
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.
40
<PAGE>
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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.
41
<PAGE>
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company's investment 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, 1997, the fair value of the Company's marketable securities
approximates cost.
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 North America, Europe and the
Pacific Rim. 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, 1997. As of December 31,
1997, three customers accounted for approximately 29%, 17% and 11% of the
accounts receivable balance. As of December 31, 1996, one customer accounted for
approximately 54% of the accounts receivable balance.
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 using
the straight-line method over the estimated useful 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 per share
The Company adopted Statement of Accounting Standard No. 128 ("FAS 128"),
Earnings Per Share ("EPS"), which was issued in February 1997. FAS 128 requires
presentation of both basic and diluted EPS on the income statement. For all
periods presented, Basic EPS is computed by dividing net income available to
common stockholders (numerator) by the weighted average number of common shares
outstanding (denominator) during the period. In computing diluted EPS, the
average stock price for the period is used in determining the number of shares
assumed to be purchased from the exercise of stock options. Diluted EPS is
computed using the weighted average number of common and potential common stock
equivalent shares outstanding during the period.
42
<PAGE>
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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.
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.
43
<PAGE>
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4 - BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
December 31
-------------------
<S> <C> <C>
1996 1997
---- ----
Accounts receivable, net:
Trade $ 10,950 $ 17,253
Unbilled 1,088 245
-------- --------
12,038 17,498
-------- --------
Less: allowance (950) (989)
-------- --------
$ 11,088 $ 16,509
-------- --------
-------- --------
</TABLE>
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, as incurred.
This funding is offset against research and development expenses.
44
<PAGE>
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
December 31,
---------------
1996 1997
---- ----
<S> <C> <C>
Inventory:
Work-in-process $ 382 $ 1,860
Finished goods 1,417 2,263
-------- ---------
$ 1,799 $ 4,123
-------- ---------
-------- ---------
Property and equipment:
Computer equipment $ 7,704 $ 9,100
Office equipment and furniture 413 702
Machinery and equipment 550 824
Leasehold improvements 188 493
-------- ---------
8,855 11,119
Less: accumulated depreciation and amortization (4,998) (5,415)
-------- ---------
$ 3,857 $ 5,704
-------- ---------
-------- ---------
Accrued expenses and other liabilities:
Accrued payroll and related expenses $ 2,195 $ 2,765
Accrued royalties 905 1,187
Accrued merger and related expenses 1,073 --
Taxes payable 706 1,266
Other accrued liabilities 1,209 1,404
Deferred revenue 343 464
-------- ---------
$ 6,431 $ 7,086
-------- ---------
-------- ---------
</TABLE>
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 2% 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:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Research and development expenses:
Gross research and development expenses $ 6,116 $ 9,136 $13,787
Less: grants earned (200) (182) --
------- ------- -------
$ 5,916 $ 8,954 $13,787
------- ------- -------
------- ------- -------
</TABLE>
Royalty expenses related to these grants were $450,000, $1,248,000, and
$301,000 in 1995, 1996 and 1997, respectively.
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 $3,732,000, $3,698,000 and $1,752,000 in 1995, 1996
and 1997, respectively.
NOTE 7 - COMMITMENTS:
The Company rents facilities and equipment under various lease agreements
expiring through 2000. Rent expense for 1995, 1996 and 1997 totaled
approximately $429,000, $405,000 and $748,000 respectively. Future minimum lease
payments required under noncancelable leases at December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
<S> <C>
1998 $ 878,000
1999 714,000
2000 192,000
----------
Total minimum lease payments $1,784,000
----------
----------
</TABLE>
46
<PAGE>
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 374,977 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 and 117 warrants
were exercised and converted into Common Stock in the year ended December 31,
1996 and 1997, respectively, on a one-for-one basis. The remaining 137,724
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 1995. 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.
In September 1997, in connection with a software license agreement, the
Company issued a warrant to purchase 75,000 shares of its Common Stock at an
exercise price of $24.31 per share. The warrant is exercisable for a period of
four years from the date beginning one year after the issuance date of the
warrant. The $717,000 estimated value of the warrant, will be amortized over the
four-year period of the license agreement. The unamortized balance at December
31, 1997 of $657,000 is included in prepaid expenses and other current assets.
47
<PAGE>
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 2,140,000 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.
At December 31, 1997, shares available for grant under this plan were
194,939.
48
<PAGE>
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
The following table summarizes the Company's stock option activity for the
years ended December 31, 1995, 1996 and 1997. The weighted average exercise
price for each category presented is also shown in the table below:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1995 1996 1997
---------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ -------
Outstanding at beginning of period 1,011,944 $ 0.15 1,328,084 $2.09 2,164,208 $ 2.30
Granted 391,465 $ 6.74 980,546 $2.24 771,890 $18.86
Exercised (41,433) $ 0.15 (140,253) $0.17 (727,882) $ 0.39
Canceled (33,892) $ 0.15 (4,169) $0.29 (155,045) $10.01
--------- --------- --------- ------
Options outstanding at period end 1,328,084 $ 2.09 2,164,208 $2.30 2,053,171 $ 8.62
--------- --------- --------- ------
--------- --------- --------- ------
Options exercisable at period end 1,809,873
---------
---------
</TABLE>
49
<PAGE>
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes information about employee and director
stock options outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------- ------------------------
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Exercise Price Number Life (years) Price Number Price
- -------------- ------ ------------ -------- ------ ---------
<C> <C> <C> <C> <C> <C>
$ 0.13 - $ 1.57 988,379 7.2 $ 0.27 818,130 $ 0.18
$ 4.69 - $10.63 212,788 8.2 9.21 139,739 10.10
$11.25 - $15.00 209,943 8.6 13.50 209,943 13.50
$17.75 - $20.75 603,661 9.5 19.40 603,661 19.40
$23.25 - $27.75 38,400 8.9 23.69 38,400 23.69
--------- -------- --------- ---------
2,053,171 $ 8.62 1,809,873 $ 9.40
--------- -------- --------- ---------
--------- -------- --------- ---------
</TABLE>
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.
The weighted average fair value of options granted during the years ended
December 31, 1996 and 1997, as defined by SFAS 123, were $7.05 and $9.19 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).
50
<PAGE>
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 years ended December 31, 1996 and 1997, 24,197
and 42,669 shares were purchased by employees under the terms of the plan
agreements at a weighted average price of $11.55 and $13.33 per share,
respectively. At December 31, 1997, 233,134 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 and 1997, as defined by SFAS 123, was $5.46 and $3.64 per
share, respectively.
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 three
years ended December 31, 1997 would have been as follows (in thousands, except
per share data):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Pro forma net income $ 919 $ 1,749 $ 547
Pro forma net income per share:
Basic $ 0.38 $ 0.20 $ 0.06
Diluted 0.11 0.17 0.05
</TABLE>
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.
51
<PAGE>
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1995 1996 1997
----- ---- ----
<S> <C> <C> <C>
Dividend rate 0.0% 0.0% 0.0%
Risk-free interest rates 5.1% to 7.0% 5.3% to 6.6% 5.1% to 6.3%
Volatility 67.0% 67.0% 67.0%
Expected life
Option plans 5 years 5 years 5 years
Purchase plan 0.5 years 0.5 years 0.5 years
</TABLE>
The pro forma amounts reflect compensation expense related to stock
options and purchase rights granted during the years ended December 31, 1995,
1996 and 1997. In future years, the annual compensation expense will increase
relative to the fair values of stock options granted in those years.
NOTE 9 - EARNINGS PER SHARE:
FAS 128 requires the reconciliation of the numerators and the denominators
of the basic and diluted per share computation as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---------------------------------- ---------------------------------- ---------------------------------
Income Shares Per Share Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denomintor) Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income available
to common stockholders 948 2,391 $0.40 2,363 8,802 $0.27 4,229 9,412 $0.45
------- ------- -----
------- ------- -----
Effects of Dilutive Securities:
Convertible Preferred Stock - 3,023 - - - -
Stock Options - 2,323 - 1,706 - 1,539
Warrants - 660 - 153 - 121
Diluted EPS:
Income available to
common stockholder 948 8,397 $0.11 2,363 10,661 $0.22 4,229 11,072 $0.38
------- ------- -----
------- ------- -----
</TABLE>
NOTE 10 - INCOME TAXES:
The components of income before income taxes are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1995 1996 1997
--------- ---------- --------
(in thousands)
<S> <C> <C> <C>
U.S. $ 2,206 $ (783) $ 1,925
Foreign (859) 3,811 3,232
-------- -------- -------
$ 1,347 $ 3,028 $ 5,157
-------- -------- -------
-------- -------- -------
</TABLE>
52
<PAGE>
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1995 1996 1997
-------- ---------- ---------
<S> <C> <C> <C>
Current: (in thousands)
U.S. $ 151 $ 103 $ 360
State 33 66 98
Foreign 215 496 470
-------- --------- ---------
$ 399 $ 665 $ 928
-------- --------- ---------
-------- --------- ---------
</TABLE>
The tax provision differs from the amounts obtained by applying the
statutory U.S. Federal Income Tax Rate to income taxes as shown below.
Tax provision difference
<TABLE>
<CAPTION>
1995 1996 1997
-------- ------- -------
(in thousands)
<S> <C> <C> <C>
Tax at U.S. statutory rate $ 458 $ 1,030 $ 1,753
Utilization of net operating loss carryovers (1,116) (575) (856)
Foreign Earnings - (309) (213)
State taxes net of federal benefit 74 13 65
Merger expenses - 455 -
Gain on transfer of holding in LLC 850 29 -
Alternative minimum tax 84 - 50
Other 49 22 129
-------- ------- -------
$ 399 $ 665 $ 928
-------- ------- -------
-------- ------- -------
</TABLE>
Deferred income tax assets comprise the following:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1995 1996 1997
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Federal and state net operating loss carryforwards $ 13,751 $ 13,176 $ 12,286
Capitalized research and development expenses 555 392 216
Nondeductible reserves and accruals 1,088 1,051 886
--------- --------- ---------
Deferred tax assets 15,394 14,619 13,388
Less valuation allowance (15,394) (14,619) (13,388)
--------- --------- ---------
Net deferred tax asset $ -- $ -- $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>
53
<PAGE>
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 1997, the Company has NOLs of approximately $36
million for federal tax reporting purposes. The federal NOLs expire on
various dates between 2000 and 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 four 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 expired 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% during the remaining period of six years. The
fourth program was approved in 1997. 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% during the remaining period
of eight years. Benefits under the third and the fourth program are limited to
fourteen years from approval or twelve years from commencement of production.
The net impact of the tax holidays was an increase in net income of $433,000 in
fiscal 1997 and to increase net income per share by $0.04.
54
<PAGE>
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11 - GEOGRAPHIC REPORTING AND CUSTOMER CONCENTRATION:
Sales to customers by geographical areas are as follows:
Reporting by geographical areas are as follows:
<TABLE>
<CAPTION>
United Pacific
States Rim Europe Total
--------- ---------- ---------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Revenues from third parties:
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
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
Year ended December 31, 1997
U.S. $ 25,480 $ 5,429 $ 1,184 $ 32,093
Israel - 4,396 8,438 12,834
--------- ---------- ---------- ---------
$ 25,480 $ 9,825 $ 9,622 $ 44,927
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
</TABLE>
55
<PAGE>
ZORAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1995 1996 1997
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
Operating income:
U.S. $ 2,052 $ (2,021) $ 511
Israel (558) 4,022 3,388
------------ ------------ ------------
Total $ 1,494 $ 2,001 $ 3,899
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1997
------------ ------------
(in thousands)
<S> <C> <C>
Identifiable assets:
U.S. $ 28,711 $ 37,774
Israel 12,671 13,170
------------ ------------
Total $ 41,382 $ 50,944
------------ ------------
------------ ------------
</TABLE>
Significant customers are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Customers comprising 10% or
more of the Company's
total revenues for the
period indicated:
A 10% 38% --
B 27% -- --
C -- 16% 15%
D -- -- 15%
E -- -- 15%
</TABLE>
56
<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,
1996 1996 1996 1996 1997 1997 1997 1997
--------- -------- -------- ------- --------- -------- -------- --------
(in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product sales $6,381 $ 8,721 $10,067 $10,334 $ 6,316 $ 6,216 $ 8,486 $11,699
Software, licensing and development 1,187 2,306 2,302 2,811 3,751 3,036 3,101 2,322
------ ------- ------- ------- ------- ------- ------- -------
Total revenues 7,568 11,027 12,369 13,145 10,067 9,252 11,587 14,021
------ ------- ------- ------- ------- ------- ------- -------
Cost and expenses:
Cost of product sales 3,425 5,290 5,563 5,984 3,526 2,478 4,044 5,984
Research and development 1,580 1,720 2,785 2,869 3,312 3,203 3,722 3,550
Selling, general and administrative 2,063 3,152 2,961 2,563 2,604 2,567 2,986 3,052
Merger and related - - - (2,153) - - - -
------ ------- ------- ------- ------- ------- ------- -------
Total costs and expenses 7,068 10,162 11,309 13,569 9,442 8,248 10,752 12,586
------ ------- ------- ------- ------- ------- ------- -------
Operating income (loss) 500 865 1,060 (424) 625 1,004 835 1,435
Interest and other income
(expense), net 244 297 208 278 278 350 316 314
------ ------- ------- ------- ------- ------- ------- -------
Income (loss) before taxes 744 1,162 1,268 (146) 903 1,354 1,151 1,749
Provision for income taxes 83 149 136 297 226 338 288 76
------ ------- ------- ------- ------- ------- ------- -------
Net income (loss) $ 661 $ 1,013 $ 1,132 $ (443) $ 677 $ 1,016 $ 863 $ 1,673
------ ------- ------- ------- ------- ------- ------- -------
------ ------- ------- ------- ------- ------- ------- -------
Net income (loss) per share:
Basic $ 0.08 $ 0.12 $ 0.13 $ (0.05) $ 0.07 $ 0.11 $ 0.09 $ 0.17
------ ------- ------- ------- ------- ------- ------- -------
------ ------- ------- ------- ------- ------- ------- -------
Diluted $ 0.06 $ 0.10 $ 0.10 $ (0.05) $ 0.06 $ 0.09 $ 0.08 $ 0.15
------ ------- ------- ------- ------- ------- ------- -------
------ ------- ------- ------- ------- ------- ------- -------
Shares used to compute basic net
income (loss) per share 8,702 8,733 8.827 8,945 9,103 9,301 9,504 9,741
------ ------- ------- ------- ------- ------- ------- -------
------ ------- ------- ------- ------- ------- ------- -------
Shares used to compute diluted net
income (loss) per share 10,175 10,600 10,851 8,945 11,070 11,036 11,131 11,052
------ ------- ------- ------- ------- ------- ------- -------
------ ------- ------- ------- ------- ------- ------- -------
</TABLE>
57
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
58
<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
"Section 16(a) Beneficial Ownership Reporting Compliance."
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."
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 by 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."
59
<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 34
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, 1997:
None
60
<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.
Dated: March ___, 1998 ZORAN CORPORATION
By: /s/ Levy Gerzberg
-----------------------------
Levy Gerzberg, President and
Chief Executive Officer
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 ___, 1998
- ------------------ (Principal Executive Officer)
Levy Gerzberg
/s/ Ami Kraft Vice President, Finance and Chief Financial Officer March ___, 1998
- --------------------------- (Principal Financial and Accounting Officer)
Ami Kraft
/s/ Uzia Galil Chairman of the Board of Directors March ___, 1998
- ---------------------------
Uzia Galil
/s/ George T. Haber Director March ___, 1998
- ---------------------------
George T. Haber
/s/ James D. Meindl Director March ___, 1998
- ---------------------------
James D. Meindl
/s/ Arthur B. Stabenow Director March ___, 1998
- ---------------------------
Arthur B. Stabenow
/s/ Philip M. Young Director March ___, 1998
- ---------------------------
Philip M. Young
</TABLE>
61
<PAGE>
EXHIBIT INDEX
Exhibit Title
<TABLE>
<CAPTION>
Exhibit
Number
-------
<S> <C>
3.1(1) Form of Restated Certificate of Incorporation of the Registrant.
3.2(2) Bylaws of the Registrant, as amended.
4.1(3) Amended and Restated Stock Rights Agreement dated July 30, 1993 among the Registrant and certain of
its stockholders, as amended.
*10.1(3) 1993 Stock Option Plan, as amended.
*10.2(3) 1995 Outside Directors Stock Option Plan.
*10.3(4) Amended and Restated 1995 Employee Stock Purchase Plan.
*10.4(3) Form of Indemnity Agreement for officers and directors.
+10.5(3) Agreement dated June 28, 1991 between the Registrant and Fujifilm Microdevices Co., Ltd.
("Fujifilm"), as amended.
+10.6(3) Agreement dated July 27, 1992 between the Registrant and Fujifilm.
10.7(3) Letter Agreement dated December 16, 1991 between the Registrant and Dolby Laboratories Licensing
Corporation, as amended.
10.11(3) Lease Agreement dated October 1, 1992 between the Registrant's
subsidiary, Zoran Microelectronics Ltd. ("ZML"), and Matam-Haifa
Scientific Industries Center Ltd.
+10.12(3) License Agreement for ZR33891 Digital Filter Processor dated June
8, 1995 between the Registrant and Atmel Corporation ("Atmel").
+10.13(3) License Agreement for ZR34325 Vector Signal Processor dated June
8, 1995 between the Registrant and Atmel.
+10.14(3) 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(3) Cooperation and Project Funding Agreement dated June 9, 1992
between ZML and BIRDF.
10.16(3) 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(3) 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.
</TABLE>
62
<PAGE>
<TABLE>
<S> <C>
10.18(3) 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.
10.21(3) Form of Stock Purchase Warrant issued to purchasers of Series K
Preferred Stock.
10.29(5) Summary of Discussion dated April 23, 1996 between ZML and Matam regarding Lease Agreement dated
October 1, 1992 between ZML and Matam.
10.30(6) 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(7) Agreement and Plan of Reorganization dated October 20, 1996 among
the Registrant, See Acquisition Corporation and CompCore
Multimedia, Inc. (the "CompCore Acquisition Agreement").
*10.32(7) 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).
10.33(8) Sub-Sublease dated April 1, 1997 between the Registrant and Integrated Silicon Solutions, Inc.
*10.34 Confidential Separation Agreement dated August 4, 1997 between the Registrant and George T. Haber.
21.1 List of subsidiaries of the Registrant.
23.1 Consent of Price Waterhouse LLP.
27 Financial Data Schedule.
</TABLE>
- ------------------------------
* 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 Exhibit 3.2 to Registrants Form
SB-2 Registration Statement (No. 33-98630-LA), which became
effective on December 14, 1995 (the "1995 Registration
Statement").
(2) Incorporated by reference to Exhibit 3.3 to the 1995
Registration Statement.
(3) Incorporated by reference to identically numbered exhibit
to the 1995 Registration Statement.
(4) Incorporated by reference to identically numbered exhibit to
Registrant's Form 10-K Annual Report for the year ended
December 31, 1995.
(5) 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").
63
<PAGE>
(6) Incorporated by reference to Exhibit 10.2 to the June 1996
Form 10-Q.
(7) 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.
(8) Incorporated by reference to identically numbered exhibit to
Registrant's Form 10-Q Quarterly Report for the quarter
ended March 31, 1997.
64
<PAGE>
EXHIBIT 10.34
CONFIDENTIAL SEPARATION AGREEMENT
THIS AGREEMENT is entered into as of August 4, 1997 by and between
Zoran Corporation, a Delaware corporation (the "Company"), and George T.
Haber ("Haber").
RECITALS
A. Haber is employed as the Executive Vice President of the
Company pursuant to an Employment Agreement dated as of October 20, 1996 (the
"Employment Agreement); and
B. The parties have agreed in principle with respect to an
arrangement pursuant to which Haber will resign as an officer and employee of
the Company and continue to provide consulting services to the Company,
subject to the execution of this definitive agreement with respect to such
matters.
NOW, THEREFORE, it is agreed as follows:
1. Resignation. The parties hereby confirm Haber's
resignation as Executive Vice President of the Company and as an employee of
the Company (including all positions with all subsidiaries, affiliates and
divisions of the Company), effective as of 5:00 p.m. on August 4, 1997 (the
"Effective Date") at which time the "Employment" (as defined in the
Employment Agreement) will terminate.
2. Service as a Member of the Board of Directors.
Notwithstanding Haber's resignation as an officer and employee of the
Company, he will continue to serve as a member of the Board of Directors of
the Company following the Effective Date.
3. Employment-Related Benefits. In partial
consideration for the release of claims and other consideration described in
this Agreement, the Company has provided or will provide Haber with the
following benefits:
(a) Accrued Wages. Haber shall be paid all
accrued but unpaid wages through the Effective Date, which shall include
Haber's base salary (as specified in Section 2.1 of the Employment Agreement)
and all accrued but unused vacation pay, less applicable withholding, in
accordance with the Company's normal payroll procedures and applicable law.
Haber shall not be entitled to receive any additional payment as an Annual
Bonus (as defined in Section 2.2 of the Employment Agreement) for any period
of his employment.
(b) Expense Reimbursement. Haber shall be
reimbursed for all business expenses properly incurred by Haber in the
performance of his duties as an employee of
1
<PAGE>
the Company through the Effective Date, in accordance with the Company's
normal expense reimbursement policies and the provisions of Section 4 of the
Employment Agreement.
(c) Health and Other Benefits. Haber
acknowledges that he has been given notice of his right to continue his
health insurance coverage under the Company's Health Plan in accordance with
the applicable provisions of the federal Consolidated Omnibus Budget
Reconciliation Act, as amended ("COBRA").
(d) Statements Concerning Separation. The
Company agrees to promptly issue a press release, substantially in the form
of Exhibit A hereto (the "Press Release"), concerning the circumstances of
Haber's resignation as an officer of the Company and his continued service as
a member of the Company's Board of Directors. The Company will designate Levy
Gerzberg as spokesperson for the Company to whom questions regarding Haber's
employment and/or resignation should be referred. The Company agrees to use
reasonable efforts to ensure that questions concerning Haber's employment
and/or separation are referred to such designated spokesperson and that
statements made by representatives of the Company regarding Haber's
separation from the Company are reasonably consistent with the Press Release.
The Company shall ensure that the officers and directors of the Company do
not make any negative, derogatory or disparaging remarks about Haber to any
third party, including any prospective employers, and shall use reasonable
efforts to ensure that other representatives of the Company make no such
remarks.
(e) Indemnity Agreement. The Company
acknowledges that it will continue to be bound by and comply with the terms
of the Indemnity Agreement dated as of December 27, 1996 between Haber and
the Company (the "Indemnity Agreement").
(f) Other Benefits. Haber acknowledges
that, except as specifically provided herein, he will not be entitled to
receive any severance payments or other employment-related benefits from the
Company in respect to his employment with the Company, the termination of
such employment or the consulting services to be rendered pursuant to Section
4 of this Agreement.
4. Consulting Services.
(a) Engagement. In consideration for the
payments to be made to Haber under this Section 4, Haber agrees to provide
consulting services to the Company during the period beginning on the
Effective Date and ending July 31, 1998 (the "Termination Date"), unless
earlier terminated as provided in subsection (d) below (the "Consulting
Term").
(b) Description of Services. Haber shall
provide consulting services to the Company, as specifically requested by the
President and Chief Executive Officer of the Company, for the purpose of
facilitating the transition of Haber's responsibilities as Executive Vice
President to his successor or successors and to assist with the orderly
transfer of Haber's duties with respect to pending matters to such person or
persons as may be designated by the President and Chief Executive Officer of
the Company.
2
<PAGE>
(c) Service Commitment.
(i) Between the Effective Date and
December 31, 1997, Haber will hold himself available to provide consulting
services on a part-time basis (including travel on behalf of the Company),
for not less than thirteen (13) working days per calendar quarter (the
"Minimum Commitment"). The Company shall give Haber not less than three (3)
days notice of its requirement for Haber's consulting services. The parties
shall attempt to schedule the performance of the Minimum Commitment at
approximately one (1) full working day per week and, to the extent
practicable, will establish a schedule for the performance of the Minimum
Commitment.
(ii) Between the Effective Date and
December 31, 1997, Haber shall perform consulting services in excess of the
Minimum Commitment only upon written agreement between Haber and the Company.
(iii) Between January 1, 1998 and
the Termination Date, Haber will hold himself available to provide consulting
services of up to twenty (20) hours per month. Such services shall be
performed only upon the specific written authorization of the President and
Chief Executive Officer of the Company.
(d) Consulting Fees. The Company shall
compensate Haber for his consulting services as follows:
(i) For services rendered pursuant to
the Minimum Commitment, the Company shall pay Haber a consulting fee of
$7,500 per calendar month, subject to pro-rata reduction if Haber fails to
perform the pro-rata portion of the Minimum Commitment during such month
(unless such failure was the result of the Company not requesting the
performance of such services).
(ii) For services rendered pursuant
to Section 4(c)(ii), the Company shall pay Haber a consulting fee of $250 per
hour.
(iii) For services rendered pursuant
to Section 4(c)(iii), the Company shall pay Haber a consulting fee of $300
per hour.
(iv) All such fees shall be payable
monthly, within thirty (30) days of invoice specifying the number of hours
spent and containing a detailed description of the services provided by
Haber, provided Haber has furnished such documentation and services as the
Company has reasonably requested hereunder.
(e) Termination. The Company shall have the
right to terminate Haber's consulting services under this Agreement (i) at
any time, upon Haber's failure to perform any duties reasonably assigned to
him hereunder, which failure is not cured within ten (10) days following
written notice thereof, or (ii) at any time, with or without cause, upon
thirty (30) days
3
<PAGE>
written notice delivered to Haber. Haber may terminate his consulting
services under this Agreement at any time upon thirty (30) days' written
notice delivered to the Company.
(f) Facilities, Equipment and Supplies.
Except as specifically agreed by the parties, Haber will perform his
consulting services at his own facility. If the parties agree that certain
specific consulting activities shall be performed by Haber at the Company's
facility, the Company will provide to Haber an office, access to telephone,
facsimile and e-mail equipment, and reasonable clerical support for his use
in the performance of such consulting services. Haber will not use such
facilities, equipment or services for any activities other than the
performance of such consulting services.
(g) Other Activities. The Company
acknowledges and agrees that, subject to his obligations hereunder and under
the other agreements referred to in Section 5(a) hereof, Haber shall have the
right to engage in employment and consulting activities for himself and
others during the Consulting Term.
(h) Expenses. The Company will reimburse
Haber for reasonable out-of-pocket expenses approved in advance by the
Company and directly related to the performance of his consulting services
hereunder.
(i) Relationship of Parties. Haber shall at
all times during the performance of his consulting services hereunder be an
independent contractor, maintaining sole and exclusive control over his
business and operations. At no time will either party hold itself out to be
the agent, employee, employer, lessee, sublessee, partner or joint venturer
of the other party. Haber shall not have the express or implied right or
authority to assume or create any obligation on behalf of or in the name of
the Company, or to bind the Company in regard to any contract, agreement or
undertaking with any third party. Haber acknowledges that he shall not be
entitled, by virtue of his consulting services hereunder, to any of the
benefits which the Company may make available to its employees, including but
not limited to workers' compensation insurance and coverage.
5. Covenants and Agreements of Haber. Haber
covenants and agrees with the Company as follows:
(a) Proprietary Information and Inventions
Agreement. Haber confirms and acknowledges that he will continue to be
bound by and comply with the terms of (i) the Proprietary Information and
Inventions Agreement which he entered into with the Company effective October
20, 1996 (the "Inventions Agreement") and (ii) the Noncompetition Agreement
dated as of December 27, 1996 between Haber and the Company (the
"Noncompetition Agreement").
(b) Company Property. Haber confirms and
acknowledges that on or prior to the Effective Date, he will return to the
Company any Company credit cards, keys, badges, or other Company
identification which have been issued to him, and that at such time hereafter
as the parties shall agree (on or before the termination of Haber's
consulting services
4
<PAGE>
hereunder) he will return to the Company all records, documents, data,
specifications, drawings, notes, reports, proposals (or copies or extracts of
any of them), computer software, customer information, correspondence
(including electronic mail) or other documents, information, material,
equipment or other property of the Company in his possession or under his
control, with the exception of documents or other information pertinent to
his continued role as a member of the Company's Board of Directors.
(c) Statements Concerning Separation. Haber
agrees that he will not make any statements regarding his separation from the
Company that are inconsistent with the text of the Press Release, or make any
negative, derogatory or disparaging remarks about the Company or any of its
employees, officers or directors to any third party, including but not
limited to employees, prospective employees, customers, prospective
customers, investors or prospective investors of Zoran, financial analysts,
prospective employers of Haber and venture capital firms.
6. Release of Claims and Related Matters.
(a) Release by Haber. In consideration for
the benefits and payments described herein, Haber (on behalf of himself and
his heirs, executors, personal representatives, administrators and assigns)
hereby fully releases and discharges the Company and all of the Company's
subsidiaries and all of their respective officers, directors, shareholders,
subsidiaries, predecessors, affiliates, employees, agents, attorneys,
successors and assigns of and from any and all claims, actions and causes of
actions, whether now known or unknown, suspected or unsuspected, which Haber
has, had or may have against any of them based upon or arising out of any
matter, fact, act or omission whatsoever that occurred or existed any time up
to and including the date of this Agreement, including without limitation:
any and all claims relating to or arising out of Haber's relationship as an
officer, employee or director of the Company or the termination or
modification of that relationship; any and all claims for wrongful discharge
or discrimination on the basis of age, sex, national origin or any other
basis; any and all claims for breach of contract, either express or implied;
any and all claims for breach of any fiduciary duty or any covenant of good
faith and fair dealing, express or implied; any and all claims for negligent
or intentional infliction of emotional distress; any and all claims for
negligent or intentional misrepresentation; any and all claims for
defamation; any and all claims for violation of any federal, state or
municipal statute or regulation; and any and all claims for attorneys' fees
and costs (all of which are hereinafter referred to, collectively, as the
"Haber Released Claims"). The foregoing release does not extend to any claims
based upon or arising out of (i) the Indemnity Agreement or (ii) the
obligations of the Company created by this Agreement.
(b) Release by Company. In consideration for
the release by Haber of the Haber Released Claims, the Company (on behalf of
itself, its affiliates, successors and assigns) hereby fully releases and
discharges Haber and all of his affiliates, employees, agents, attorneys,
successors and assigns of and from any and all claims, actions and causes of
action, whether now known or unknown, suspected or unsuspected, which the
Company has, had or may have against any of them based upon or arising out of
any matter, fact, act or omission whatsoever that occurred or existed at any
time up to and including the date of this Agreement, relating to or arising
out of Haber's relationship as an officer, employee or director of the
Company or the
5
<PAGE>
termination of that relationship (all of which are hereinafter referred to,
collectively, as the "Company Released Claims" and, together with the Haber
Released Claims, as the "Released Claims"). The foregoing release does not
extend to any claims based upon or arising out of (i) dishonesty, fraud,
misrepresentation, theft or deliberate or attempted injury to the Company of
which the Board of Directors of the Company has no actual knowledge as of the
date of this Agreement; (ii) the breach of any provision of the Inventions
Agreement or the Noncompetition Agreement; (iii) the indemnification
provisions of the Agreement and Plan of Reorganization, dated October 20,
1996, as amended, between the Company, CompCore Multimedia, Inc. and See
Acquisition Corporation (the "Reorganization Agreement") and/or the Escrow
Agreement entered into in connection therewith (the "Escrow Agreement"); or
(iv) the obligations of Haber created by this Agreement.
(c) Section 1542 of the California Civil Code.
Each party acknowledges that such party is familiar with the provisions of
Section 1542 of the Civil Code of the State of California which provides as
follows:
"A general release does not extend to claims which the creditor
does not know or suspect to exist in his favor at the time of
executing the release, which if known by him must have materially
affected his settlement with the debtor."
Except as provided in the last sentence of Section 6(b) hereof, each party
(i) waives any rights or benefits which such party has, had or may have under
Civil Code Section 1542, or any statute or common law principle of similar
effect of any state or jurisdiction, to the fullest extent that such party
may lawfully waive such rights and benefits pertaining to the subject matter
of this Agreement and (ii) understands that such party may later discover
claims or facts in addition to or different from those that such party now
knows or believes to exist with respect to the subject matter of this
Agreement; nevertheless, such party intends to settle all of the Released
Claims fully, finally and forever in exchange for the payment and other
benefits provided by this Agreement. Except as provided in the last sentence
of Section 6(b) hereof, this Agreement will remain in effect as a full and
complete release notwithstanding the discovery or existence of any additional
claims or facts.
(d) Ownership of Released Claims. Each party
represents and warrants that such party is the sole and lawful owner of all
right, title and interest in and to all of the Released Claims of such party,
and that they have made no assignment, sale or other disposition,
voluntarily, by operation of law, or otherwise, of any Released Claim or any
part or portion thereof.
(e) Covenant Not To Sue. Each party
covenants and agrees never to commence voluntarily, aid in any way, prosecute
or cause to be commenced or prosecuted against the other any action or other
proceeding based upon any of the Released Claims.
7. Disclaimer of Admissions. Neither this Agreement
nor any action taken in connection with this Agreement or pursuant to it will
constitute an admission by either party of
6
<PAGE>
any liability of any kind to the other party, or of any violation of any
federal, state or other law, nor will it constitute to or be construed as an
admission of any wrongdoing whatsoever.
8. Confidentiality of this Agreement. Each party
represents to the other that it has not disclosed the existence or any of the
terms of this Agreement to anyone other than its respective legal counsel,
accountants or (in the case of Haber) his immediate family members or (in the
case of the Company) its officers, directors, employees and agents with a
reasonable need to know. The parties agree that, except for the information
contained in the Press Release, they will not disclose any of the terms of
this Agreement to any other person or entity, except as such disclosure may
be required for legal, accounting or tax reporting purposes or as otherwise
may be required by law.
9. Attorneys' Fees.
(a) This Agreement. Each of the parties to
this Agreement shall be responsible for the payment of its own costs and
legal expenses, and no party shall hereafter assert against the other party
any claim for reimbursement of attorneys' fees or other legal expenses
incurred in connection with the negotiation and execution of this Agreement.
(b) Subsequent Litigation. In the event of
any litigation or arbitration arising out of this Agreement, the prevailing
party shall be entitled to reimbursement of its costs and attorneys' fees and
expenses.
10. Binding Provisions. All terms, conditions and
agreements contained in this Agreement shall inure to the benefit of, and be
binding upon, the respective successors and assigns of the parties.
11. Governing Law. This Agreement will be governed by
the laws of the State of California as applied to agreements entered into and
to be performed entirely within California between California residents. The
language of this Agreement shall be construed as a whole accordingly to its
fair meaning, and not strictly for or against either of the parties.
12. Entire Agreement. This Agreement constitutes the
entire agreement and final understanding of the parties with respect to the
subject matter hereof and supersedes any and all prior or contemporaneous
negotiations, agreements or understandings by or between the parties, whether
written or oral, express or implied with respect to such subject matter.
Notwithstanding the foregoing, nothing contained herein shall be construed to
limit the effectiveness of the Inventions Agreement, the Noncompetition
Agreement, the Indemnity Agreement, the Reorganization Agreement, the Escrow
Agreement or the Employment Agreement (to the extent that, by its terms, it
survives the termination of Haber's employment). This Agreement is intended
to be a complete and wholly integrated expression of the parties'
understanding and agreement, and may not be modified, altered, amended or
otherwise changed in any way except by a written document which specifically
identifies the intended alteration and clearly expresses the intention to
change this Agreement, signed by Haber and by an officer of the Company.
7
<PAGE>
13. Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed to be an original and all of
which shall be deemed one instrument.
HABER HAS CONSULTED WITH AND BEEN REPRESENTED BY INDEPENDENT LEGAL COUNSEL
WITH RESPECT TO THIS AGREEMENT, AND HE ENTERS THIS AGREEMENT AFTER
CONSULTATION WITH SUCH LEGAL COUNSEL. HABER ENTERS INTO THIS AGREEMENT
KNOWINGLY, WILLINGLY AND VOLUNTARILY IN EXCHANGE FOR THE PAYMENTS AND
BENEFITS DESCRIBED HEREIN, AND HE AND HIS LEGAL COUNSEL HAVE HAD AN ADEQUATE
OPPORTUNITY TO MAKE WHATEVER INVESTIGATION OR INQUIRY THEY DEEM NECESSARY OR
DESIRABLE IN CONNECTION WITH THIS AGREEMENT.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first written above.
ZORAN CORPORATION
By:
--------------------------------
Title:
------------------------------
------------------------------------
GEORGE T. HABER
8
<PAGE>
EXHIBIT A
SANTA CLARA, CALIF. -- August 4, 1997 --Zoran Corporation (NASDAQ: ZRAN),
announced today that George T. Haber, Executive Vice President of Zoran,
will resign, effective August 4, 1997 to pursue other opportunities.
Mr. Haber will remain a member of Zoran's Board of Directors and
will serve as a consultant to the company.
Mr. Haber was a co-founder of CompCore Multimedia, Inc., a provider of MPEG
hardware and software products for processing digital video and audio
signals. CompCore became a wholly-owned subsidiary of Zoran as a result of an
acquisition completed in December 1996.
Dr. Levy Gerzberg, Zoran's President and CEO, stated, "We acknowledge
George's valuable contribution to the development of CompCore's compression
technologies which have become an important part of Zoran's integrated
hardware and software product line. We wish George success in his future
endeavors and look forward to his continuing contributions as a member of the
Board of Directors and consultant. Zoran remains firmly committed to the
CompCore component of its product line as an important element of the
company's strategy to position itself as a broad-based provider of hardware
and software products for a wide range of video and audio applications
enabled by compression.
About Zoran
Zoran Corporation develops and markets integrated circuits and software for
digital video and audio applications enabled by compression for the PC and
consumer multimedia markets. Zoran's product lines include JPEG codecs, MPEG
and DVD decoders, Dolby Digital and MPEG audio decoders, real-time Video CD
and DVD software for the PC, and VLSI cores. The company's software is
bundled by PC and graphic system manufacturers for software-only or
hardware-assisted Video CD, DVD and JPEG compressed video playback on the PC.
Current applications for Zoran IC products include professional and consumer
video editing systems, filmless digital cameras, PC-based or stand-alone
Video CD systems and DVD players, and digital audio systems.
The company has further strengthened its technology leadership with the
recent acquisition of CompCore Multimedia, Inc., a leading provider of
software and hardware IC cores for multimedia products. Zoran is
headquartered in Santa Clara, California with operations in Haifa Israel,
Tokyo, Japan and Toronto, Canada.
For more information about Zoran call (408) 919-4111.
9
<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;
2. CompCore Multimedia, Inc., a California corporation.;
and
3. Zoran International, Inc., a Delaware corporation.
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-2414, No. 333-20225 and No. 333-37111) of
Zoran Corporation of our report dated January 23, 1998 appearing on page 35
of the Annual Report on Form 10-K.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
San Jose, California
March 27, 1998
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