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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from__________ to__________
Commission File Number: 0-27246
ZORAN CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-2794449
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3112 SCOTT BOULEVARD, SANTA CLARA, CALIFORNIA 95054
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 919-4111
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __
The number of outstanding shares of the registrant's Common Stock, $.001 par
value, as of April 30, 1998 was 9,934,184.
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ZORAN CORPORATION
INDEX
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PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
March 31, 1998 and December 31, 1997 3
Condensed Consolidated Income Statements
Three Months Ended March 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
</TABLE>
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ZORAN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash & equivalents $ 8,442 $ 9,903
Short-term investments 10,839 12,473
Accounts receivable 11,841 16,509
Inventories 7,600 4,123
Prepaid expenses & other current assets 2,016 2,232
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Total current assets 40,738 45,240
Property & equipment, net 5,765 5,704
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Total assets $ 46,503 $ 50,944
--------- ----------
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LIABILITIES & EQUITY
Current liabilities:
Accounts payable $ 4,955 $ 5,656
Accrued expenses and other liabilities 6,608 11,002
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Total current liabilities 11,563 16,658
Stockholder's equity:
Common Stock, $0.001 par value;
20,000,000 shares authorized; 9,909,176
and 9,800,679 shares issued and outstanding 10 10
Additional paid-in capital 78,699 78,664
Warrants 717 717
Accumulated deficit (44,486) (45,105)
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Total stockholders' equity 34,940 34,286
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Total liabilities & stockholders' equity $ 46,503 $ 50,944
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</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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ZORAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1998 1997
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<S> <C> <C>
Revenues:
Product sales $ 8,634 $ 6,316
Software, licensing and development 2,534 3,751
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Total revenues 11,168 10,067
Costs and expenses:
Cost of product sales 4,657 3,526
Research and development 3,234 3,312
Selling, general and administrative 2,748 2,604
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Total costs and expenses 10,639 9,442
Operating income 529 625
Interest & other income (expense), net 245 278
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Income before income taxes 774 903
Provision for income taxes 155 226
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Net income $ 619 $ 677
-------- --------
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Basic net income per share $ 0.06 $ 0.07
-------- --------
-------- --------
Diluted net income per share $ 0.06 $ 0.06
-------- --------
-------- --------
Shares used to compute basic net income per share 9,856 9,103
-------- --------
-------- --------
Shares used to compute diluted net income per share 10,952 11,070
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</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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ZORAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 619 $ 677
Adjustments to reconcile net income to net cash used
by operations:
Depreciation, amortization and other 537 379
Changes in current assets and liabilities:
Accounts receivable 4,668 1,813
Inventory (3,477) 760
Prepaid expenses and other current assets 171 (310)
Accounts payable (701) (3,159)
Accrued expenses and other liabilities (4,394) (1,103)
-------- -------
Net cash used by operating activities (2,577) (943)
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Cash flows from investing activities:
Capital expenditures for property and equipment (553) (892)
Sale of short-term investments, net 1,634 378
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Net cash provided (used) in investing activities 1,081 (514)
Cash flows from financing activities:
Proceeds from issuance of Common Stock, net 35 22
-------- -------
Net cash provided by financing activities 35 22
Net (decrease) in cash and cash equivalents (1,461) (1,435)
Cash and cash equivalents at beginning of period 9,903 11,176
-------- -------
Cash and cash equivalents at end of period $ 8,442 $ 9,741
-------- -------
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</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
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ZORAN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
contain all adjustments (consisting only of normal recurring adjustments) which,
in the opinion of management, are necessary to present fairly the financial
information included therein. While the Company believes that the disclosures
are adequate to make the information not misleading, it is suggested that these
financial statements be read in conjunction with the audited consolidated
financial statements and accompanying notes included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997. Results for the
interim periods presented are not necessarily indicative of the results to be
expected for the full year.
2. BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
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<S> <C> <C>
Inventory:
Work-in-process $ 2,343 $ 1,860
Finished goods 5,257 2,263
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$ 7,600 $ 4,123
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</TABLE>
3. INCOME TAXES
The provision for income taxes reflects the estimated annualized effective
tax rate applied to earnings for the interim periods. The effective tax rate
differs from the U.S. statutory rate due to utilization of net operating losses
and State of Israel tax benefits on foreign earnings. The provision includes
primarily taxes on income in excess of net operating loss carryover limitations
and foreign withholding taxes.
4. EARNINGS PER SHARE
FAS 128 requires the reconciliation of the numerators and the denominators
of the basic and diluted per share computation as follows:
<TABLE>
<CAPTION>
MARCH 31,
1998 1997
------------------------------------- -------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income available
to common stockholders $ 619 9,856 $ 0.06 $ 677 9,103 $ 0.07
--------- ---------
--------- ---------
Effects of Dilutive Securities:
Stock Options - 1,038 1,843
Warrants - 58 124
Diuted EPS:
Income available to
common stockholder $ 619 10,952 $ 0.06 $ 677 11,070 $ 0.06
--------- ---------
--------- ---------
</TABLE>
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO THE
COMPANY'S FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY
FROM THOSE CURRENTLY ANTICIPATED DEPENDING UPON A VARIETY OF FACTORS, INCLUDING
THOSE DESCRIBED BELOW UNDER THE SUB-HEADING, "FUTURE PERFORMANCE AND RISK
FACTORS" AND DISCUSSED MORE FULLY IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997.
OVERVIEW
From the Company's inception in 1981 through 1991, the Company derived the
substantial majority of its revenue from digital filter processors ("DFPs") and
vector signal processors ("VSPs") used principally in military, industrial and
medical applications. In 1989, the Company repositioned its business to develop
and market data compression products for the evolving multimedia markets and
discontinued development of DFP and VSP products. In 1994, the Company
discontinued production of these products which are not expected to contribute
significant revenues in future periods. The Company's current lines of
multimedia compression products include JPEG-based products used in video
editing systems and filmless digital cameras, MPEG-based products used in video
playback and Dolby Digital-based audio products used in movie and home theater
systems and DVD players which have been recently introduced by several
manufacturers.
Historically, average selling prices ("ASPs") in the semiconductor industry
in general, and for the Company's products in particular, have decreased over
the life of a particular product. Although ASPs for the Company's hardware
products have fluctuated substantially from period to period, these fluctuations
have been driven principally by changes in customer mix (original equipment
manufacturer ("OEM") sales versus sales to distributors) and the transition from
low-volume to high-volume production sales rather than by factors related to
product life cycles. During 1996 and 1997, the Company reduced its ASPs on
certain products in order to better penetrate the consumer market. The Company
believes that, as its product lines continue to mature and competitive markets
evolve, it is likely to experience further declines in the ASPs of its products,
although the timing and amount of such future changes cannot be predicted with
any certainty. There can be no assurance that costs will decrease at the same
rate as such declines in ASPs, or at all.
The Company sells its products, either directly or through distributors or
independent sales representatives, to OEMs worldwide. Sales prices to
distributors are generally lower than prices for direct sales, as distributors
are responsible for certain sales and marketing expenses, maintenance of
inventories and customer support and training. Lower gross margins on sales to
distributors are partially offset by reduced selling and marketing expenses
related to such sales. Product sales in Japan are primarily made through
Fujifilm Microdevices Co., Ltd. ("Fujifilm"), the Company's strategic partner
and distributor in Japan. Fujifilm provides more sales and marketing support
than Zoran's other distributors.
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.
7
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The Company conducts a substantial portion of its research and development
and certain sales and marketing and administrative operations in Israel through
its wholly-owned Israeli subsidiary. As a result, certain expenses are incurred
in Israeli shekels. Until May 1995, substantially all of the Company's product
sales were made from the Company's U.S. facility. In May 1995, the Company
restructured its manufacturing and sales organizations and began selling a
portion of its products directly from its facility in Israel. To date,
substantially all of the Company's revenues have been denominated in U.S.
dollars and most costs of product sales have been incurred in U.S. dollars. The
Company expects that most of its revenues and costs of product sales will
continue to be denominated and incurred in U.S. dollars for the foreseeable
future. The Company has not experienced material losses or gains as a result of
currency exchange rate fluctuations and has not engaged in hedging transactions
to reduce its exposure to such fluctuations. The Company intends to actively
monitor its foreign exchange exposure and to take appropriate action to reduce
its foreign exchange risk, if such risk becomes material.
RESULTS OF OPERATIONS
REVENUES
Total revenues for the quarter ended March 31, 1998 increased by 10.9%
to $11.2 million from $10.1 million for the same period in 1997. Product
sales for the quarter increased by 36.7% to $8.6 million from $6.3 million
for first quarter of 1997. Unit sales increased across all product families
compared to the same period in 1997, with the greatest percentage increase
coming from the Company's audio-based product family. Software, licensing
and development revenues decreased by 32.4% to $2.5 million compared to $3.8
million for the first quarter of 1997. This decrease was primarily due to the
timing of significant new licensing contracts for software and hardware
design and as well as the timing of revenue recognition of long-term
development contracts
Product sales consist of revenues from sales of the Company's integrated
circuits. Software, licensing and development revenue consists of revenue from
license and royalty agreements, primarily for audio and video decoder software,
that generally provide for the license of software for a specified period of
time for either a single fee or a fee based on the number of units distributed
by the licensee. Development revenue is derived from hardware design contracts
that provide for license and milestone payments to be made at specified times.
PRODUCT GROSS MARGIN
Product gross margin for the quarter ended March 31, 1998 increased by 3.8%
to 53.0% from 49.1% for the same period in 1997. 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 compared to the same quarter in 1997.
The Company's product gross margin is dependent on product mix and on the
percentage of products sold directly to the Company's OEM customers versus
indirectly through its marketing partners who purchase the Company's products at
lower prices but absorb most of the associated marketing and sales support
expenses. The Company expects product and customer mix to continue to fluctuate
in future periods, causing further fluctuations in margins.
RESEARCH AND DEVELOPMENT
Research and development ("R&D") expenses for the quarter ended March
31, 1998 decreased by 3.9% to $3.2 million from $3.3 million for the same
period in 1997. R&D expenses decreased as a percentage of total revenues for
the quarter from 32.9% for the first quarter of 1997 to 29.0% for the first
quarter of 1998.
The Company continues to believe that significant investments in R&D are
required for it to remain competitive and expects to continue
8
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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 for the quarter ended
March 31, 1998 increased by 5.5% to $2.7 million from $2.6 million for the same
period in 1997. The increase was primarily due to increased sales and marketing
expenses related to product market development and to support planned revenue
growth.
The Company expects that SG&A expenses will continue to increase to
support the anticipated growth of the Company.
INTEREST AND OTHER INCOME, NET
Net interest and other income for the quarter ended March 31, 1998
decreased by 11.8% to $245,000 from $278,000 for the same period in 1997. The
decrease resulted primarily from decreased interest income due to slightly lower
cash balances during the quarter as compared to the same quarter in 1997.
PROVISION FOR INCOME TAXES
The Company's estimated effective tax rate decreased to 20% for the current
quarter from 25% for the same quarter last year. The decrease was primarily due
the tax benefits derived from revenue and net income attributable the Company's
operations in Israel, which receives favorable tax treatment.
9
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LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had $8.4 million of cash and cash
equivalents, $10.8 million of short-term investments and $29.1 million of
working capital. Cash used in operations for the three month period was $2.5
million, primarily reflecting changes in inventory, accounts receivable,
accrued liabilities, and offset in part by net income, which includes
non-cash charges for depreciation and amortization. The Company's capital
expenditures for the quarter ended March 31, 1998 totaled $553,000. The
Company had no bank debt at March 31, 1998 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 at least the next
12 months.
FUTURE PERFORMANCE AND RISK FACTORS
THE COMPANY'S FUTURE BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION
ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES, INCLUDING THOSE DESCRIBED BELOW.
PRODUCT CONCENTRATION; EVOLVING MARKETS. Since the Company's markets are
still evolving, only a limited number of commercial and consumer products
that incorporate the Company's integrated circuits are currently in volume
production. Current applications for the Company's products include
professional and consumer video editing systems, PC-based and stand-alone
video CD and DVD players, digital audio systems, filmless digital cameras and
video conferencing systems. During 1994 and 1995, the Company derived a
majority of its product revenues from the sale of integrated circuits for
video editing applications. Video editing applications continued to account
for the largest percentage of the Company's product sales in 1996 and 1997.
Delays in the development of the DVD market resulted in decreased sales of
the Company's audio products in 1997 compared to 1996. The Company expects
that sales of its devices for video capture and editing applications and
digital audio applications will continue to account for a significant portion
of its revenues for the near future. Over the longer term, the Company's
ability to generate increased revenues will be dependent on the expansion of
sales of its products for use in other existing applications, as well as the
development and acceptance of new applications for the Company's technologies
and products. The potential size of the markets for new applications and the
timing of their development and acceptance is uncertain. The Company's
future success will depend upon whether manufacturers select the Company's
integrated circuits and software for incorporation into their products, and
upon the successful marketing of these products by the manufacturers. There
can be no assurance that demand for existing applications will be sustained,
that new markets will develop or that manufacturers developing products for
any of these markets will design the Company's integrated circuits into their
products or successfully market them. The failure of existing and new
markets to develop or to be receptive to the Company's products would have a
material adverse effect on the Company's business, operating results and
financial condition.
The emergence of markets for the Company's integrated circuits will be
affected by a variety of factors beyond the Company's control. In
particular, the Company's products are designed to conform with certain
current industry standards. There can be no assurance that manufacturers
will continue to follow these standards or that competing standards will not
emerge which will be preferred by manufacturers. The emergence of markets
for the Company's products is also dependent in part upon third-party content
providers developing and marketing content for end user systems, such as
video and audio playback systems, in a format compatible with the Company's
products. There can be no assurance that these or other factors beyond the
Company's control will not adversely affect the development of markets for
the Company's products.
RELIANCE ON INDEPENDENT FOUNDRIES AND CONTRACTORS. The Company does not
operate any manufacturing facilities, and from time to time shortages of
foundry capacity develop for certain process technologies in the
semiconductor industry. The Company currently relies on independent foundries
to manufacture substantially all of its products. The Company's independent
foundries fabricate products for
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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.
The Company's reliance on independent foundries involves a number of
risks, including the inability to obtain adequate capacity, the
unavailability of or interruption in access to certain process technologies,
reduced control over delivery schedules, quality assurance, manufacturing
yields and cost, and potential misappropriation of the Company's intellectual
property. The loss of any of the Company's foundries as a supplier, the
inability of the Company in a period of increased demand for its products to
expand supply or the Company's inability to obtain timely and adequate
deliveries from its current or future suppliers could reduce or delay
shipments of the Company's products. Any of these developments could damage
relationships with the Company's current and prospective customers and have a
material adverse effect on the Company's business, operating results or
financial condition.
At present, all of the Company's semiconductor products are assembled by
one of two independent contractors, ASAT and Anam, and tested by those
contractors or other independent contractors. The Company's reliance on
independent assembly and testing houses limits its control over delivery
schedules, quality assurance and product cost. Disruptions in the provision
of services by the Company's assembly or testing houses or other
circumstances that would require the Company to seek alternative sources of
assembly or testing could lead to supply constraints or delays in the
delivery of the Company's products. These constraints or delays could damage
relationships with current and prospective customers and have a material
adverse effect on the Company's business, operating results or financial
condition.
NEW PRODUCT DEVELOPMENT AND TIMELY INTRODUCTION OF NEW AND ENHANCED
PRODUCTS. The markets for the Company's products are characterized by
rapidly changing technologies, evolving industry standards, frequent new
product introductions and short product life cycles. The Company expects to
increase its expenses relating to product development, and its future success
will depend to a substantial degree upon its ability to develop and
introduce, on a timely and cost-effective basis, new and enhanced products
that meet changing customer requirements and industry standards. There can be
no assurance that the Company will successfully develop, introduce or manage
the transition to new products. Future delays in the introduction or shipment
of new or enhanced products, the inability of such products to gain market
acceptance or problems associated with new product transitions could
adversely affect the Company's business, operating results and financial
condition.
COMPETITION; PRICING PRESSURES. The Company's existing and potential
competitors include many large domestic and international companies that have
substantially greater financial, manufacturing, technical, marketing,
distribution and other resources, broader product lines and longer standing
relationships with customers than the Company. The markets in which the
Company competes are intensely competitive and are characterized by rapid
technological change, declining ASPs and rapid product obsolescence.
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.
There can be no assurance that the Company will be able to retain its key
customers or that such customers will not cancel purchase orders or
reschedule or decrease their level of purchases. In addition, sales to these
key customers may fluctuate significantly from quarter to quarter. Any
development that would result in a substantial decrease or delay in sales to
one or more key customers, including actions by competitors or technological
changes, could have a material adverse effect on the Company's business,
operating results or financial condition. In addition, any development that
would adversely affect the collectability of account balances from one or
more key customers could have a material adverse effect on the Company's
business, operating results or financial condition.
FLUCTUATIONS IN OPERATING RESULTS; NET OPERATING LOSS CARRYFORWARDS. The
Company's quarterly operating results have varied significantly due to a
number of factors, including the timing of new product introductions by the
Company and its competitors, market acceptance of new and enhanced versions
of the Company's products and products of its customers, the timing of large
customer orders, the availability of development funding and the timing of
development revenue, changes in the mix of products sold, and
11
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competitive pricing pressures. The Company expects that its operating
results will fluctuate in the future as a result of these factors and a
variety of other factors, including the availability of adequate foundry
capacity, fluctuations in manufacturing yields, the emergence of new industry
standards, product obsolescence, changes in pricing policies by the Company,
its competitors or its suppliers, the cyclical nature of the semiconductor
industry, the evolving and unpredictable nature of the markets for products
incorporating the Company's integrated circuits and software and the amount
of research and development expenses associated with new product
introductions. The Company's operating results could also be adversely
affected by economic conditions generally or in various geographic areas
where the Company or its customers do business, other conditions affecting
the timing of customer orders, a downturn in the markets for its customer's
products, particularly the consumer electronics market, or order
cancellations or reschedulings. These factors are difficult or impossible to
forecast, and these or other factors could materially affect the Company's
quarterly or annual operating results. The Company places orders to purchase
its products from independent foundries several months in advance of the
scheduled delivery date, often in advance of receiving non-cancelable orders
from its customers. If anticipated shipments or development revenue in any
quarter are canceled or do not occur as quickly as expected, expense and
inventory levels could be disproportionately high. A significant portion of
the Company's expenses is relatively fixed, and the timing of increases in
expenses is based in large part on the Company's forecast of future revenues.
As a result, if revenues do not meet the Company's expectations it may be
unable to quickly adjust expenses to levels appropriate to actual revenues,
which could have a material adverse effect on the Company's business,
operating results or financial condition. To date, the Company's operating
results have not been materially affected by seasonal factors. However, as
markets for consumer products incorporating the Company's integrated circuits
mature, the Company expects that sales will tend to be stronger during the
last several months of the calendar year than at other times due to increased
demand for consumer products during the holiday season. As a result of the
foregoing, the Company's operating results and stock price may be subject to
significant volatility, particularly on a quarterly basis. Any shortfall in
revenues or net income from levels expected by securities analysts could have
an immediate and significant adverse effect on the trading price of the
Company's Common Stock.
MANAGEMENT OF GROWTH. 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.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a
significant degree upon the continuing contributions of its senior
management. The loss of key management personnel could delay product
development cycles or otherwise have a material adverse effect on the
Company's business, operating results or financial condition. There can be no
assurance that the Company will be able to retain the services of any of its
key employees. The Company believes that its future success will also depend
in large part on its ability to attract and retain highly-skilled
engineering, managerial, sales and marketing personnel, both in the United
States and in Israel. Competition for such personnel is intense, and there
can be no assurance that the Company will be successful in attracting,
integrating and retaining such personnel. Failure to attract and retain key
personnel could have a material adverse effect on the Company's business,
operating results or financial condition.
RELIANCE ON INTERNATIONAL SALES AND OPERATIONS; RELIANCE ON OPERATIONS IN
ISRAEL. The Company anticipates that international sales will continue to
represent a significant portion of total revenues. In addition,
substantially all of the Company's semiconductor products are manufactured,
assembled and tested
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outside of the United States by independent foundries and subcontractors. The
Company is subject to the risks of doing business internationally, including
unexpected changes in regulatory requirements, fluctuations in exchange
rates, imposition of tariffs and other barriers and restrictions and the
burdens of complying with a variety of foreign laws. The Company is also
subject to general geopolitical risks, such as political and economic
instability and changes in diplomatic and trade relationships, in connection
with its international operations.
A substantial portion of the Company's research and development and sales
operations are located in the State of Israel. Therefore, the Company is
directly affected by the political, economic and military conditions to which
that country is subject. In addition, many of the Company's expenses in
Israel are paid in Israeli shekels, thereby subjecting the Company to the
risk of foreign currency fluctuations and to economic pressures resulting
from Israel's generally high rate of inflation. There can be no assurance
that such factors will not have a material adverse effect of the Company's
business, operating results or financial condition.
VOLATILITY OF STOCK PRICE. The market price of the Company's Common Stock
has fluctuated significantly since the IPO and is subject to material
fluctuations in the future in response to announcements concerning the
Company or its competitors or customers, quarterly variations in operating
results, announcements of technological innovations, the introduction of new
products or changes in product pricing policies by the Company or its
competitors, proprietary rights or other litigation, changes in analysts'
earnings estimates, general conditions in the semiconductor industry,
developments in the financial markets and other factors. In addition, the
stock market has, from time to time, experienced extreme price and volume
fluctuations that have particularly affected the market prices for
semiconductor companies or technology companies generally and which have been
unrelated to the operating performance of the affected companies. Broad
market fluctuations of this type may adversely affect the future market price
of the Common Stock.
RISKS RELATED TO YEAR 2000 PROBLEM. In the next two years, most companies
could face a potentially serious information systems problem because many
software applications and operational programs written in the past were
designed to handle date formats with two-digit years and thus may not
properly recognize calendar dates beginning in the Year 2000. This problem
could result in computers either outputting incorrect data or shutting down
altogether when attempting to process a date such as "01/01/00." The Company
has examined all of its critical software and operational applications as
well as the software products it has sold and found no potential problems
related to the Year 2000 issue. In addition, however, the Company could be
exposed to a potential adverse impact resulting from the failure of financial
institutions and other third parties to adequately address the Year 2000
problem. The Company intends to devote the necessary resources to identify
and resolve Year 2000 issues that may exist with third parties. However, the
Company cannot estimate the cost of this effort at this time, nor can any
assurance be given that the Year 2000 problem will not have a material
adverse effect on the Company's business, operating results or financial
condition.
MARKET RISK DISCLOSURE. The Company has an investment portfolio of
securities that are classified as "available-for-sale". These securities are
subject to interest rate risk and will fall in value if market interest rates
increase. The Company attempts to limit this exposure by investing primarily
in short-term securities. From time to time, the Company makes certain
capital equipment or other purchases denominated in foreign currencies. As a
result, cash flows and earnings are exposed to fluctuations in interest rates
and foreign currency exchange rates. The Company attempts to limit these
exposures through operational strategies and generally has not hedged
currency exposures.
13
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months
ended March 31, 1998.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZORAN CORPORATION
Date: May 14, 1998 /S/ LEVY GERZBERG
------------------------
Levy Gerzberg
President
Chief Executive Officer
15
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<PAGE>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED INCOME STATEMENTS. THE CONSOLIDATED BALANCE SHEETS AND THE
ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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