<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 18, 1999
REGISTRATION NO. 333-______
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ZORAN CORPORATION
(Exact name of registrant as specified in its charter)
------------------------------
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<S> <C> <C>
DELAWARE 3112 SCOTT BOULEVARD 94-2794449
(State or other jurisdiction SANTA CLARA, CALIFORNIA 95054 (I.R.S. Employer
of (408) 919-4111 Identification Number)
incorporation or organization) (Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
</TABLE>
------------------------------
LEVY GERZBERG
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ZORAN CORPORATION
3112 SCOTT BOULEVARD
SANTA CLARA, CALIFORNIA 95054
(408) 919-4111
(Name and address, including zip code, of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
DENNIS C. SULLIVAN, ESQ. KENNETH LAMB, ESQ.
PAUL A. BLUMENSTEIN, ESQ. STEWART MCDOWELL, ESQ.
MICHAEL B. GEBHARDT, ESQ. BRIAN GIN, ESQ.
GRAY CARY WARE & FREIDENRICH LLP GIBSON, DUNN & CRUTCHER LLP
400 HAMILTON AVENUE ONE MONTGOMERY STREET
PALO ALTO, CALIFORNIA 94301-1825 TELESIS TOWER
(650) 833-2000 SAN FRANCISCO, CALIFORNIA 94104
(415) 393-8200
</TABLE>
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. / /
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED SHARE(1) PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $0.001 par value........ 3,450,000 shares $34.5625 $119,240,625.00 $33,149
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rules 457(c) and 457(g) of the Securities Act of 1933, and based
on the average of the high and low sales prices of the common stock, as
reported on the Nasdaq National Market on November 16, 1999.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(A),
MAY DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 18, 1999
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
3,000,000 SHARES
[LOGO]
COMMON STOCK
$ PER SHARE
- --------------------------------------------------------------------------------
Zoran Corporation is offering 2,500,000 shares and the selling stockholders
identified in this prospectus are offering 500,000 shares. We will not receive
any of the proceeds from the sale of shares by the selling stockholders. This is
a firm commitment underwriting.
The common stock is listed on the Nasdaq National Market under the symbol
"ZRAN." On November 17, 1999, the last reported sale price of the common stock
on the Nasdaq National Market was $34.63 per share.
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 7.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----------
<S> <C> <C>
Price to the public............................ $ $
Underwriting discount..........................
Proceeds to Zoran..............................
Proceeds to the selling stockholders...........
</TABLE>
Zoran has granted an over-allotment option to the underwriters. Under this
option, the underwriters may elect to purchase a maximum of 450,000 additional
shares from Zoran within 30 days following the date of this prospectus to cover
over-allotments.
- --------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
CIBC WORLD MARKETS
ROBERTSON STEPHENS
SALOMON SMITH BARNEY
SOUNDVIEW TECHNOLOGY GROUP
The date of this prospectus is , 1999.
<PAGE>
[INSERT ARTWORK DESCRIPTION]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary.......................................... 4
Risk Factors................................................ 7
Special Note Regarding Forward-Looking Statements........... 19
Use of Proceeds............................................. 20
Dividend Policy............................................. 20
Price Range of Common Stock................................. 21
Capitalization.............................................. 22
Selected Consolidated Financial Data........................ 23
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 24
Business.................................................... 34
Management.................................................. 50
Related-Party Transactions.................................. 53
Principal and Selling Stockholders.......................... 54
Underwriting................................................ 56
Legal Matters............................................... 58
Experts..................................................... 58
Where You Can Find Additional Information About Zoran....... 58
Documents Incorporated By Reference......................... 58
Index to Consolidated Financial Statements.................. F-1
</TABLE>
----------------------------
As used in this prospectus, the terms "we," "us," "our" and Zoran mean Zoran
Corporation and its subsidiaries (unless the context indicates another meaning),
and the term "common stock" means our common stock, par value $0.001 per share.
Our principal executive offices are located at 3112 Scott Boulevard, Santa
Clara, California 95054. Our telephone number is (408) 919-4111.
Unless otherwise stated herein, all information contained in this prospectus
assumes no exercise of the over-allotment option granted to the underwriters.
The underwriters are offering the shares subject to various conditions and may
reject all or part of any order. The shares should be ready for delivery on or
about , 1999 against payment in immediately available funds.
Zoran, the Zoran logo, SILICONSOFTWARE and Vaddis are our registered trademarks.
We have applied for federal trademark registration of the following trademarks:
VMD, the VMD logo, Virtual Multi-Channel Digital and SupraAV. All other
trademarks, servicemarks or tradenames referred to in this prospectus are the
property of their respective owners.
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED IN OTHER PARTS OF THIS PROSPECTUS.
BECAUSE IT IS A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU
SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY, INCLUDING "RISK FACTORS" AND THE FINANCIAL STATEMENTS AND
RELATED NOTES, BEFORE MAKING AN INVESTMENT DECISION.
ABOUT ZORAN
We develop and market integrated circuits, integrated circuit cores, which are
"building blocks" for integrated circuits, and embedded software used by
original equipment manufacturers in digital audio and video products for
commercial and consumer markets. We also provide complete, copy-ready system
reference designs based on our technology that help our customers produce
commercial and consumer products more quickly and cost-effectively. Our
integrated circuits are used in a variety of commercial and consumer products
enabled by digital compression, including digital versatile disc, or DVD,
players, Super Video CD players, digital speakers and audio systems, filmless
digital cameras, and professional and consumer video editing systems
manufactured by companies such as Dolby Laboratories, Pinnacle Systems, Sharp
and Toshiba.
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 audio and video to be processed and stored
in digital form. One of the most significant barriers to the widespread adoption
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. Through digital compression techniques, a substantial
number of the redundancies inherent in audio and video data can be identified
and eliminated, significantly reducing the overall amount of data, while
retaining high-quality sound and images.
Established and emerging compression standards specify data formats in which
compressed data must be presented in order to enable products from different
vendors to interact and permit the capture, transmission, storage and display of
audio and video data in digital format. These standards do not, however, specify
the compression methodologies to be employed or additional functionality which
may be used to enhance or manipulate digital signals and do not determine image
or sound quality or compression efficiency. Integrated circuit manufacturers
differentiate their products on the basis of the quality of their compression
solution.
Original equipment manufacturers are seeking to integrate multiple functions on
individual chips in order to reduce their costs, speed their time-to-market and
produce smaller products with reduced power consumption. They also seek
solutions that can be easily integrated into commercial and consumer products.
The current challenge to manufacturers of compression integrated circuits is,
therefore, to provide product manufacturers with high-quality, cost-effective,
standards-based solutions that deliver flexible control, image enhancement,
audio effects and other functions in addition to compression.
We provide feature-rich, cost-effective, standards-based solutions for a broad
range of digital audio and video applications. We were a pioneer in the
development of high performance digital signal processor products, and have
developed expertise in integrated circuit design, mathematical algorithms and
software development, as well as proprietary digital signal processing
techniques, and audio and video compression technologies. The key elements of
our solution are:
- STANDARDS-PLUS METHODOLOGY. We enable original equipment manufacturers to
improve image and sound quality and deliver superior products to end users
by adding more features around compression standards, such as more efficient
use of memory, processing and communication resources, as well as audio and
image enhancement algorithms.
- EXPANDABLE AND PROGRAMMABLE ARCHITECTURE. We can vary the architecture of
our chips by adding or deleting modules, and we can also modify the software
embedded in the chips themselves to address
4
<PAGE>
specific applications. We also license ready-to-manufacture cores that can
be integrated into our customers' integrated circuits.
- INTEGRATED SYSTEM SOLUTIONS. We help our customers meet their total system
requirements by providing integrated products that combine hardware and
software to address required system functions and features on a single
integrated circuit or chip set.
- COST-EFFECTIVE PRODUCTS. We focus on reducing the feature size, power
requirements and number of integrated circuits necessary to perform required
system functions, including compression functions. This reduces our
customers' manufacturing costs for their products which incorporate our
integrated circuits, and also reduces the operating costs for these
products, enabling the use of our products in a broader range of high volume
applications.
- COPY-READY SYSTEM REFERENCE DESIGNS. We provide our customers with a broad
range of engineering reference boards and products complete with device
driver software, embedded software and detailed schematics. These products
substantially shorten our customers' product design time.
We provide cost-effective, high-performance digital audio and video solutions
addressing selected high growth applications enabled by compression in evolving
multimedia markets. Key elements of our strategy include:
- Focus on emerging high-growth products including DVD and Super Video CD
players, filmless digital cameras, digital speakers and PC video;
- Leverage our existing technology and expertise to related applications
including Internet audio and video appliances, digital television and
television set-top boxes, as well as personal digital audio and video
devices;
- Further penetrate key international markets such as China, Taiwan and Korea;
- Extend our technological leadership by using our multi-disciplinary
expertise to develop new technologies for compression of digital audio and
video; and
- Expand our strategic partnerships by working closely in the product
definition, development and marketing processes with leading manufacturers
of products that incorporate our integrated circuits.
To implement our strategy, we have established a direct sales force located at
several sales and marketing offices, and a worldwide network of independent
sales representatives and distributors.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by Zoran................ 2,500,000 shares
Common stock offered by the selling 500,000 shares
stockholders...............................
Common stock to be outstanding after this 13,395,535 shares(1)
offering...................................
Use of proceeds.............................. We intend to use the proceeds for general
corporate purposes, principally working
capital and capital expenditures. See "Use of
Proceeds."
Nasdaq National Market symbol................ ZRAN
</TABLE>
- ---------------------
(1) This share number is based on shares outstanding as of October 31, 1999, but
excludes:
- 2,028,597 shares of common stock issuable upon exercise of outstanding
options with a weighted average exercise price of $10.35 per share, and
138,000 shares reserved for future grant under our option plan;
- 75,000 shares of common stock issuable upon exercise of outstanding
warrants, with an average exercise price of $24.31 per share; and
- 161,558 shares of common stock reserved for issuance under our employee
stock purchase plan.
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenue............................... $ 9,499 $23,464 $44,109 $44,927 $44,225 $30,089 $41,619
Operating income (loss)..................... (4,441) 1,494 2,001 3,899 90 (626) 2,945
Net income (loss)........................... $(4,895) $ 948 $ 2,363 $ 4,229 $ 929 $ 56 $ 3,338
Basic net income (loss) per share(1)........ $ (4.82) $ 0.35 $ 0.27 $ 0.45 $ 0.09 $ 0.01 $ 0.32
Diluted net income (loss) per share(1)...... $ (4.82) $ 0.11 $ 0.22 $ 0.38 $ 0.08 $ 0.01 $ 0.28
Shares used to compute basic net income
(loss) per share(1)....................... 1,015 2,391 8,802 9,412 10,042 9,988 10,578
Shares used to compute diluted net income
(loss) per share(1)....................... 1,015 8,397 10,661 11,072 11,119 10,970 11,865
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
-------------------------
ACTUAL AS ADJUSTED(2)
-------- --------------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $18,448 $ 100,261
Working capital............................................. 37,389 119,202
Total assets................................................ 54,152 135,965
Long-term debt.............................................. -- --
Accumulated deficit......................................... (40,838) (40,838)
Total stockholders' equity.................................. 41,962 123,775
</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.
(2) The "as adjusted" column reflects the sale by us of 2,500,000 shares in this
offering at an assumed offering price of $34.63 per share after deducting
the estimated underwriting discount and offering expenses, and the
application of the net proceeds from the offering.
6
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS AND OTHER INFORMATION
CONTAINED IN THIS PROSPECTUS BEFORE DECIDING TO INVEST IN OUR COMMON STOCK.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. THE RISKS AND
UNCERTAINTIES DESCRIBED BELOW MAY NOT BE THE ONLY ONES WE FACE. IF ANY OF THE
FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS COULD BE HARMED AND THE TRADING
PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR
INVESTMENT. PLEASE SEE THE "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS"
ON PAGE 19 OF THIS PROSPECTUS.
OUR QUARTERLY REVENUES AND OPERATING RESULTS FLUCTUATE DUE TO A VARIETY OF
FACTORS, WHICH MAY RESULT IN VOLATILITY OR A DECLINE IN THE PRICE OF OUR STOCK.
Our quarterly operating results have varied significantly due to a number of
factors, including:
- fluctuation in demand for our products;
- the timing of new product introductions by us and our competitors;
- the level of market acceptance of new and enhanced versions of our products
and our customers' products;
- the timing of large customer orders;
- the length and variability of the sales cycle for our products;
- the cyclical nature of the semiconductor industry;
- the availability of development funding and the timing of development
revenue;
- changes in the mix of products sold;
- seasonality in demand for our products;
- competitive pricing pressures; and
- the evolving and unpredictable nature of the markets for products
incorporating our integrated circuits and embedded software.
We expect that our operating results will continue to fluctuate in the future as
a result of these factors and a variety of other factors, including:
- the cost and availability of adequate foundry capacity;
- fluctuations in manufacturing yields;
- the emergence of new industry standards;
- product obsolescence; and
- the amount of research and development expenses associated with new product
introductions.
Our operating results could also be harmed by:
- economic conditions generally or in various geographic areas where we or our
customers do business;
- other conditions affecting the timing of customer orders; or
- a downturn in the markets for our customers' products, particularly the
consumer electronics market.
These factors are difficult or impossible to forecast. We place orders to
purchase our products from independent foundries several months in advance of
the scheduled delivery date, often in advance of receiving non-cancelable orders
from our customers. If anticipated shipments in any quarter are canceled
7
<PAGE>
or do not occur as quickly as expected, expense and inventory levels could be
disproportionately high. If anticipated license revenues in any quarter are
canceled or do not occur, gross margins may be reduced. A significant portion of
our expenses are relatively fixed, and the timing of increases in expenses is
based in large part on our forecast of future revenues. As a result, if revenues
do not meet our expectations we may be unable to quickly adjust expenses to
levels appropriate to actual revenues, which could harm our operating results.
As a result of these factors, our operating results may vary significantly from
quarter to quarter. Any shortfall in revenues or net income from levels expected
by securities analysts could cause a decline in the trading price of our stock.
OUR SUCCESS FOR THE FORESEEABLE FUTURE WILL BE DEPENDENT ON GROWTH IN DEMAND FOR
INTEGRATED CIRCUITS FOR DIGITAL VERSATILE DISC, OR DVD, SUPER VIDEO CD, DIGITAL
AUDIO, VIDEO EDITING AND FILMLESS DIGITAL CAMERA APPLICATIONS AND OUR ABILITY TO
MARKET AND SELL OUR PRODUCTS TO MANUFACTURERS WHO INCORPORATE THOSE TYPES OF
INTEGRATED CIRCUITS INTO THEIR PRODUCTS.
In the first nine months of 1999, we derived a majority of our product revenues
from the sale of integrated circuits for DVD and Super Video CD applications. We
expect that sales of our products for DVD and Super Video CD applications,
digital audio applications and video editing applications will continue to
account for a significant portion of our revenues for the near future. Our
ability to sell our recently introduced products for filmless digital camera
applications will also have a significant impact on our financial performance
for the foreseeable future. If the markets for these products and applications
decline or fail to develop as expected, or we are not successful in our efforts
to market and sell our products to manufacturers who incorporate integrated
circuits into these products, our financial results will be harmed.
OUR CUSTOMERS EXPERIENCE FLUCTUATING PRODUCT CYCLES AND SEASONALITY, WHICH
CAUSES OUR SALES TO FLUCTUATE.
Because the markets our customers serve are characterized by numerous new
product introductions and rapid product enhancements, our operating results may
vary significantly from quarter to quarter. During the final production of a
mature product, our customers typically exhaust their existing inventory of our
products. Consequently, orders for our products may decline in those
circumstances, even if our products are incorporated into both mature products
and replacement products. A delay in the customer's transition to commercial
production of a replacement product would delay our ability to recover the lost
sales from the discontinuation of the related mature product. Our customers also
experience significant seasonality in the sales of their consumer products,
which affects their orders of our products. Typically, the fourth calendar
quarter represents a disproportionate percentage of sales for our customers due
to the holiday period, and therefore a disproportionate percentage of our sales.
We expect these sales fluctuations to continue for the foreseeable future.
PRODUCT SUPPLY AND DEMAND IN THE SEMICONDUCTOR INDUSTRY IS SUBJECT TO CYCLICAL
VARIATIONS.
The semiconductor industry is subject to cyclical variations in product supply
and demand. Downturns in the industry often occur in connection with, or
anticipation of, maturing product cycles for both semiconductor companies and
their customers and declines in general economic conditions. These downturns
have been characterized by abrupt fluctuations in product demand, production
over-capacity and accelerated decline of average selling prices. In some cases,
these downturns have lasted more than one year. A downturn in the semiconductor
industry could harm our sales and revenues if demand drops or our gross margins
if average selling prices decline.
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THE DEVELOPMENT AND EVOLUTION OF MARKETS FOR OUR INTEGRATED CIRCUITS IS
DEPENDENT ON FACTORS SUCH AS INDUSTRY STANDARDS, OVER WHICH WE HAVE NO CONTROL;
FOR EXAMPLE, IF MANUFACTURERS ADOPT NEW OR COMPETING INDUSTRY STANDARDS WITH
WHICH OUR PRODUCTS ARE NOT COMPATIBLE, OUR EXISTING PRODUCTS WOULD BECOME LESS
DESIRABLE TO THE MANUFACTURERS AND OUR SALES WOULD SUFFER.
The emergence of markets for our products is affected by a variety of factors
beyond our control. In particular, our products are designed to conform to
current specific industry standards. Manufacturers may not continue to follow
these standards, which would make our products less desirable to manufacturers
and reduce our sales. Also, competing standards may emerge that are preferred by
manufacturers, which could also reduce our sales and require us to make
significant expenditures to develop new products. The emergence of new markets
for our products is also dependent in part upon third parties developing and
marketing content in a format compatible with commercial and consumer products
that incorporate our products. If content compatible with commercial and
consumer products that incorporate our products is not available, manufacturers
may not be able to sell products incorporating our integrated circuits, and our
sales to manufacturers would suffer.
WE RELY ON INDEPENDENT FOUNDRIES AND CONTRACTORS FOR THE MANUFACTURE, ASSEMBLY
AND TESTING OF OUR INTEGRATED CIRCUITS, AND THE FAILURE OF ANY OF THESE THIRD
PARTIES TO DELIVER PRODUCTS OR OTHERWISE PERFORM AS REQUESTED COULD DAMAGE OUR
RELATIONSHIPS WITH OUR CUSTOMERS AND HARM OUR SALES AND FINANCIAL RESULTS.
We do not operate any manufacturing facilities, and we rely on independent
foundries to manufacture substantially all of our products. These independent
foundries fabricate products for other companies and may also produce products
of their own design. From time to time there are manufacturing capacity
shortages in the semiconductor industry. We do not have long-term supply
contracts with any of our suppliers, including our principal supplier, Taiwan
Semiconductor Manufacturing Company, or TSMC. Therefore, TSMC is not obligated
to manufacture products for us for any specific period, in any specific quantity
or at any specified price, except as may be provided in a particular purchase
order.
Our reliance on independent foundries involves a number of risks, including:
- the inability to obtain adequate manufacturing capacity;
- the unavailability of or interruption in access to certain process
technologies necessary for manufacture of our products;
- reduced control over delivery schedules;
- reduced control over quality assurance;
- reduced control over manufacturing yields and cost; and
- potential misappropriation of our intellectual property.
In addition, TSMC and some of our other foundries are located in areas of the
world which are subject to natural disasters such as earthquakes. While the
recent earthquake in Taiwan did not have a material impact on our independent
foundries, a similar event centered near TSMC's facility could severely reduce
TSMC's ability to manufacture our integrated circuits. The loss of any of our
manufacturers as a supplier, our inability to expand the supply of our products
in response to increased demand, or our inability to obtain timely and adequate
deliveries from our current or future suppliers due to a natural disaster or any
other reason could delay or reduce shipments of our products. Any of these
circumstances could damage our relationships with current and prospective
customers and harm our sales and financial results.
We also rely on independent contractors for the assembly and testing of our
products. At present, all of our semiconductor products are assembled by one of
three independent contractors: ASE, Amkor or ASAT. Our semiconductor products
are tested by these contractors or other independent contractors. Our reliance
on independent assembly and testing houses limits our control over delivery
schedules,
9
<PAGE>
quality assurance and product cost. Disruptions in the services provided by our
assembly or testing houses or other circumstances that would require us to seek
alternative sources of assembly or testing could lead to supply constraints or
delays in the delivery of our products. These constraints or delays could damage
our relationships with current and prospective customers and harm our sales and
financial results.
BECAUSE FOUNDRY CAPACITY IS LIMITED WE MAY BE REQUIRED TO ENTER INTO COSTLY
LONG-TERM SUPPLY ARRANGEMENTS TO SECURE FOUNDRY CAPACITY.
If we are not able to obtain additional foundry capacity as required, our
relationships with our customers would be harmed and our sales would likely be
reduced. In order to secure additional foundry capacity, we have considered and
will continue to consider various arrangements with suppliers, which could
include, among others:
- option payments or other prepayments to a foundry;
- nonrefundable deposits with or loans to foundries in exchange for capacity
commitments;
- contracts that commit us to purchase specified quantities of silicon wafers
over extended periods;
- issuance of our equity securities to a foundry;
- investment in a foundry;
- joint ventures; or
- other partnership relationships with foundries.
We may not be able to make any such arrangement in a timely fashion or at all,
and such arrangements, if any, may not be on terms favorable to us. Moreover, if
we are able to secure foundry capacity, we may be obligated to utilize all of
that capacity or incur penalties. Such penalties may be expensive and could harm
our financial results.
IF OUR INDEPENDENT FOUNDRIES DO NOT ACHIEVE SATISFACTORY YIELDS, OUR
RELATIONSHIPS WITH OUR CUSTOMERS MAY BE HARMED.
The fabrication of silicon wafers is a complex process. Minute levels of
contaminants in the manufacturing environment, defects in photomasks used to
print circuits on a wafer, difficulties in the fabrication process or other
factors can cause a substantial portion of the integrated circuits on a wafer to
be non-functional. Many of these problems are difficult to detect at an early
stage of the manufacturing process and may be time consuming and expensive to
correct. As a result, foundries often experience problems achieving acceptable
yields, which are represented by the number of good integrated circuits as a
proportion of the number of total integrated circuits on any particular wafer.
Poor yields from our independent foundries would reduce our ability to deliver
our products to customers, harm our relationships with our customers, and harm
our business.
TO BE SUCCESSFUL, WE MUST EFFICIENTLY DEVELOP NEW AND ENHANCED PRODUCTS TO MEET
RAPIDLY CHANGING CUSTOMER REQUIREMENTS AND INDUSTRY STANDARDS.
The markets for our products are characterized by:
- rapidly changing technologies;
- evolving industry standards;
- frequent new product introductions; and
- short product life cycles.
We expect to increase our product development expenses, and our future success
will depend to a substantial degree upon our ability to develop and introduce,
on a timely and cost-effective basis, new
10
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and enhanced products that meet rapidly changing customer requirements and
industry standards. We may not successfully develop, introduce or manage the
transition to new products. Delays in the introduction or shipment of new or
enhanced products, lack of market acceptance for such products or problems
associated with new product transitions could harm our sales and financial
results.
WE FACE COMPETITION OR POTENTIAL COMPETITION FROM COMPANIES WITH GREATER
RESOURCES THAN OURS, AND IF WE ARE UNABLE TO COMPETE EFFECTIVELY WITH THESE
COMPANIES, OUR MARKET SHARE MAY DECLINE AND OUR BUSINESS COULD BE HARMED.
Competition in the compression technology market has historically been dominated
by large companies such as STMicroelectronics and companies that develop and use
their own integrated circuits, such as Sony. As this market continues to
develop, we face competition from other large semiconductor vendors, including:
- C-Cube Microsystems;
- LSI Logic;
- Cirrus Logic (Crystal Semiconductor);
- Fujitsu; and
- Motorola.
For example, in the markets for JPEG-based products for use in filmless digital
cameras, LSI Logic and Ricoh are providing system-on-a-chip solutions to third
parties. We also face competition from internally-developed solutions developed
and used by major Japanese original equipment manufacturers, who may also be our
customers.
Many of our existing and potential competitors have substantially greater
resources than ours in many areas, including:
- finances;
- manufacturing;
- technology;
- marketing; and
- distribution.
Many of our competitors have broader product lines and longer standing
relationships with customers than we do. Moreover, our competitors may foresee
the course of market developments more accurately than we do and could in the
future develop new technologies that compete with our products or even render
our products obsolete. In addition, a number of private companies have announced
plans for new products to address the same digital multimedia compression
problems that our products address. If we are unable to compete successfully
against our current and future competitors, we could experience price
reductions, order cancellations and reduced gross margins, any one of which
could harm our business.
The DVD market is just emerging, and additional competitors are expected to
enter the market for DVD players and software. We believe 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 our products. Some of these potential competitors may develop
captive implementations for use only with their own PC and consumer electronics
products. It is also possible that application software vendors, such as
Microsoft, may attempt to enter the DVD application market in the future. This
increased competition may result in price reductions, reduced profit margins and
loss of market share.
11
<PAGE>
OUR PRODUCTS ARE CHARACTERIZED BY AVERAGE SELLING PRICES THAT DECLINE OVER
RELATIVELY SHORT TIME PERIODS; IF WE ARE UNABLE TO REDUCE OUR COSTS OR INTRODUCE
NEW PRODUCTS WITH HIGHER AVERAGE SELLING PRICES, OUR FINANCIAL RESULTS WOULD
SUFFER.
Average selling prices for our products decline over relatively short time
periods. Many of our manufacturing costs are fixed. When our average selling
prices decline, our revenues decline unless we sell more units, and our gross
margins decline unless we are able to reduce our manufacturing costs by a
commensurate amount. Our operating results suffer when gross margins decline. We
may experience these problems in the future and cannot predict when they may
occur or their severity.
WE DERIVE MOST OF OUR REVENUE FROM SALES TO A SMALL NUMBER OF LARGE CUSTOMERS,
AND IF WE ARE NOT ABLE TO RETAIN THESE CUSTOMERS, OR THEY RESCHEDULE, REDUCE OR
CANCEL ORDERS, OUR REVENUES WOULD BE REDUCED AND OUR FINANCIAL RESULTS WOULD
SUFFER.
Our largest customers account for a substantial percentage of our revenues. In
1998, sales to Fujifilm accounted for 22.7% of our total revenues, including
26.5% of our product sales, and sales to Pinnacle accounted for 14.3% of
revenues, including 18.8% of product sales. During the nine months ended
September 30, 1999, sales to Fujifilm accounted for 41.5% of our total revenues,
including 47.2% of product sales, and sales to Pinnacle accounted for 7.9% of
revenues, including 9.5% of product sales. During 1998, our four largest
customers accounted for approximately 45.7% of our revenues and for the nine
months ended September 30, 1999, our four largest customers accounted for
approximately 61.0% of our revenues. Sales to these large customers have varied
significantly from year to year and will continue to fluctuate in the future.
These sales also may fluctuate significantly from quarter to quarter. We may not
be able to retain our key customers or these customers may cancel purchase
orders or reschedule or decrease their level of purchases from us. Any
substantial decrease or delay in sales to one or more of our key customers could
harm our sales and financial results. In addition, any difficulty in collecting
amounts due from one or more key customers could harm our financial results.
WE ARE DEPENDENT ON OUR RELATIONSHIP WITH FUJIFILM FOR A SIGNIFICANT PERCENTAGE
OF OUR PRODUCT SALES, AND IF THIS RELATIONSHIP WERE TERMINATED, OUR BUSINESS
WOULD BE SEVERELY HARMED.
Fujifilm has been our largest customer in three of the last five years. Fujifilm
purchases our products primarily as a distributor. Under our arrangement with
Fujifilm, Fujifilm acts as the primary distributor in Japan of products
developed by us under development contracts with Fujifilm. Fujifilm also sells
some of these products in Japan under its own name. We may sell these products
directly in Japan only to specified customers and must first buy the products
from Fujifilm. Fujifilm provides more sales and marketing support than our other
distributors. Fujifilm also has a nonexclusive license to distribute most of our
products outside of Japan. Fujifilm has provided wafer manufacturing services on
a most-favored terms basis to us since 1993 and has also provided funding to
support our development efforts. If our relationship with Fujifilm were
terminated, our business would be severely harmed.
OUR PRODUCTS GENERALLY HAVE LONG SALES CYCLES AND IMPLEMENTATION PERIODS, WHICH
INCREASES OUR COSTS IN OBTAINING ORDERS AND REDUCES THE PREDICTABILITY OF OUR
EARNINGS.
Our products are technologically complex. Prospective customers generally must
make a significant commitment of resources to test and evaluate our products and
to integrate them into larger systems. As a result, our sales process is often
subject to delays associated with lengthy approval processes that typically
accompany the design and testing of new products. The sales cycles of our
products often last for many months or even years. Longer sales cycles require
us to invest significant resources in attempting to make sales and delay the
generation of revenue.
Long sales cycles also subject us to other risks, including customers' budgetary
constraints, internal acceptance reviews and cancellations. In addition, orders
expected in one quarter could shift to another because of the timing of
customers' purchase decisions. The time required for our customers to
incorporate our products into their own can vary significantly with the needs of
our customers and
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<PAGE>
generally exceeds several months, which further complicates our planning
processes and reduces the predictability of our operating results.
WE ARE NOT PROTECTED BY LONG-TERM CONTRACTS WITH OUR CUSTOMERS.
We generally do not enter into long-term purchase contracts with our customers,
and we cannot be certain as to future order levels from our customers. When we
do enter into a long-term contract, the contract is generally terminable at the
convenience of the customer. In the event of an early termination by one of our
major customers, it is unlikely that we will be able to rapidly replace that
revenue source, which would harm our financial results.
WE ARE DEPENDENT UPON OUR INTERNATIONAL SALES AND OPERATIONS; ECONOMIC,
POLITICAL OR MILITARY EVENTS IN A COUNTRY WHERE WE MAKE SIGNIFICANT SALES OR
HAVE SIGNIFICANT OPERATIONS COULD INTERFERE WITH OUR SUCCESS OR OPERATIONS THERE
AND HARM OUR BUSINESS.
During 1998, 59.4% of our total revenues were derived from international sales,
and during the nine months ended September 30, 1999, 75.7% of our total revenues
were derived from international sales. We anticipate that international sales
will continue to represent a significant portion of our total revenues for the
foreseeable future. In addition, substantially all of our semiconductor products
are manufactured, assembled and tested outside of the United States by
independent foundries and subcontractors.
We are subject to the risks inherent in doing business internationally,
including:
- unexpected changes in regulatory requirements;
- fluctuations in exchange rates;
- political and economic instability;
- imposition of tariffs and other barriers and restrictions; and
- the burdens of complying with a variety of foreign laws.
The majority of our research and development personnel and facilities and a
significant portion of our sales personnel are located in Israel. Political,
economic and military conditions in Israel directly affect our operations. Some
of our officers and employees in Israel are obligated to perform up to 39 days
of military reserve duty annually. The absence of these employees for
significant periods during the work week may cause us to operate inefficiently
during these periods.
During 1998, we opened an office in Shenzhen, China. Our operations in China
will be subject to the economic and political uncertainties affecting that
country. For example, the Chinese economy has experienced significant growth in
the past decade, but such growth has been uneven across geographic and economic
sectors and has recently been slowing. This growth may continue to decrease and
any slow down may have a negative effect on our business. The Chinese economy is
also experiencing deflation which may continue in the future. This deflation
could result in devaluation of the Chinese Yuan, which could reduce our sales to
the Chinese market.
THE PRICES OF OUR PRODUCTS MAY BECOME LESS COMPETITIVE DUE TO FOREIGN EXCHANGE
FLUCTUATIONS.
Foreign currency fluctuations may affect the prices of our products. Prices for
our products are currently denominated in U.S. dollars for sales to our
customers throughout the world. If there is a significant devaluation of the
currency in a specific country, the prices of our products will increase
relative to that country's currency and our products may be less competitive in
that country. Also, we cannot be sure that our international customers will
continue to be willing to place orders denominated in U.S. dollars. If they do
not, our revenue and operating results will be subject to foreign exchange
fluctuations.
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<PAGE>
OUR ABILITY TO COMPETE COULD BE JEOPARDIZED IF WE ARE UNABLE TO PROTECT OUR
INTELLECTUAL PROPERTY RIGHTS FROM CHALLENGES BY THIRD PARTIES.
Our success and ability to compete depend in large part upon protecting our
proprietary technology. We rely on a combination of patent, trade secret,
copyright and trademark laws, non-disclosure and other contractual agreements
and technical measures to protect our proprietary rights. These agreements and
measures may not be sufficient to protect our technology from third-party
infringement, or to protect us from the claims of others. Monitoring
unauthorized use of our products is difficult and we cannot be certain that the
steps we have taken will prevent unauthorized use of our technology,
particularly in foreign countries where the laws may not protect our proprietary
rights as fully as in the United States. The laws of certain foreign countries
in which our products are or may be developed, manufactured or sold, including
various countries in Asia, may not protect our 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 our technology and products more likely in these
countries. If competitors are able to use our technology, our ability to compete
effectively could be harmed.
WE COULD BECOME SUBJECT TO CLAIMS AND LITIGATION REGARDING INTELLECTUAL PROPERTY
RIGHTS, WHICH COULD SERIOUSLY HARM OUR BUSINESS AND REQUIRE US TO INCUR
SIGNIFICANT COSTS.
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. In the past, we have
been subject to claims and litigation regarding alleged infringement of other
parties' intellectual property rights. We could become subject to litigation in
the future either to protect our intellectual property or as a result of
allegations that we infringe others' intellectual property rights. Claims that
our products infringe proprietary rights would force us to defend ourselves and
possibly our customers or manufacturers against the alleged infringement. These
claims and any resulting lawsuit, if successful, could subject us to significant
liability for damages and invalidation of our proprietary rights. These
lawsuits, regardless of their success, would likely be time-consuming and
expensive to resolve and would divert management time and attention. Any
potential intellectual property litigation could force us to do one or more of
the following:
- stop selling our products that incorporate the challenged intellectual
property;
- obtain from the owner of the infringed intellectual property right a license
to sell or use the relevant technology, which license may not be available
on reasonable terms or at all;
- pay damages; or
- redesign those products that use such technology.
If we are forced to take any of the foregoing actions, our business could be
severely harmed.
IF NECESSARY LICENSES OF THIRD-PARTY TECHNOLOGY ARE NOT AVAILABLE TO US OR ARE
VERY EXPENSIVE, OUR PRODUCTS COULD BECOME OBSOLETE.
From time to time we may be required to license technology from third parties to
develop new products or product enhancements. Third party licenses may not be
available to us on commercially reasonable terms, if at all. If we are unable to
obtain any third-party license required to develop new products and product
enhancements, we may have to obtain substitute technology of lower quality or
performance standards or at greater cost, either of which could seriously harm
the competitiveness of our products.
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<PAGE>
IF WE ARE NOT ABLE TO APPLY OUR NET OPERATING LOSSES AGAINST TAXABLE INCOME IN
FUTURE PERIODS, OUR FINANCIAL RESULTS WILL BE HARMED.
Our future net income and cash flow will be affected by our ability to apply our
net operating losses, which totaled approximately $36.0 million for federal tax
reporting purposes as of December 31, 1998, against taxable income in future
periods. Our net operating losses incurred prior to the consummation of our
initial public offering in 1995 that we can use to reduce future taxable income
for federal tax purposes are limited to approximately $3.0 million per year.
Changes in tax laws in the United States may further limit our ability to
utilize our net operating losses. Any further limitation on our ability to
utilize our net operating losses could harm our financial condition. See Note 10
of Notes to Consolidated Financial Statements.
ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND SEVERELY HARM OUR
FINANCIAL CONDITION.
We intend to consider investments in complementary companies, products or
technologies. While we have no current agreements to do so, we may acquire
businesses, products or technologies in the future. In the event of any future
acquisitions, we could:
- issue stock that would dilute our current stockholders' percentage
ownership;
- incur debt;
- assume liabilities;
- incur amortization expenses related to goodwill and other intangible assets;
or
- incur large and immediate write-offs.
Our operation of any acquired business will also involve numerous risks,
including:
- problems combining the purchased operations, technologies or products;
- unanticipated costs;
- diversion of management's attention from our core business;
- adverse effects on existing business relationships with customers;
- risks associated with entering markets in which we have no or limited prior
experience; and
- potential loss of key employees, particularly those of the purchased
organizations.
We may not be able to successfully integrate any businesses, products or
technologies or personnel that we might acquire in the future and any failure to
do so could disrupt our business and seriously harm our financial condition.
OUR PRODUCTS COULD CONTAIN DEFECTS, WHICH COULD REDUCE SALES OF THOSE PRODUCTS
OR RESULT IN CLAIMS AGAINST US.
We develop complex and evolving products. Despite testing by us and our
customers, errors may be found in existing or new products. This could result
in, among other things, a delay in recognition or loss of revenues, loss of
market share or failure to achieve market acceptance. These defects may cause us
to incur significant warranty, support and repair costs, divert the attention of
our engineering personnel from our product development efforts and harm our
relationships with our customers. The occurrence of these problems could result
in the delay or loss of market acceptance of our products and would likely harm
our business. Defects, integration issues or other performance problems in our
products could result in financial or other damages to our customers or could
damage market acceptance of our products. Our customers could also seek damages
from us for their losses. A product liability claim brought against us, even if
unsuccessful, would likely be time consuming and costly to defend.
IF WE DO NOT MAINTAIN OUR CURRENT DEVELOPMENT CONTRACTS OR ARE UNABLE TO ENTER
INTO NEW DEVELOPMENT CONTRACTS, OUR BUSINESS COULD BE HARMED.
We historically have generated a significant percentage of our total revenues
from development contracts, primarily with key customers. These development
contracts have provided us with partial
15
<PAGE>
funding for the development of some of our products. Under these contracts, we
receive payments upon reaching certain development milestones. If we fail to
achieve the milestones specified in our existing development contracts, if our
existing contracts are terminated or we are unable to secure future development
contracts, our ability to cost-effectively develop new products would be reduced
and our business would be harmed.
WE MAY NEED ADDITIONAL FUNDS TO EXECUTE OUR BUSINESS PLAN, AND IF WE ARE UNABLE
TO OBTAIN SUCH FUNDS, WE WILL NOT BE ABLE TO EXPAND OUR BUSINESS AS PLANNED.
We may require substantial additional capital to finance our future growth,
secure additional foundry capacity and fund our ongoing research and development
activities beyond 1999. Our capital requirements will depend on many factors,
including:
- acceptance of and demand for our products;
- the types of arrangements that we may enter into with our independent
foundries; and
- the extent to which we invest in new technology and research and development
projects.
To the extent that our existing sources of liquidity and cash flow from
operations are insufficient to fund our activities, we may need to raise
additional funds. If we raise additional funds through the issuance of equity
securities, the percentage ownership of our existing stockholders would be
reduced. Further, such equity securities may have rights, preferences or
privileges senior to those of our common stock. Additional financing may not be
available to us when needed or, if available, it may not be available on terms
favorable to us.
IF WE FAIL TO MANAGE OUR FUTURE GROWTH, IF ANY, OUR BUSINESS WOULD BE HARMED.
We anticipate that our future growth, if any, will require us to recruit and
hire a substantial number of new engineering, managerial, sales and marketing
personnel. Our ability to manage our growth successfully will also require us to
expand and improve our administrative, operational, management and financial
systems and controls. Many of our key operations, including the major portion of
our research and development operations and a significant portion of our sales
and administrative operations, are located in Israel. A majority of our sales
and marketing and certain of our research and development and administrative
personnel, including our President and Chief Executive Officer and other
officers, are based in the United States. The geographic separation of these
operations places additional strain on our resources and our ability to
effectively manage our growth. If we are unable to manage growth effectively,
our business would be harmed.
WE RELY ON THE SERVICES OF OUR EXECUTIVE OFFICERS AND OTHER KEY PERSONNEL, WHOSE
KNOWLEDGE OF OUR BUSINESS AND INDUSTRY WOULD BE EXTREMELY DIFFICULT TO REPLACE.
Our success depends to a significant degree upon the continuing contributions of
our senior management. The loss of key management personnel could delay product
development cycles or otherwise harm our business. We may not be able to retain
the services of any of our key employees. We believe that our future success
will also depend in large part on our ability to attract, integrate 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
we may not be successful in attracting, integrating and retaining such
personnel. Failure to attract, integrate and retain key personnel could harm our
ability to carry out our business strategy and compete with other companies.
THE ISRAELI RATE OF INFLATION MAY NEGATIVELY IMPACT OUR COSTS IF IT EXCEEDS THE
RATE OF DEVALUATION OF THE NEW ISRAELI SHEKEL AGAINST THE U.S. DOLLAR.
A portion of the cost of our operations, relating mainly to our personnel and
facilities in Israel, is incurred in New Israeli Shekels. As a result, we bear
the risk that the rate of inflation in Israel will exceed the rate of
devaluation of the New Israeli Shekel in relation to the dollar, which will
increase our costs as expressed in dollars. To date, we have not engaged in
hedging transactions. In the future, we may enter into currency hedging
transactions to decrease the risk of financial exposure from fluctuations
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<PAGE>
in the exchange rate of the U.S. dollar against the New Israeli Shekel. These
measures may not adequately protect us from the impact of inflation in Israel.
THE GOVERNMENT PROGRAMS WE PARTICIPATE IN AND TAX BENEFITS WE RECEIVE REQUIRE US
TO MEET SEVERAL CONDITIONS AND MAY BE TERMINATED OR REDUCED IN THE FUTURE, WHICH
WOULD INCREASE OUR COSTS.
In the nine months ended September 30, 1999, we received an aggregate of
$486,000 in grants for research and development from the Chief Scientist in
Israel's Ministry of Industry and Trade. To continue to be eligible for these
grants, our development projects must be approved by the Chief Scientist on a
case-by-case basis. If our development projects are not approved by the Chief
Scientist, we will not receive grants to fund these projects, which would
increase our research and development costs. We also receive tax benefits, in
particular exemptions and reductions as a result of the "Approved Enterprise"
status of our existing operations in Israel. To be eligible for these tax
benefits, we must maintain our Approved Enterprise status by meeting conditions,
including making specified investments in fixed assets located in Israel and
investing additional equity in our Israeli subsidiary. If we fail to meet these
conditions in the future, the tax benefits would be canceled and we could be
required to refund the tax benefits already received. These tax benefits may not
be continued in the future at their current levels or at any level. Israeli
governmental authorities have indicated that the government may reduce or
eliminate these benefits in the future, which would harm our business.
WE HAVE ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND THERE ARE
PROVISIONS OF DELAWARE LAW THAT COULD PREVENT OR DELAY A CHANGE IN CONTROL OF
OUR COMPANY.
Our certificate of incorporation, our bylaws and Delaware law contain provisions
that could make it more difficult for a third party to acquire us, even if doing
so would be beneficial to our stockholders. These include provisions:
- prohibiting a merger with a party that has acquired control of 15% or more
of our outstanding common stock, such as a party that has completed a
successful tender offer, until three years after that party acquired control
of 15% of our outstanding common stock;
- authorizing the issuance of up to 3,000,000 shares of "blank check"
preferred stock;
- eliminating stockholders' rights to call a special meeting of stockholders;
and
- requiring advance notice of any stockholder nominations of candidates for
election to our board of directors.
WE FACE A NUMBER OF UNKNOWN RISKS ASSOCIATED WITH YEAR 2000 PROBLEMS THAT COULD
RESULT IN CLAIMS AGAINST US OR IMPAIR THE USE OF OUR PRODUCTS BY OUR CUSTOMERS.
The year 2000 computer issue creates a variety of risks for us. The year 2000
computer problem refers to the potential for system and processing failures of
date-related data as a result of computer-controlled systems using two digits,
rather than four digits, to define the applicable year. For example, computer
programs that have time sensitive software may recognize a date represented as
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar business activities. The risks involve:
- potential warranty or other claims by our customers arising from errors in
products;
- errors in systems we use to run our business;
- errors in systems used by our suppliers, manufacturers and customers; and
- potential reduced spending by end-users on digital consumer multimedia
products as a result of concerns over the impact that the year 2000 computer
problem may have on such products.
We have designed our products for use in the year 2000 and beyond and believe
that they are year 2000 compliant. However, our products are generally
integrated into larger products sold to end-users. Each of our customers'
products involve different combinations of third party products. We cannot
evaluate whether all of their products are year 2000 compliant. We may face
claims based on year 2000 problems
17
<PAGE>
in other companies' products or based on issues arising from the integration of
multiple products within the overall product. Although no year 2000 claims have
been made against us, we may in the future be required to defend our products
against legal proceedings which could be expensive, regardless of the merits of
these claims.
Our current and prospective customers' purchasing plans could be affected by
year 2000 issues if they need to expend significant resources to fix their
existing systems to become year 2000 compliant. This situation may reduce finds
available to purchase our products.
OUR STOCK PRICE HAS FLUCTUATED AND MAY CONTINUE TO FLUCTUATE WIDELY.
The market price of our common stock has fluctuated significantly since our
initial public offering in 1995. Between January 1, 1999 and November 17, 1999,
the sales price of our common stock, as reported on the Nasdaq National Market,
has ranged from a low of $8.50 to a high of $36.00. The market price of our
common stock is subject to significant fluctuations in the future in response to
a variety of factors, including:
- announcements concerning our business or that of our competitors or
customers;
- quarterly variations in operating results;
- announcements of technological innovations;
- the introduction of new products or changes in product pricing policies by
us or our competitors;
- proprietary rights or other litigation;
- changes in analysts' earnings estimates;
- general conditions in the semiconductor industry; and
- developments in the financial markets.
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 reduce the future market price of our common
stock.
MANAGEMENT WILL HAVE BROAD DISCRETION OVER ALLOCATION OF PROCEEDS FROM THIS
OFFERING.
The net proceeds to us from the sale of the 2,500,000 shares of common stock we
are offering are estimated to be approximately $81.8 million after deducting the
underwriting discount and estimated offering expenses. We currently have no
specific plans for a significant portion of our net proceeds from this offering.
Consequently, our management will have the discretion to allocate the net
proceeds to uses that stockholders may not deem desirable. We may be unable to
yield a significant return on any investment of the proceeds. Substantially all
of our proceeds from the offering will be invested in short-term,
interest-bearing, investment-grade securities immediately following the
offering.
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<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus contains forward-looking statements
within the meaning of the federal securities laws. These forward-looking
statements include, among others, statements regarding our product development
plans, use of proceeds, projected capital expenditures, liquidity and business
strategy. These statements may be found under the captions "Prospectus Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and "Business."
Forward-looking statements typically are identified by use of terms such as
"may," "will," "expect," "anticipate," "estimate" and similar words, although
some forward-looking statements are expressed differently. You should be aware
that our actual results could differ materially from those contained in the
forward-looking statements due to a number of factors, including the matters
discussed under "Risk Factors" and in other sections of this prospectus, which
address various factors that could cause our actual results to differ from those
set forth in the forward-looking statements.
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<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the 2,500,000 shares of
common stock we are offering will be approximately $81.8 million. If the
underwriters fully exercise the over-allotment option, the net proceeds will be
approximately $96.6 million. "Net proceeds" is what we expect to receive after
we pay the underwriting discount and other estimated expenses for this offering.
For the purpose of estimating net proceeds, we are assuming that the public
offering price will be $34.63 per share. We will not receive any proceeds from
the sale of shares by the selling stockholders.
We expect to use the net proceeds for working capital and general corporate
purposes, which may include the purchase of equipment and the expansion of
facilities. We also may use a portion of the net proceeds to acquire or invest
in businesses, technologies, products or services that are complementary to our
business. From time to time we have discussed potential strategic acquisitions
and investments with third parties. We are not currently in discussions
regarding any acquisitions or investments and have no agreements or commitments
to complete any such transaction. Pending our uses of the proceeds, we intend to
invest the net proceeds of this offering primarily in short-term,
investment-grade, interest-bearing instruments.
DIVIDEND POLICY
We have not declared or paid any cash dividends on our capital stock and do not
anticipate paying any cash dividends in the foreseeable future. Our current
policy is to retain all of our earnings to finance the growth and development of
our business.
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PRICE RANGE OF COMMON STOCK
Our common stock has been quoted on the Nasdaq National Market under the symbol
"ZRAN" since our initial public offering on December 15, 1995. The following
table sets forth, for the periods indicated, the high and low sales prices of
the common stock, as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
1997:
First Quarter.............................................. $ 30.75 $ 15.75
Second Quarter............................................. $ 26.50 $ 12.75
Third Quarter.............................................. $ 28.63 $ 17.50
Fourth Quarter............................................. $ 26.63 $ 11.50
1998:
First Quarter.............................................. $ 18.25 $ 12.50
Second Quarter............................................. $ 14.75 $ 9.50
Third Quarter.............................................. $ 12.06 $ 5.88
Fourth Quarter............................................. $ 18.00 $ 5.19
1999:
First Quarter.............................................. $ 20.13 $ 11.50
Second Quarter............................................. $ 17.75 $ 8.50
Third Quarter.............................................. $ 36.00 $ 16.38
Fourth Quarter (through November 16, 1999)................. $ 35.50 $ 20.44
</TABLE>
On November 17, 1999, the last reported sale price of our common stock on the
Nasdaq National Market was $34.63 per share. As of October 31, 1999, there were
approximately 291 holders of record of our common stock.
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CAPITALIZATION
The following table sets forth our unaudited cash, cash equivalents and
short-term investments and our unaudited capitalization as of September 30, 1999
on an actual basis and as adjusted to reflect the sale of the 2,500,000 shares
of common stock that we are offering at an assumed public offering price of
$34.63, after deducting the underwriting discount and estimated offering
expenses:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS, EXCEPT
SHARE AND
PER SHARE DATA)
<S> <C> <C>
Cash, cash equivalents and short-term investments........... $ 18,448 $100,261
======== ========
Stockholders' Equity:
Common stock: $0.001 par value; 20,000,000 shares
authorized;
10,834,296 shares issued and outstanding, actual;
13,395,535
shares issued and outstanding, as adjusted (1)...... $ 10 $ 13
Additional paid-in capital.............................. 81,590 163,400
Warrants................................................ 717 717
Accumulated other comprehensive income.................. 483 483
Accumulated deficit..................................... (40,838) (40,838)
-------- --------
Total stockholders' equity.......................... 41,962 123,775
-------- --------
Total capitalization.............................. $ 41,962 $123,775
======== ========
</TABLE>
- ---------------------
(1) These share numbers exclude:
- 1,961,423 shares of common stock issuable upon exercise of outstanding
options with a weighted average exercise price of $9.52 per share;
- 75,000 shares of common stock issuable upon exercise of outstanding
warrants, with an exercise price of $24.31 per share; and
- 198,170 shares of common stock reserved for issuance under our employee
stock purchase plan.
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following selected financial data in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the notes thereto included
elsewhere in this prospectus. The following data, insofar as it relates to each
of the years 1994 through 1998, has been derived from annual financial
statements, including the consolidated balance sheets at December 31, 1997 and
1998 and the related consolidated statements of income and of cash flows for the
three years ended December 31, 1998 and notes thereto appearing elsewhere in
this prospectus. The consolidated balance sheets at December 31, 1994, 1995 and
1996 and the consolidated statements of operations for the years ended
December 31, 1994 and 1995 are derived from audited consolidated financial
statements not included in this prospectus. The data for the nine months ended
September 30, 1998 and 1999 has been derived from unaudited financial statements
also appearing in this prospectus and which, in the opinion of management,
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the unaudited interim periods.
The results of operations for the nine months ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the full year
ending December 31, 1999, or any other future period.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Product sales...................................... $ 6,243 $18,086 $35,503 $32,717 $33,465 $22,230 $34,728
Software, licensing and development................ 3,256 5,378 8,606 12,210 10,760 7,859 6,891
------- ------- ------- ------- ------- ------- -------
Total revenues................................. 9,499 23,464 44,109 44,927 44,225 30,089 41,619
------- ------- ------- ------- ------- ------- -------
Costs and expenses:
Cost of product sales.............................. 4,677 9,306 20,262 16,032 19,036 12,750 18,497
Research and development........................... 4,887 5,916 8,954 13,787 13,548 9,654 9,945
Selling, general and administrative................ 4,376 6,748 10,739 11,209 11,551 8,311 10,232
Merger and related................................. -- -- 2,153 -- -- -- --
------- ------- ------- ------- ------- ------- -------
Total costs and expenses....................... 13,940 21,970 42,108 41,028 44,135 30,715 38,674
------- ------- ------- ------- ------- ------- -------
Operating income (loss).............................. (4,441) 1,494 2,001 3,899 90 (626) 2,945
Interest and other income (expense), net............. (225) (147) 1,027 1,258 1,071 696 1,226
------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes.................... (4,666) 1,347 3,028 5,157 1,161 70 4,171
Provision for income taxes........................... 229 399 665 928 232 14 833
------- ------- ------- ------- ------- ------- -------
Net income (loss).................................... $(4,895) $ 948 $ 2,363 $ 4,229 $ 929 $ 56 $ 3,338
======= ======= ======= ======= ======= ======= =======
Basic net income (loss) per share (1)................ $ (4.82) $ 0.35 $ 0.27 $ 0.45 $ 0.09 $ 0.01 $ 0.32
======= ======= ======= ======= ======= ======= =======
Diluted net income (loss) per share (1).............. $ (4.82) $ 0.11 $ 0.22 $ 0.38 $ 0.08 $ 0.01 $ 0.28
======= ======= ======= ======= ======= ======= =======
Shares used to compute basic net income (loss) per
share (1).......................................... 1,015 2,391 8,802 9,412 10,042 9,988 10,578
======= ======= ======= ======= ======= ======= =======
Shares used to compute diluted net income (loss) per
share (1).......................................... 1,015 8,397 10,661 11,072 11,119 10,970 11,865
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- -------------
1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments.......... $ 1,743 $21,438 $23,419 $22,376 $19,175 $18,448
Working capital (deficit).................................. (2,272) 19,753 24,673 28,582 30,830 37,389
Total assets............................................... 7,205 31,264 41,382 50,944 49,170 54,152
Long-term debt, less current portion....................... 1,027 601 -- -- -- --
Accumulated deficit........................................ (52,545) (51,697) (49,334) (45,105) (44,176) (40,838)
Total stockholders' equity (deficit)....................... (1,176) 20,917 28,530 34,286 36,186 41,962
</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.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THIS DISCUSSION TOGETHER WITH THE FINANCIAL STATEMENTS AND OTHER
FINANCIAL INFORMATION INCLUDED IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THOSE INDICATED IN THE FORWARD-LOOKING
STATEMENTS. PLEASE SEE THE "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS"
ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
From our inception in 1981 through 1991, we derived the substantial majority of
our revenue from digital filter processors and vector signal processors used
principally in military, industrial and medical applications. In 1989, we
repositioned our business to develop and market data compression products for
the evolving multimedia markets and discontinued development of digital filter
processor and vector signal processor products. In 1994, we discontinued
production of these products. Our current lines of digital audio and video
products include integrated circuits and related products used in digital
versatile disc players, movie and home theater systems, filmless digital cameras
and video editing systems.
In December 1996, we expanded our compression based product offerings through
the acquisition of CompCore Multimedia, a provider of software-based compression
products and cores for audio and video decoder integrated circuits.
We derive most of our revenues from the sale of our integrated circuit products.
Historically, average selling prices in the semiconductor industry in general,
and for our products in particular, have decreased over the life of a particular
product. Average selling prices for our hardware products have fluctuated
substantially from period to period, primarily as a result of changes in our
customer mix of original equipment manufacturer, or OEM, sales versus sales to
distributors and the transition from low-volume to high-volume production.
During 1997 and 1998, we reduced the prices of some of our products in order to
better penetrate the consumer market. We believe that, as our product lines
continue to mature and competitive markets evolve, we are likely to experience
further declines in the average selling prices of our products, although we
cannot predict the timing and amount of such future changes with any certainty.
Our cost of product sales consists primarily of fabrication costs, assembly and
test costs, and the cost of materials and overhead from operations. If we are
unable to reduce our cost of product sales to offset anticipated decreases in
average selling prices, our product gross margins will decrease. Our product
gross margin is also dependent on product mix and on the percentage of products
sold directly to our OEM customers versus indirectly through our marketing
partners who purchase our products at lower prices but absorb most of the
associated marketing and sales support expenses, maintain inventories and
provide 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, our strategic partner and distributor in Japan. Fujifilm provides more
sales and marketing support than our other distributors. We expect both product
and customer mix to continue to fluctuate in future periods, causing further
fluctuations in margins.
We also derive revenue from licensing our software and other intellectual
property. Licensing revenue includes one-time license fees and royalties based
on the number of units distributed by the licensee. In addition, we have
historically generated a significant percentage of our total revenues from
development contracts, primarily with key customers, although development
revenue has declined as a percentage of total revenues over the past several
years. These development contracts have provided us with partial funding for the
development of some of our products. These development contracts provide for
license and milestone payments which are recorded as development revenue. We
classify all development costs, including costs related to these development
contracts, as research and development expenses. We retain ownership of the
intellectual property developed by us under these development contracts. While
we
24
<PAGE>
intend to continue to enter into development contracts with certain strategic
partners, we expect development revenue to continue to decline as a percentage
of total revenues.
Our research and development expenses consist of salaries and related costs of
employees engaged in ongoing research, design and development activities and
costs of engineering materials and supplies. We are also a party to research and
development agreements with the Chief Scientist in Israel's Ministry of Industry
and Trade and the Israel-United States Binational Industrial Research and
Development Foundation, which fund up to 50% of incurred project costs for
approved products up to specified contract maximums. These agreements require us
to use our best efforts to achieve specified results and require us to pay
royalties at rates of 3% to 5% of resulting product sales, and up to 30% of
resulting license revenues, up to a maximum of 100% to 150% of total funding
received. Reported research and development expenses are net of these grants,
which fluctuate from period to period. We believe that significant investments
in research and development are required for us to remain competitive and we
expect to continue to devote significant resources to product development,
although such expenses as a percentage of total revenues may fluctuate.
Our selling, general and administrative expenses consist primarily of
employee-related expenses, royalties, sales commissions, product promotion and
other professional services. We expect that selling, general and administrative
expenses will continue to increase to support our anticipated growth.
We conduct a substantial portion of our research and development and certain
sales and marketing and administrative operations in Israel through our
wholly-owned Israeli subsidiary. As a result, some of our expenses are incurred
in New Israeli Shekels. To date, substantially all of our product sales and our
development and licensing revenue have been denominated in U.S. dollars and most
costs of product sales have been incurred in U.S. dollars. We expect that most
of our sales and costs of sales will continue to be denominated and incurred in
U.S. dollars for the foreseeable future. We have not experienced material losses
or gains as a result of currency exchange rate fluctuations and have not engaged
in hedging transactions to reduce our exposure to such fluctuations. We may in
the future elect to take appropriate action to reduce our foreign exchange risk.
Our effective income tax rate has benefitted from the availability of net
operating losses which we have utilized to reduce taxable income for U.S.
federal income tax purposes and by our Israeli subsidiary's status as an
"Approved Enterprise" under Israeli law, which provides a ten-year tax holiday
for income attributable to a portion of of our operations in Israel. Our U.S.
federal net operating losses expire at various times between 2000 and 2009, and
the benefits from our subsidiary's Approved Enterprise status expire at various
times beginning in 2003.
In June 1999, we sold to MGI Software of Canada the intellectual property
related to our SoftDVD product line and transferred to MGI certain related
software development and support resources in exchange for cash, MGI common
stock and future royalties. Our results for the second quarter of 1999 include a
$732,000 gain realized from this transaction which is reported as part of
interest and other income or expense. In connection with this transaction, we
also recorded a charge that reduced software, licensing and development revenue
for the quarter by $517,000 for possible issues related to receivables
associated with the SoftDVD product line. The net impact of the MGI transaction
on our operating results was after-tax gain of $172,000, or $0.01 per share on a
diluted basis. This gain does not reflect the potential future economic benefit
that may be derived from this transaction and realized in future periods in the
form of royalties. We do not currently expect, however, that these royalties
will have a material impact on quarterly revenues for the foreseeable future. In
addition, the shares of MGI stock received by us as part of this transaction are
subject to future appreciation or depreciation. Our software revenues have
declined significantly as a result of the sale of the SoftDVD product line.
25
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth consolidated statement of operations data as a
percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales........................................... 80.5% 72.8% 75.7% 73.9% 83.4%
Software, licensing and development 19.5 27.2 24.3 26.1 16.6
----- ----- ----- ----- -----
Total revenues........................................ 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Costs and expenses:
Cost of product sales................................... 45.9 35.7 43.1 42.4 44.4
Research and development................................ 20.3 30.7 30.6 32.1 23.9
Selling, general and administrative..................... 24.4 24.9 26.1 27.6 24.6
Merger and related...................................... 4.9 -- -- -- --
----- ----- ----- ----- -----
Total costs and expenses.............................. 95.5 91.3 99.8 102.1 92.9
----- ----- ----- ----- -----
Operating income.......................................... 4.5 8.7 0.2 (2.1) 7.1
Interest and other income (expense), net.................. 2.3 2.8 2.4 2.3 2.9
Income before income taxes................................ 6.8 11.5 2.6 0.2 10.0
Provision for income taxes................................ 1.5 2.1 0.5 0.0 2.0
----- ----- ----- ----- -----
Net income................................................ 5.3% 9.4% 2.1% 0.2% 8.0%
===== ===== ===== ===== =====
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
REVENUES. Total revenues increased by 38.3% to $41.6 million in the nine months
ended September 30, 1999 from $30.1 million in the same period in 1998. Product
sales increased by 56.2% to $34.7 million in the nine months ended
September 30, 1999 from $22.2 million in the same period in 1998. The increase
in product sales resulted primarily from increased unit sales of DVD and Super
Video CD products. Software, licensing and development revenues decreased by
12.3% to $6.9 million in the nine months ended September 30, 1999 from
$7.9 million in the same period in 1998. This decrease was principally due to a
decline in software licensing revenues following the sale of our SoftDVD product
line in June 1999 and, to a lesser degree, a decline in development revenue.
These decreases were partially offset by increased revenues from licenses of our
integrated circuit cores.
PRODUCT GROSS MARGIN. Product gross margin increased to 46.7% in the nine months
ended September 30, 1999, compared to 42.7% in the same period in 1998. The
increase was due to a shift in product mix to a higher percentage of
higher-margin products, a shift in customer mix to a greater percentage of
direct sales to original equipment manufacturer customers and lower per unit
manufacturing costs as a result of increased unit sales.
RESEARCH AND DEVELOPMENT. Research and development expenses increased by 3.0% to
$9.9 million in the nine months ended September 30, 1999 from $9.7 million in
the same period in 1998. Research and development expenses in the nine months
ended September 30, 1999 were net of reimbursements of $486,000 under product
development agreements with the Chief Scientist. Gross research and development
expenses increased as a result of increased expenditures related to development
of new integrated circuit products, partially offset by a decline in software
development activities in the third quarter principally as a result of our sale
of the SoftDVD product line. Research and development expenses decreased as a
percentage of total revenues to 23.9% in the nine months ended September 30,
1999, compared to 32.1% in the same period in 1998.
26
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by 23.1% to $10.2 million in the nine months ended
September 30, 1999 from $8.3 million in the same period in 1998. The increase
was primarily due to increased sales and marketing expenses related to product
market development in China and increased sales commissions resulting from
increased sales volume.
INTEREST AND OTHER INCOME (EXPENSE), NET. Net interest and other income
increased by 76.1% to $1.2 million in the nine months ended September 30, 1999
from $696,000 in the same period in 1998. The increase resulted primarily from a
$732,000 gain realized from the sale of our SoftDVD product line in the second
quarter of 1999.
PROVISION FOR INCOME TAXES. Our estimated effective tax rate was 20% for both
periods.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES. Total revenues decreased by 1.6% to $44.2 million in 1998 from
$44.9 million in 1997. Product sales increased by 2.3% to $33.5 million in 1998
from $32.7 million in 1997. The increase in product sales resulted primarily
from increased unit sales of DVD and Super Video CD products. Software,
licensing and development revenues decreased by 11.9% to $10.8 million in 1998
from $12.2 million in 1997. This decrease was due to a reduction in royalties
from our Softpeg products.
PRODUCT GROSS MARGIN. Product gross margin decreased to 43.1% in 1998, compared
to 51.0% in 1997. The decrease was due to a product sales mix that included an
increased percentage of lower margin products, and higher manufacturing costs
during 1998.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased by 1.7% to
$13.5 million in 1998 from $13.8 million in 1997. Research and development
expenses in 1998 were net of reimbursements in the amounts of $851,000 under
product development agreements with the Chief Scientist. There were no such
reimbursements during 1997. Gross research and development expenses increased as
a result of our planned enhancement to our technology and development
capabilities. Research and development expenses decreased as a percentage of
total revenues to 30.6% in 1998, compared to 30.7% in 1997.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by 3.1% to $11.6 million in 1998 from $11.2 million in 1997.
The increase was primarily due to increased sales and marketing expenses related
to product market development and to support planned revenue growth in China.
INTEREST AND OTHER INCOME (EXPENSE), NET. Net interest and other income
decreased by 14.9% to $1.1 million in 1998 from $1.3 million in 1997. The
decrease resulted primarily from decreased interest income as a result of lower
balances of cash, cash equivalents and short-term investments.
PROVISION FOR INCOME TAXES. Our estimated effective tax rate increased to 20.0%
for 1998 from 18.0% in 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES. Total revenues increased by 1.9% 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 our Dolby Digital audio compression
integrated circuits due to delays in the development of the DVD market. These
decreases were partially offset by unit sales and revenue increases for our
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 GROSS MARGIN. Product gross margin increased 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
27
<PAGE>
products, an increased percentage of products sold directly to OEM customers and
lower manufacturing costs during 1997.
RESEARCH AND DEVELOPMENT. Research and development expenses increased by 54.0%
to $13.8 million in 1997 from $9.0 million in 1996. The increase was a result of
the planned enhancement of our technology and development capabilities in
conjunction with our growth in general and our increased software, licensing and
development revenue. Research and development 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.
Research and development expenses increased as a percentage of total revenues to
30.7% in 1997, compared to 20.3% in 1996.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
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.
MERGER AND RELATED EXPENSES. Total costs and expenses in 1996 included
non-recurring merger and related expenses of $2.2 million. These expenses
related to the acquisition of CompCore in December 1996 and included
professional fees, other direct transaction costs and other merger-related costs
associated with combining the operations of the two companies.
INTEREST AND OTHER INCOME (EXPENSE), 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 our remaining debt during 1996.
PROVISION FOR INCOME TAXES. Our estimated effective tax rate decreased to 18.0%
for 1997 from 22.0% in 1996. The decrease was primarily due to the tax benefits
derived from revenue and net income attributable to our operations in Israel
which receive favorable tax treatment.
28
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following tables present unaudited quarterly data for the eight quarters
ended September 30, 1999, and this data expressed as a percentage of total
revenues for such quarters. In our opinion, this information has been presented
on the same basis as the audited consolidated financial statements appearing
elsewhere in this prospectus, and all necessary adjustments have been included
in the amounts stated below to present fairly the unaudited quarterly results
when read in conjunction with our audited consolidated financial statements.
Results of operations for any quarter are not necessarily indicative of the
results to be expected for the entire fiscal year or for any future period.
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1997 1998 1998 1998 1998 1999 1999 1999
-------- -------- -------- --------- -------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product sales......................... $11,699 $ 8,634 $ 4,610 $ 8,986 $11,235 $ 9,282 $10,927 $14,519
Software, licensing and development... 2,322 2,534 2,465 2,860 2,901 2,610 2,704 1,577
------- ------- ------- ------- ------- ------- ------- -------
Total revenues...................... 14,021 11,168 7,075 11,846 14,136 11,892 13,631 16,096
------- ------- ------- ------- ------- ------- ------- -------
Costs and expenses:
Cost of product sales................. 5,984 4,657 2,940 5,153 6,286 5,093 5,684 7,720
Research and development.............. 3,550 3,234 2,944 3,476 3,894 3,524 3,991 2,430
Selling, general and administrative... 3,052 2,748 2,686 2,877 3,240 3,247 3,302 3,683
Total costs and expenses............ 12,586 10,639 8,570 11,506 13,420 11,864 12,977 13,833
------- ------- ------- ------- ------- ------- ------- -------
Operating income (loss)................. 1,435 529 (1,495) 340 716 28 654 2,263
Interest and other income (expense),
net................................... 314 245 275 176 375 99 878 249
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes....... 1,749 774 (1,220) 516 1,091 127 1,532 2,512
Provision for income taxes.............. 76 155 (244) 103 218 25 306 502
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)....................... $ 1,673 $ 619 $ (976) $ 413 $ 873 $ 102 $ 1,226 $ 2,010
======= ======= ======= ======= ======= ======= ======= =======
Basic net income (loss) per share....... $ 0.17 $ 0.06 $ (0.10) $ 0.04 $ 0.09 $ 0.01 $ 0.12 $ 0.19
======= ======= ======= ======= ======= ======= ======= =======
Diluted net income (loss) per share..... $ 0.15 $ 0.06 $ (0.10) $ 0.04 $ 0.08 $ 0.01 $ 0.10 $ 0.17
======= ======= ======= ======= ======= ======= ======= =======
Shares used to compute basic net income
(loss) per share...................... 9,741 9,856 9,975 10,064 10,154 10,278 10,436 10,681
======= ======= ======= ======= ======= ======= ======= =======
Shares used to compute diluted net
income (loss) per share............... 11,052 10,952 9,975 10,941 11,469 11,776 11,673 12,083
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1997 1998 1998 1998 1998 1999 1999 1999
-------- -------- -------- --------- -------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product sales......................... 83.4% 77.3% 65.2% 75.9% 79.5% 78.1% 80.2% 90.2%
Software, licensing and development... 16.6 22.7 34.8 24.1 20.5 21.9 19.8 9.8
----- ----- ----- ----- ----- ----- ----- -----
Total revenues...................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ----- -----
Costs and expenses:
Cost of product sales................. 42.7 41.7 41.6 43.5 44.5 42.8 41.7 48.0
Research and development.............. 25.3 29.0 41.6 29.3 27.5 29.6 29.3 15.1
Selling, general and administrative... 21.8 24.6 38.0 24.3 22.9 27.3 24.2 22.9
Total costs and expenses............ 89.8 95.3 121.2 97.1 94.9 99.7 95.2 86.0
----- ----- ----- ----- ----- ----- ----- -----
Operating income (loss)................. 10.2 4.7 (21.2) 2.9 5.1 0.3 4.8 14.0
Interest and other income (expense),
net................................... 2.3 2.2 3.9 1.5 2.7 0.8 6.4 1.6
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before income taxes....... 12.5 6.9 (17.3) 4.4 7.8 1.1 11.2 15.6
Provision for income taxes.............. 0.6 1.4 (3.5) 0.9 1.6 0.2 2.2 3.1
----- ----- ----- ----- ----- ----- ----- -----
Diluted net income (loss)............... 11.9% 5.5% (13.8)% 3.5% 6.2% 0.9% 9.0% 12.5%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
29
<PAGE>
Our quarterly operating results have been affected by seasonal factors. Original
equipment manufacturers that purchase our integrated circuits for incorporation
into consumer products typically increase their purchases during the year-end
holiday period. As a result, our revenues have historically peaked in the fourth
quarter of each year and declined in the first quarter of the subsequent year.
We expect these seasonal fluctuations to continue for the foreseeable future.
Our operating results in the quarter ended June 30, 1998 were impacted by delays
in the introduction of Microsoft's Windows98 operating system which resulted in
delays in the shipment of PCs and related products. These delays adversely
affected sales of our PC video products and our SoftDVD product line.
Our product sales increased sequentially during each quarter of 1999, driven
principally by increased unit sales of our DVD decoder products. Software,
licensing and development revenues remained relatively constant during the first
two quarters of 1999 but decreased substantially in the quarter ended
September 30, 1999, principally as a result of a decline in software revenues
following the sale of our SoftDVD product line in June 1999.
Our quarterly operating results are subject to fluctuation due to a variety of
factors, some of which are outside of our control. Accordingly, you should not
rely on our operating results for any past quarter as an indication of future
performance.
LIQUIDITY AND CAPITAL RESOURCES
During 1998 and 1999, our capital requirements have been satisfied primarily by
cash flows from operations. At September 30, 1999, we had $4.9 million of cash
and cash equivalents, $13.6 million of short-term investments and $37.4 million
of working capital.
Our operating activities used cash of $3.1 million during the nine months ended
September 30, 1999, primarily due to an increase in accounts receivable, a
decrease in accounts payable and an increase in inventory, partially offset by
growth in accrued expenses and other liabilities and the non-cash impact of
depreciation and amortization. The increase in accounts receivable was due to
the increase in revenues during the nine month period. Inventories increased in
order to support the anticipated demand of our product in the second half of
1999.
Cash used in investing activities was $2.2 million during the nine months ended
September 30, 1999. Capital equipment expenditures accounted for $1.1 million of
the cash used while the purchase of short-term investments used $1.2 million.
Cash provided by financing activities was $2.0 million for the nine months ended
September 30, 1999 and consisted of proceeds from the issuance of common stock
under our incentive stock option and employee stock purchase plans.
We believe that the net proceeds from this offering together with our current
balances of cash, cash equivalents and short-term investments, and anticipated
cash flow from operations, will satisfy our anticipated working capital and
capital expenditure requirements at least through 2000. Nonetheless, our future
capital requirements may vary materially from those now planned and will depend
on many factors including, but not limited to:
- the levels at which we maintain inventory and accounts receivable;
- the market acceptance of our products;
- the levels of promotion and advertising required to launch our new products
or to enter markets and attain a competitive position in the marketplace;
- our business, product, capital expenditure and research and development
plans and technology roadmap;
- volume pricing concessions;
- capital improvements to new and existing facilities;
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- technological advances;
- the response of competitors to our products; and
- our relationships with our suppliers and customers.
In addition, we may require an increase in the level of working capital to
accommodate planned growth, hiring and infrastructure needs. Additional capital
may also be required for consummation of any acquisitions of businesses,
products or technologies.
To the extent that the funds generated from this offering, together with
existing resources and cash generated from operations, are insufficient to fund
our future activities, we may need to raise additional funds through public or
private financings or borrowings. If additional funds are raised through the
issuance of debt securities, these securities could have rights, preferences and
privileges senior to holders of common stock, and the terms of this debt could
impose restrictions on our operations. The sale of additional equity or
convertible debt securities could result in additional dilution to our
stockholders. We cannot be certain that additional financing will be available
in amounts or on terms acceptable to us, if at all. If we are unable to obtain
this additional financing, we may be required to reduce the scope of our planned
product development and sales and marketing efforts, which could harm our
business, financial condition and operating results.
STOCK OPTION REPRICING
In August 1998, our employees were offered the opportunity to reprice their
options. Repricing was conditional on employees accepting the restart of their
vesting schedule. The vesting schedule will revert back to the original schedule
if we meet significant performance goals. Substantially all options with an
exercise price in excess of $5.94 were cancelled and replaced with new options
having an exercise price of $5.94, the market price on the date that the
employees accepted the repricing. Options to purchase a total of 924,164 shares
were repriced.
MARKET RISK DISCLOSURE
We are exposed to financial market risks including changes in interest rates and
foreign currency exchange rates.
The fair value of our investment portfolio or related income would not be
significantly impacted by either a 10% increase or decrease in interest rates
due mainly to the short term nature of the major portion of our investment
portfolio.
A majority of our revenue and capital spending is transacted in U.S. dollars,
although a portion of the cost of our operations, relating mainly to our
personnel and facilities in Israel, is incurred in New Israeli Shekels. We have
not engaged in hedging transactions to reduce our exposure to fluctuations that
may arise from changes in foreign exchange rates. Based on our overall currency
rate exposure at September 30, 1999 a near-term 10% appreciation or depreciation
of the New Israeli Shekel would have an immaterial affect on our financial
condition.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two-digit entries in date code fields. Beginning in the year 2000,
these date code fields will need to accept four-digit entries to distinguish
21st century dates from 20th century dates. Computer programs or hardware that
have date-sensitive software or embedded chips and have not been upgraded to
comply with these requirements may recognize a date using "00" as the year 1900
rather that the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities. The risk for us exists in three areas:
- systems used by us to run our business;
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- embedded software and software products sold to our customers; and
- the year 2000 readiness of our key suppliers and customers.
GENERAL READINESS ASSESSMENT
The year 2000 problem can affect the computers, software and other equipment
that we use in our operations. As a result, we are conducting a comprehensive
inventory and evaluation of the systems used in running our business. To date,
we have not identified any potential year 2000 issues that would have a material
impact on our operations. This portion of the investigation is complete. To
date, we have not obtained verification or validation from any independent third
parties of our processes to assess and correct any of our year 2000 problems or
the costs associated with these activities.
ASSESSMENT OF OUR PRODUCTS
We have assessed the ability of our products to operate properly in the
year 2000. We believe that our current products are year 2000 compliant.
Accordingly, we do not believe that the year 2000 issue presents a material
exposure as it relates to our products. However, our customers incorporate our
products into a wide variety of end-user products. Each of our customers'
products involve different combinations of components supplied by third parties.
We cannot evaluate whether all of these end-user products are year 2000
compliant. We may face claims based on year 2000 problems in other companies'
products or based on issues arising from the integration of multiple products
within the overall product. Although no year 2000 claims have been made against
us, we may in the future be required to defend our products against legal
proceedings which could be expensive, regardless of the merits of these claims.
ASSESSMENT OF INTERNAL INFRASTRUCTURE
We believe that we have identified most of the major computers, software
applications and related equipment used in connection with our internal
operations that need to be evaluated to determine if they must be modified,
upgraded or replaced to minimize the possibility of a material disruption to our
business. Based on a review of these computer systems, we have determined that
our computer systems and applications are compliant with the year 2000 format.
SYSTEMS OTHER THAN INFORMATION TECHNOLOGY SYSTEMS
In addition to computers and related systems, the operation of office and
facilities equipment, such as fax machines, telephone switches, security systems
and other common devices, may be affected by the year 2000 problem. We have
assessed the potential effect of the year 2000 problem on our office and
facilities equipment and have determined that no problems exist that cannot be
remediated by the replacement of relatively inexpensive equipment.
COSTS OF REMEDIATION
We estimate the total cost to us of completing any required modifications,
upgrades or replacements of our internal systems will not exceed $50,000, most
of which we have already incurred in 1999.
SUPPLIERS AND CUSTOMERS
As part of our review of the year 2000 problem, we have contacted and are
continuing to contact critical suppliers to identify and, to the extent
possible, resolve issues involving the year 2000 problem. We have received
responses from all of our critical suppliers. None of these suppliers has
indicated that they will not resolve any significant year 2000 problems. We are
also contacting our key customers in order to ascertain their year 2000
compliance status. Failure of our customers to be year 2000 ready may result in
lost sales and reduced revenue or diminish the ability of customers to pay on a
timely basis. We have contacted all of our key customers, but have not received
responses from some of these customers. We have limited or no control over the
actions of these third parties. Thus, while we expect that we will be
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able to resolve any significant year 2000 problems with these third parties,
they may not resolve any or all year 2000 problems before the occurrence of a
material disruption to the operation of our business. Any failure on the part of
these third parties to timely resolve year 2000 problems with their systems in a
timely manner could harm our business.
MOST LIKELY CONSEQUENCES OF YEAR 2000 PROBLEMS
We believe that it is not possible to determine with complete certainty that all
year 2000 problems affecting us have been identified or corrected. The number of
devices and systems that could be affected and the interactions among these
devices and systems are too numerous to address. In addition, no one can
accurately predict whether failures will occur as a result of the year 2000
problem or the severity, timing, duration or financial consequences of these
potential failures. As a result, we believe that the following consequences are
possible:
- a significant number of operational inconveniences and inefficiencies for
us, our manufacturers and our customers that will divert management's time
and attention and financial and human resources from ordinary business
activities;
- possible business disputes and claims, including claims under product
warranty, due to year 2000 problems experienced by our original equipment
manufacturer customers or their end-user customers and incorrectly
attributed to our products, which we believe will be resolved in the
ordinary course of business; and
- a few serious business disputes alleging that we failed to comply with the
terms of contracts or industry standards of performance, some of which could
result in litigation or contract termination.
CONTINGENCY PLANS
Since we have not yet identified any significant non-compliance problems we
currently do not have contingency plans in place to address situations that may
result if we are unable to achieve year 2000 readiness of our critical
operations. However, such a plan is likely to include the accelerated
replacement of affected equipment or software which could harm our financial
results and operations.
DISCLAIMER
The discussion of our efforts and expectations relating to year 2000 compliance
includes forward-looking statements. Our ability to achieve year 2000
compliance, and the level of incremental costs associated therewith, could be
adversely affected by, among other things, the availability and cost of contract
personnel and external resources, third-party suppliers' ability to modify
proprietary software and unanticipated problems not identified in the ongoing
compliance review.
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BUSINESS
INTRODUCTION
We develop and market integrated circuits, integrated circuit cores and embedded
software used by original equipment manufacturers, or OEMs, in digital audio and
video products for commercial and consumer markets. We also provide complete,
copy-ready system reference designs based on our technology that help our
customers produce commercial and consumer products more quickly and cost-
effectively. Our integrated circuits are used in a variety of products,
including digital versatile disc, or DVD, players, Super Video CD players,
digital speakers and audio systems, filmless digital cameras, and professional
and consumer video editing systems.
INDUSTRY BACKGROUND
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 audio and video 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 audio
and video signals through digital signal processing and offer a number of
fundamental advantages over analog technologies. Through complex digital signal
processing operations, digital audio and video signals may be compressed,
providing significant storage and transmission efficiencies. They also may be
filtered, allowing for noise reduction, and they may be transmitted and
reproduced without perceptible image or sound degradation. Digital formats also
provide users with additional benefits, including random access to data,
superior editing capabilities and enhanced security features such as protection
against unauthorized copying and controlled and secure access.
One of the most significant barriers to the widespread adoption 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 a two-hour movie in uncompressed digital
form would require approximately 200 video CDs. Through digital compression
techniques a substantial number of the redundancies inherent in audio and video
data can be identified and eliminated, significantly reducing the overall amount
of data which needs to be retained. Compression techniques introduced in the
early 1990s allowed the same two-hour movie which required 200 video CDs to be
compressed and stored on only two video CDs with video resolution comparable to
that of a standard VHS tape. More recent techniques allow the storage of a
full-length movie of more than three hours on a single DVD, with substantially
improved audio and video quality and the incorporation of additional data, such
as additional languages, scenes and director and actor commentary. 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. Digital audio compression allows
efficient storage and delivery of multi-channel audio, making possible high-
quality special effects such as multi-channel surround sound, virtual surround
sound and wireless audio delivery via two speakers or headphones. In the field
of still photography, digital compression allows dozens or hundreds of digital
pictures to be stored on a single memory card, depending on the resolution
desired.
To drive the implementation and speed the adoption of products based on digital
formats, industry participants organized committees to define international
compression standards. The principal standards in use today include:
- The Joint Photographic Experts Group, or JPEG, standard for the high quality
compression of still images and the real-time, low-cost compression and
decompression of moving images;
- The MPEG 1 standard, adopted by the Moving Pictures Experts Group, or MPEG,
for the compression of both audio and video data at the high compression
ratios necessary for the limited storage capacity of the CD-ROM format;
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- The MPEG 2 standard, subsequently adopted by the Motion Pictures Expert
Group, for the compression of both audio and video data, designed to provide
improved quality in broadcast and video playback applications; and
- Dolby AC-3, also known as Dolby Digital, developed by Dolby Laboratories, an
industry standard for the compression of audio for use in multi-channel
digital surround sound systems.
These industry standard techniques have enabled the dramatic growth in a variety
of digital multimedia markets, including:
- DVD PLAYERS. DVD players use MPEG 2 video compression and Dolby Digital
audio technology to provide significantly higher quality playback than is
possible with VCR or video CD technology. According to Understanding &
Solutions, a market research firm, sales of DVD players are expected to grow
from 2.1 million units in 1998 to 13.6 million units in 2002, a compounded
annual growth rate of 59.5%.
- DIGITAL AUDIO SYSTEMS. Dolby Digital and other audio compression techniques
are used in multi-channel surround sound products including movie theater
sound systems, audio/video receivers and digital speakers. According to
Forward Concepts, a market research firm, the demand for digital audio
systems is expected to grow from 1.7 million units in 1998 to 63.8 million
units in 2002, a compounded annual growth rate of 147.5%.
- FILMLESS DIGITAL CAMERAS. Filmless digital cameras use JPEG compression
technology to capture high resolution images that can be viewed, edited and
stored on a computer system and transmitted over telephone lines and
computer networks. According to Cahners In-Stat Group, a market research
firm, sales of digital cameras are expected to grow from 3.8 million units
in 1998 to 29.0 million units in 2003, a compounded annual growth rate of
50.1%.
- PC VIDEO SYSTEMS. JPEG-based PC video systems are used to capture and "cut
and paste" video sequences and add special audio and video effects.
According to International Data Corporation, sales of video editing systems
are expected to grow from 964,000 units in 1998 to 9.2 million units in
2002, a compounded annual growth rate of 75.8%.
Additional products and markets are developing based on these established
compression standards as well as emerging compression technologies such as MLP,
a new standard for DVD audio, and MP3, a compression standard for the download
of audio recordings from the Internet.
These established and emerging compression standards specify data formats in
which compressed data must be presented in order to enable products from
different vendors to interact and permit the capture, transmission, storage and
display of audio and video data in digital format. These standards do not
specify the compression 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 can differentiate their products on the basis of the quality of
their compression solution.
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
audio and video systems and products to address high volume consumer
applications. In addition, product manufacturers are facing competitive pressure
to introduce their products more rapidly. To address these issues, OEMs seek to
integrate multiple functions on individual chips in order to reduce their costs,
speed time-to-market and produce smaller products with reduced power
consumption. They also seek solutions that can be easily integrated
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into their commercial and consumer products. The current challenge to
manufacturers of compression integrated circuits is, therefore, to provide
product manufacturers with high-quality, cost-effective, standards-based
solutions that deliver flexible control, image enhancement, audio effects and
other functions in addition to high quality compression solutions.
THE ZORAN SOLUTION
We provide feature-rich, cost-effective, standards-based solutions for a broad
range of digital audio and video applications. We were a pioneer in the
development of high performance digital signal processor products, and have
developed expertise in digital signal processing, integrated circuit design,
mathematical algorithms and software development, as well as proprietary digital
signal processing, audio and video compression technologies. We apply our
multi-disciplinary expertise and proprietary technologies to the development of
fully-integrated solutions for high-growth multimedia markets. The key elements
of our solution are:
STANDARDS-PLUS METHODOLOGY. We have leveraged our broad multi-disciplinary
expertise and proprietary digital signal processing and compression technologies
to develop what we refer to as "standards-plus" solutions. We have enabled
OEMs to improve image and sound quality and deliver superior products to end
users by adding more features around compression standards, such as more
efficient use of memory, processing and communication resources, as well as
audio and image enhancement algorithms. We have also provided OEMs the ability
to include OEM-programmable effects, as well as variable compression ratios for
video. These "standards-plus" features allow our customers to differentiate
their products from those of their competitors.
EXPANDABLE AND PROGRAMMABLE ARCHITECTURE. We design our integrated circuits to
enable easy adaptation for a broad range of specific applications. We can vary
the architecture of our chips by adding or deleting modules, and we can also
modify the software embedded in the chips themselves to address specific
applications. We also license ready-to manufacture "cores"--building blocks of
integrated circuits--that can be integrated into our customers' chips. Combined
with the enhanced functionality of our "standards-plus" technology, our
expandable and programmable architecture facilitates product design, upgrades
and customization, substantially accelerating our customers' time to market with
differentiated products.
INTEGRATED SYSTEM SOLUTIONS. We help our customers meet their total system
requirements by providing integrated products that combine hardware and software
to address required system functions and features on a single integrated circuit
or chip set, reducing the number of integrated circuits, and in some cases
providing a complete solution on a single chip. As a result, our customers'
total system cost can be reduced and they can concentrate on differentiating
their products from those of their competitors. For example, we recently
introduced the Camera On A CHip, or COACH, which includes most of the
electronics of a filmless digital camera. By delivering a camera on a chip, we
enable our customers to reduce the costs of their products and focus on
providing products that meet the needs of their end users.
COST-EFFECTIVE PRODUCTS. We focus on reducing the feature size, power
requirements and number of integrated circuits necessary to perform required
system functions, including compression functions. This reduces our customers'
manufacturing costs for their products which incorporate our integrated
circuits, and also reduces the operating costs for these products, enabling the
use of our products in a broader range of high volume applications. The modular
nature of our architecture reduces our new product development costs, and
enables our design engineers to meet our customers' new product specification
and cost parameters.
COPY-READY SYSTEM REFERENCE DESIGNS. We provide our customers with a broad range
of engineering reference boards and products complete with device driver
software, embedded software and detailed schematics. These products
substantially shorten our customers' product design time.
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STRATEGY
We provide cost-effective, high-performance digital audio and video solutions
addressing selected high-growth applications enabled by compression in evolving
multimedia markets. Key elements of our strategy include:
FOCUS ON HIGH-GROWTH APPLICATIONS. Our strategy is to focus on providing digital
audio and video solutions for emerging high-growth consumer electronics, PC and
communications applications. Our current focus markets include DVD players and
Super Video CD players, digital speakers and audio systems, filmless digital
cameras and professional and consumer video editing systems.
LEVERAGE EXISTING TECHNOLOGY AND EXPERTISE TO RELATED APPLICATIONS. We intend to
continue to identify those markets that we believe have the highest growth
potential for our products and to actively pursue those markets. Our proprietary
digital signal processing and compression technologies can be used to serve
emerging markets for digital audio and video. Potential markets include Internet
audio and video appliances, digital television and television set-top boxes, as
well as personal digital audio and video devices.
FURTHER PENETRATE KEY INTERNATIONAL MARKETS. During 1998, we opened an office in
Shenzhen, China, and have begun volume shipments of our integrated circuits to
that market. We believe that emerging markets, such as China, Taiwan and Korea
present significant market opportunities for consumer electronic products, and
we intend to further extend our international operations to address these
emerging markets.
EXTEND TECHNOLOGICAL LEADERSHIP. Our years of experience in the fields of
digital signal processing, integrated circuit design, algorithms and software
development have enabled us to become a leader in the development of digital
audio and video solutions enabled by compression. Using our multi-disciplinary
expertise, we have developed new technologies for compression of digital audio
and video. For example, we believe that our proprietary bit rate control
technology has helped us provide reliable and inexpensive JPEG-based video
compression and our proprietary Virtual Multi-Channel Digital, or VMD,
technology enables high-quality surround-sound effects from two low-cost audio
speakers, rather than the four or five speakers required by other technologies.
We intend to continue to invest in research and development in order to maintain
our technological leadership.
EXPAND STRATEGIC PARTNERSHIPS. We work closely in the product development
process with leading manufacturers of products that incorporate our integrated
circuits. We also work closely with key customers and provide them early access
to our technologies. Potential products are designed to meet customer-driven
product requirements defined jointly by us and our partners with the partner
providing technological input and, in selected cases, a portion of the
development funding. This strategy has enabled us 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, our strategic partners also provide sales and
marketing support. We have also established long-term relationships with
strategic partners that provide manufacturing capacity and will seek to develop
additional strategic relationships with manufacturers.
MARKETS AND APPLICATIONS
Our products are currently used in a variety of consumer multimedia and PC
applications.
VIDEO PLAYBACK SYSTEMS
Currently, three types of digital video playback systems are available for
consumer video applications: video CD players, Super Video CD players and DVD
players.
Video CD players are essentially CD audio players with MPEG 1 decoders and a
video output. Video CD players offer video playback of near-VCR quality and
two-channel stereo audio playback.
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Compression enables 60 to 70 minutes of video to be stored on a single CD. Video
CD players can also play karaoke titles and are particularly popular in China,
which we believe will continue to be the primary market for these products. We
formerly sold MPEG 1-based products to manufacturers of stand-alone video CD
players but are no longer selling these products for this market.
In 1998, the Chinese government adopted the Super Video CD standard. By
utilizing MPEG 2 compression technology as well as graphics, Super Video CD
offers substantially higher audio and video quality than is possible with a
video CD player. The Super Video CD standard is replacing video CD in China.
DVD players, the latest generation of video playback systems, use MPEG 2 video
compression and Dolby Digital or similar audio technology to provide
significantly higher quality playback than is possible with VCRs, Video CD or
Super Video CD players. DVD players are sold as stand-alone products and are
also included in place of CD-ROM drives in some newer PCs, where they are
referred to as DVD-ROMs. DVD-ROMs are also sold as upgrade products. The recent
growth in the DVD market is demonstrated by the rapidly growing sales of DVD
players, the increasing number of models and manufacturers, and the increasing
number of DVD titles available for purchase and rent.
DIGITAL AUDIO SYSTEMS
Digital audio facilitates enhanced audio playback with features such as
multi-channel surround sound and virtual surround sound utilizing two channel
technology. Many standards have emerged for the digital compression of audio.
Current digital audio compression standards in use include Dolby Digital, DTS,
MLP and MP3. Dolby Digital and DTS are competing standards of audio compression
for use in multi-channel digital surround sound systems in movie theaters and at
home. MLP was developed for audio compression in DVD audio. MP3 is one of the
compression standards recognized for the download of audio recordings over the
Internet. Our audio integrated circuits incorporate all of these standards. The
principal products using compressed digital audio in the consumer market are DVD
players, PCs incorporating DVD-ROMs, digital speakers and portable MP3 players.
FILMLESS DIGITAL CAMERAS
Filmless digital cameras allow the capture of high resolution images, the
viewing, editing and storage of such images on a computer system and their
transmission over telephone lines and computer networks. High quality copies of
these images can be printed using color printers. In addition, digital cameras
can be connected directly to a PC for downloading of pictures and to a
television for displaying pictures. The original digital cameras were developed
for the professional market and currently sell at prices of $3,000 to $10,000.
As technology has advanced and manufacturing costs have decreased, digital
cameras for the consumer market have been introduced in the $100 to $1,000 price
range. Compression technology has also enabled the development of digital video
security cameras and low cost digital video cameras for use with PCs.
PC VIDEO SYSTEMS
Historically, professional video editing systems have been comprised of
expensive pieces of analog audio and video equipment. Compression technology
allows video images to be stored in a computer's memory in sufficient volume to
enable capture and "cut and paste" editing to be performed through random access
to stored images. As the cost of compression technology has declined, a number
of manufacturers have designed low cost digital video capture and editing
systems that run on PCs, creating a new category of users in the corporate,
education and government markets.
The availability of universal serial bus, or 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. We believe that enhanced support of the USB port by the
Windows98 operating system and the success of the USB equipped Apple iMac
computer will encourage the development of products of this type.
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OTHER APPLICATIONS
Other existing and potential applications for our audio and video compression
technologies include Internet audio and video appliances, digital television and
television set-top boxes, as well as personal digital audio and video devices.
TECHNOLOGY
IMAGE AND VIDEO TECHNOLOGY
THE JPEG STANDARD. In 1991, the Joint Photographic Experts Group, or JPEG,
Committee of the International Standards Organization 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. 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-1 compression is similar to VHS quality.
ZORAN JPEG TECHNOLOGY. Our JPEG technology incorporates a proprietary bit rate
control algorithm that enables our 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. An image with large
amounts of visual detail will generate a larger data file than that generated
from an image with less detail. Performance of many video applications is
hampered by variability in the size of the compressed images in a video
sequence, which can result in inefficient use of available memory, bus speed or
communication channel capacity or even the loss of images. Our bit rate control
is a "standards-plus" solution that uses real-time digital signal processing
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. Our bit
rate control has been incorporated in our 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 our 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. We implement
these functions in a single integrated circuit while we believe most other
manufacturers either offer fewer functions or require multiple chips, resulting
in higher manufacturing costs and greater power consumption.
THE MPEG STANDARDS. In 1991, the Moving Pictures Expert Group, or MPEG,
Committee of the International Standards Organization completed a technical
specification for a standard to compress moving audio and video 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 audio compression ratios of
six-to-one and video compression ratios of over 100-to-1. MPEG 1 is particularly
suitable for low-cost CD-ROM applications due to its low-cost implementation.
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In 1993, the MPEG 2 video committee completed a technical specification to
address the more stringent requirements of the broadcast industry. MPEG 2
provides more sophisticated prediction techniques, enabling a compression
solution to comprehend video as interlaced fields of data, rather than
individual frames. MPEG 2 also allows for operation at higher resolution and at
higher bit rates than MPEG 1, resulting in improved image quality for high
motion, high detail video. MPEG 2 typically achieves compression ratios of
50-to-1. 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. Beginning in 1997, we established ourselves as a leading
provider of MPEG 2 technology for DVD and Super Video CD applications. We
introduced the first DVD decoder device integrating digital video with
multi-channel digital audio and programmable audio effects for use in DVD
players. We also introduced new MPEG compression chip cores that can be
integrated into chips manufactured by OEM customers, enabling these customers to
reduce the cost of custom chip design and accelerate the time-to-market of their
products.
AUDIO TECHNOLOGY
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. It is currently used in movie
theaters comprising over 24,000 screens worldwide and is also used in home
theater and computer multimedia applications. Digital compression of audio data
allows the storage of full quality multi-channel audio playback in the limited
space allocated for audio in video-oriented formats. It also facilitates the
seamless integration of sound with compressed video. The Dolby Digital audio
compression standard is currently the principal audio compression technique used
in DVD players. Dolby Digital has also been adopted as a standard for use in
high-definition television and digital cable systems.
OTHER AUDIO STANDARDS. Other digital audio compression standards currently in
use include DTS, an audio compression standard that competes with Dolby Digital,
MLP, a compression standard for DVD audio, and MP3, used for the download of
audio recordings from the Internet.
ZORAN AUDIO TECHNOLOGY. Working closely with Dolby Laboratories, we have
developed a programmable audio digital signal processing engine with an
architecture optimized for Dolby Digital and other demanding audio applications
and we were the first to develop a single-chip solution for Dolby Digital
decoding. Zoran's Vaddis DVD decoders and audio processors now incorporate this
engine to allow systems manufacturers to replace system components with software
modules, differentiate their products from their competition, use our
SILICONSOFTWARE library of advanced audio algorithms, and reduce system costs
and time to market. In addition to Dolby Digital, our DVD decoders and audio
processors implement all principal audio compression standards, including DTS,
MLP and MP3. Our integrated circuits also include additional functions such as
Virtual Multi-Channel Digital, surround sound for headphones, High-Definition
CD, karaoke processing and speaker equalization.
PRODUCTS
Our multimedia product line consists of four principal product families:
- DVD/Super Video CD--audio and video decompression products based on MPEG,
Dolby Digital and DTS;
- Digital Audio--audio decompression products for use in products using MPEG,
Dolby Digital, DTS, MLP, MP3 and other audio technologies;
- Filmless Digital Cameras--video compression and decompression products based
on JPEG technology; and
- PC Video--video compression and decompression products based on JPEG
technology.
40
<PAGE>
The following table lists our principal multimedia integrated circuits currently
in production, including the months in which initial production units were first
made available to customers:
<TABLE>
<CAPTION>
<C> <S> <C> <C>
INITIAL
PRODUCT COMMERCIAL
FAMILY PRODUCTS SHIPMENT PRINCIPAL APPLICATIONS
Vaddis DVD decoder (ZR36700 December 1997
Vaddis III Integrated DVD decoder August 1998
(ZR36710) DVD players
DVD and Vaddis IV Integrated DVD decoder June 1999
Super (ZR36730)
Video CD
SupraAV I Super Video CD decoder August 1998
(ZR36205)
SupraAV II Super Video CD decoder September 1998 Super Video CD players
(ZR36215)
6-channel Dolby Digital decoder December 1994 Home theater
(ZR38500)
Digital Programmable Digital audio processor December 1998 Digital speakers for home theater,
Audio (ZR38601) computers and gaming consoles
Multi-standard Programmable Digital December 1998 Audio/video receivers, 3D headphones
audio processor (ZR38650)
Filmless Filmless digital camera processor-- February 1999
Digital Cameras COACH (ZR36400)
Filmless digital camera processor-- September 1999 Filmless digital cameras, security
COACH-XL (ZR36410)
JPEG codec (ZR36050) April 1993 PC video editing, office automation
Integrated converter (ZR36016)* February 1995 Color scanners and printers
PC Video JPEG codec (ZR36060) February 1997 PC video editing, security
JPEG PCI multimedia controller September 1997 PC video editing
(ZR36067)
PCI multimedia controller (ZR36125) March 1997 PC video capture
</TABLE>
* Designed and manufactured by a third party and sold by us under our name
pursuant to a non-exclusive license. See "Proprietary Rights and Licenses."
41
<PAGE>
DVD/SUPER VIDEO CD PRODUCTS. In 1997, we introduced the first member of our
Vaddis line of DVD decoders, the Vaddis I. During 1998, we introduced the Vaddis
II and Vaddis III, and in 1999 we introduced the Vaddis IV. Our Vaddis decoders
perform all the audio and video decoding and display requirements of the DVD
specification, including MPEG 2 audio and video decoding, Dolby Digital, DTS and
MLP audio decoding, on-screen display, decryption required for copyright
protection and presentation of graphic information. The Vaddis 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 Vaddis. The Vaddis IV incorporates a more powerful audio digital signal
processor that enables the support of advanced audio algorithms like MPEG 5.1,
DTS and audio DVD, which are needed in today's DVD player systems. Vaddis
decoders are being used in DVD players manufactured by Sharp, Toshiba and
others. The SupraAV is our single chip solution for the Super Video CD market.
This single chip performs all of the audio and video decoding required by the
Super Video CD standard and also allows additional features, like karaoke, to be
implemented without any additional hardware. We provide a full reference design
of a Super Video CD player, based on the SupraAV ZR36215, that helps our
customers accelerate their time to market for their players.
DIGITAL AUDIO PRODUCTS. The ZR38601, a single-chip digital audio processor
designed to support the growing PC and home theater digital speaker market,
takes advantage of most of the advanced audio algorithms included in our
SILICONSOFTWARE library. Its eight channel output architecture supports the
latest home theater applications, including Dolby Surround EX 6.1 channel sound.
The ZR38601's ability to accept six individual channels of audio input also
makes it the ideal processor for today's four channel Direct Sound computer
games. The ZR38650, a true multi-standard digital audio processor, takes
advantage of our complete SILICONSOFTWARE library. It is designed to support the
large mid and low range audio/video receiver market, while providing features
previously available only on more expensive models.
FILMLESS DIGITAL CAMERA PRODUCTS. Our JPEG technology is used in filmless
digital cameras. In September 1999, we introduced the Camera On A CHip, or
COACH--an integrated system on a chip solution that includes most of the
electronics of a filmless digital camera. The COACH can be connected directly to
a high-resolution (up to 4 mega pixel) CCD or CMOS sensor, process the video
information in real time, compress the captured image in real time to a Flash
memory, interface an LCD or micro display and interface to all types of flash
memory. Among the unique capabilities of the COACH is the ability to transfer in
real-time, over a USB bus, high quality video to the PC and thus serve also as a
PC video camera. The COACH also allows for direct connection to a printer,
including color correction and special effects, for the non-PC consumer
environment. The COACH is supplemented by a full filmless digital camera
reference design, "Cam ON," shortening the time to market for COACH customers.
PC VIDEO PRODUCTS. Our ZR36050 and ZR36060 codecs are compression/decompression
devices used for real time encoding and decoding of JPEG video for editing
applications. They are fully compliant with JPEG standards. The ZR36050 and
ZR36060 utilize our proprietary bit rate control technology for high quality
video capture. The ZR36050 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 and ZR36060 can be installed in a chipset that
includes the ZR36067 motion controller for PCI board implementation or
pre/post-processing devices such as the ZR36016 integrated color
space/raster-to-block converter. The ZR36060 integrates the functions of the
ZR36050, ZR36015 and an additional SRAM device in a single chip. The ZR36067 is
a PCI motion JPEG controller targeting consumer-priced but professional quality
desktop PCI video editing systems.
INTEGRATED CIRCUIT CORES. We offer multimedia integrated circuit cores which can
be incorporated into our customers' chips. For example, our latest generation
programmable audio digital signal processor engine, the ZR39000, offers extended
processing power and software compatibility with all previous generations of our
digital audio processors, thus allowing it to use our extensive SILICONSOFTWARE
library. The ZR39000
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<PAGE>
is designed to be integrated into DVD, television set-top box, home network, and
Internet appliance system-on-a-chip applications. Our video decoder core, the
ZR4VD1, can be used to reformat and process video from television-type analog
format to digital format, enabling video processing by PCs, digital televisions
and other video systems. Our video encoder core, the ZR4VE2, enables the
conversion of various digital video formats for display on televisions and PC
monitors, and can be integrated into graphics integrated circuits, digital
televisions, television set-top boxes and digital cameras.
CUSTOMERS
The following table lists representative customers, as well as other OEMs who
purchase our products through our distributors. Each of these customers and
OEMs has purchased, directly or indirectly, at least $100,000 of our products
from January 1, 1999 through September 30, 1999:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
PRODUCT FAMILY CUSTOMERS OTHER OEMS
DVD/Super Video CD Cet Optibase Quisheng
Fly Ring Digital Technology Marketa Semi-conductor Sharp
Fujifilm Xiaxin Toshiba
Holy Stone Enterprise
Digital Audio Acoustic Accessories Dolby Laboratories Hitachi
Altec Lansing Fujifilm Marantz
Ameda Technology Gallant Computer
Antex Minton Optical Industry
Boston Acoustics Vtech Communications
Creative Technology Xiaxin
PC Video Alcon Electronics Matrox Avid
Avermedia Technologies Newer Technology Lucent Technologies
Eastman Kodak Optibase Silicon Graphics
Edge Electronics Pinnacle Systems Sony
Flash Electronics Topas Electronic
Fujifilm Unique Technologies
</TABLE>
Fujifilm purchases our products primarily as a distributor and resells these
products, in many cases under its own trade name. Fujifilm acts as our primary
distributor in Japan and accounts for most of our product sales in Japan.
During 1998, sales to Fujifilm accounted for 22.7% of our total revenues,
including 26.5% of product sales, and sales to Pinnacle accounted for 14.3% of
revenues, including 18.8% of product sales. During the nine months ended
September 30, 1999, sales to Fujifilm accounted for approximately 41.5% of our
total revenues, including 47.2% of product sales, and sales to Pinnacle
accounted for approximately 7.9% of our total revenues, including 9.5% of
product sales. During 1998, our four largest customers accounted for
approximately 45.7% of our revenues, and during the nine months ended September
30, 1999, our four largest customers accounted for approximately 61.0% of our
revenues.
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<PAGE>
RESEARCH AND DEVELOPMENT
We believe that our future success depends on our ability to continue to enhance
our existing products and to develop new products that maintain technological
competitiveness and compliance with new standards in rapidly evolving
consumer-oriented digital audio and video markets. We attempt to leverage our
expertise in the fields of digital signal processing, integrated circuit design,
algorithms and software development to maintain our position as a leader in the
development of digital audio and video solutions enabled by compression.
Accordingly, we devote a significant portion of our resources to maintaining and
upgrading our products to reduce integrated circuit cost, feature size, power
consumption and the number of integrated circuits required to perform
compression and other functions necessary for the evolving digital audio and
video application markets. In addition, we seek to design integrated circuits
and cores, as well as copy-ready reference designs which can reduce the time
needed by manufacturers to integrate our products into their own products.
We have historically generated a significant percentage of our total revenues
from development contracts with our strategic partners. These development
contracts provide that we will receive payments upon reaching certain
development milestones and that we will retain ownership of the intellectual
property developed. Development contracts have enabled us to fund portions of
our product development efforts, to respond to the feature requirements of our
customers, to accelerate the incorporation of our products into our customers'
products and to accelerate the time-to-market of our customers' products. We are
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
has the right to sell resulting products in Japan under its distribution
agreement with us. Fujifilm also has the right to manufacture a portion of our
requirements for which it has contributed significant funding.
We are a party to research and development agreements with the Chief Scientist
in Israel's Ministry of Industry and Trade and the Israel-United States
Binational Industrial Research and Development Foundation. These organizations
fund up to 50% of incurred project costs for approved projects up to contract
maximums. The agreements require us to use our best efforts to achieve specified
results and to pay royalties at rates of 3% 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 in 1996
were $182,000 and in 1998 were $851,000. No grants were earned in 1997. We
earned a grant of $486,000 in the nine months ended September 30, 1999. 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. We are currently engaged in the development of improvements to our
Camera On A CHip, or COACH, technology under grant from the Chief Scientist.
Although we have received grants from the Chief Scientist and the Foundation in
the past, we intend to fund future research and development efforts for new
products primarily from our own funds and through research and development
arrangements with our major OEM customers.
As of September 30, 1999, we had a staff of 75 full-time and 25 part-time
research and development personnel, 94 of whom are based in Israel.
SALES AND MARKETING
Our sales and marketing strategy is to focus on providing compression solutions
for manufacturers seeking to design audio and video products for emerging high
volume consumer applications. In cooperation with leading manufacturers of audio
and video equipment in the commercial and consumer markets, we attempt to
identify market segments which have the potential for substantial growth. To
implement our strategy, we have established a direct sales force located at
several sales and marketing
44
<PAGE>
offices, and a worldwide network of independent sales representatives and
distributors. In some cases, our strategic partners also provide sales and
marketing support.
We work closely in the product development process with strategic partners to
incorporate our integrated circuits and software into their products. Potential
products are designed to meet customer-specific product requirements defined
jointly by us and our strategic partners with our partners providing
technological input, and in some cases, a portion of the development funding.
This strategy has permitted us 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, our application engineers assist customers in designing their products
to incorporate our integrated circuits.
Our sales are generally made pursuant to purchase orders received between one
and six months prior to the scheduled delivery date. We sell our products
primarily through our 12-person direct sales staff, of whom nine are located in
the United States and three are located in Israel. Our United States sales staff
is primarily responsible for sales in North America, South America and Asia, and
our Israeli sales staff is primarily responsible for sales in Europe and the
Middle East. In addition, we sell our products indirectly through 23
commissioned sales representatives as well as selected distributors. We
typically warrant our products for a 12-month period. To date, we have not
experienced material product returns or warranty expense.
During 1998, we opened an office in Shenzhen, China as part of our effort to
capture a leadership position in the Chinese digital audio and video markets. As
of September 30, 1999, we had a staff of 17 employees in our China office,
including sales, applications and customer support employees.
We distribute our 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 us under development contracts
with Fujifilm. Fujifilm also sells some of these products in Japan under its own
name. We 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 our products outside of Japan. During 1997, we
opened a representative office in Tokyo to help promote our products in Japan
and to manage the sale of products not sold through Fujifilm, such as integrated
circuit cores and certain JPEG products.
We sell our Dolby Digital-based products under a perpetual, non-exclusive
license from Dolby to sell products that incorporate the Dolby Digital
algorithm. We are not required to pay license fees or royalties to Dolby under
this agreement. Our customers enter into license agreements directly with Dolby,
pursuant to which they pay royalties to Dolby. Under our agreement with Dolby,
we may sell our Dolby Digital-based products only to customers who are licensees
of Dolby. To date, most potential customers for our 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 harm our sales.
BACKLOG
Sales of our products are made pursuant to firm purchase orders. However,
sometimes we allow 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. Our business is characterized by short lead times
and quick delivery schedules. As a result of these factors, we do not believe
that backlog at any given time is a meaningful indicator of future sales.
MANUFACTURING
We contract our wafer fabrication, assembly and testing to independent foundries
and contractors, which enables us to focus on our design strengths, minimize
fixed costs and capital expenditures and gain
45
<PAGE>
access to advanced manufacturing facilities. Our engineers work closely with our
foundry partners and subcontractors to increase yields, lower manufacturing
costs and assure quality.
Our primary foundry is Taiwan Semiconductor Manufacturing Company, or TSMC,
which has manufactured integrated circuits for us since 1987. TSMC is currently
manufacturing our DVD, audio and JPEG products. In addition, Fujifilm and
Samsung manufacture some integrated circuit products for us. Fujifilm is
currently manufacturing our JPEG codec, our JPEG-based converter products and
our MPEG 1 decoder. Samsung is currently manufacturing our COACH products. Our
independent foundries fabricate products for other companies and may also
produce products of their own design.
All of our devices are currently fabricated using standard complementary metal
oxide semiconductor process technology with 0.25 micron to 0.8 micron feature
sizes. All of our semiconductor products are currently being assembled by one of
three independent contractors, ASE, Amkor or ASAT, and tested by those
contractors or other independent contractors.
Our 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 our requirements for this product subject to
Fujifilm's ability to manufacture the product on substantially the same or
better terms and conditions as we could obtain from a third party. This
agreement also grants Fujifilm marketing rights in Japan with respect to these
products. See "Sales and Marketing."
We currently purchase products from all of our foundries under individually
negotiated purchase orders. Our agreement with Fujifilm entitles us 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 us.
We do not currently have a long-term supply contract with TSMC or Samsung, and
therefore neither TSMC nor Samsung is obligated to manufacture products for us
for any specific period, in any specific quantity or at any specified price,
except as may be provided in a particular purchase order.
COMPETITION
Our existing and potential competitors include many large domestic and
international companies that have substantially greater resources in the areas
of:
- finance;
- manufacturing;
- technology;
- marketing; and
- distribution.
These competitors also have broader product lines and longer standing
relationships with customers than we do. Some of our principal competitors
maintain their own semiconductor foundries and may therefore benefit from
capacity, cost and technical advantages. In the market for JPEG-based products
for desktop video editing applications, our principal competitors are C-Cube
Microsystems and LSI Logic. Cirrus Logic (Crystal Semiconductor), Fujitsu,
Motorola, STMicroelectronics and Yamaha are currently shipping Dolby
Digital-based audio compression products. C-Cube, ESS, LSI Logic, LuxSonor,
Matsushita, National Semiconductor, Oak Technology, STMicroelectronics, Sony and
Winbond have introduced integrated audio and video devices for DVD and Super
video CD applications. These manufacturers, as well as others, are licensed by
Dolby to incorporate Dolby Digital technology in their products. In addition,
some manufacturers, including Sony, incorporate compression technologies other
than Dolby Digital in audio products that compete with products using our
integrated circuits. In the markets for JPEG-based products for use in filmless
digital cameras, our principal competitors are in-house solutions developed and
used by major Japanese OEMs. LSI Logic and Ricoh are providing system-on-a-chip
solutions for filmless digital cameras to third parties. In the market for
MPEG-based
46
<PAGE>
chip core products, our principal competitors are David Sarnoff Research Center
and SICAN Microelectronics.
We believe that our ability to compete successfully in the rapidly evolving
markets for high performance audio and video compression technology depends on a
number of factors, including:
- price, quality, performance and features of our products;
- the timing and success of new product introductions by us, our customers and
our competitors;
- the emergence of new industry standards;
- our ability to obtain adequate foundry capacity;
- the number and nature of our competitors in a given market; and
- general market and economic conditions.
The markets in which we compete are intensely competitive and are characterized
by rapid technological change, declining average unit selling prices and rapid
product obsolescence. We expect competition to increase in the future from
existing competitors and from other companies that may enter our existing or
future markets with solutions which may be less costly or provide higher
performance or more desirable features than our products.
The DVD market is just emerging, and additional competitors are expected to
enter the market for integrated circuits used in DVD players. We believe that
several large Japanese consumer electronics companies may be planning to enter
this market and may attempt to develop MPEG 2 hardware or software to compete
with our products. Some of these potential competitors may develop captive
implementations for use only with their own PC and commercial and consumer
electronics products. This increased competition may result in price reductions,
reduced profit margins and loss of market share.
Historically, average unit selling prices in the semiconductor industry in
general, and for our products in particular, have decreased over the life of a
particular product. We expect that the average unit selling prices of our
products will continue to be subject to significant pricing pressures. In order
to offset expected declines in the average unit selling prices of our products,
we will likely need to reduce the cost of our products. We intend to accomplish
this by implementing design changes that lower the cost of manufacture, assembly
and testing, by negotiating reduced charges by our foundries as and if volumes
increase, and by successfully managing our manufacturing and subcontracting
relationships. Since we do not operate our own manufacturing, assembly or
testing facilities, we may not be able to reduce our costs as rapidly as
companies that operate their own facilities. If we fail to introduce lower cost
versions of our products in a timely manner or to successfully manage our
manufacturing, assembly and testing relationships our business would be harmed.
PROPRIETARY RIGHTS AND LICENSES
Our ability to compete successfully is dependent in part upon our ability to
protect our proprietary technology and information. Although we rely on a
combination of patents, copyrights, trademarks, trade secret laws and licensing
arrangements to protect some of our intellectual property, we believe that
factors such as the technological and creative skills of our personnel and the
success of our ongoing product development efforts are more important in
maintaining our competitive position. We generally enter into confidentiality or
license agreements with our employees, distributors, customers and potential
customers and limit access to our proprietary information. We currently hold
several U.S. patents, and have additional patent applications pending, that
pertain to technologies and processes relating to our current business. Our
intellectual property rights, if challenged, may not be upheld as valid, may not
be adequate to prevent misappropriation of our technology or may not prevent the
development of competitive products. Additionally, we may not be able to obtain
patents or other intellectual property protection in the future. In particular,
the existence of several consortiums that license patents relating
47
<PAGE>
to the MPEG standard has created uncertainty with respect to the use and
enforceability of patents implementing that standard. Furthermore, the laws of
certain foreign countries in which our products are or may be developed,
manufactured or sold, including various countries in Asia, may not protect our
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 our technology and
products more likely in these countries.
We sell our Dolby Digital-based products under a perpetual non-exclusive license
from Dolby which permits us to incorporate the Dolby Digital algorithm into our
products. Our customers enter into license agreements with Dolby pursuant to
which they pay royalties directly to Dolby. Under our agreement with Dolby, we
may sell our Dolby Digital-based products only to customers who are licensees of
Dolby. To date, most potential customers for our 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 harm our
business.
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. We or our foundries from time to time are
notified of claims that we may be infringing patents or other intellectual
property rights owned by third parties. We have been subject to intellectual
property claims and litigation in the past and we may be subject to additional
claims in the future. In particular, given the uncertainty discussed above
regarding patents relating to the MPEG standard, it is difficult for us to
assess the possibility that our activities in the MPEG field may give rise to
future patent infringement claims. Litigation by or against us relating to
patent infringement or other intellectual property matters could result in
significant expense to us and divert the efforts of our technical and management
personnel, whether or not such litigation results in a determination favorable
to us. In the event of an adverse result in any such litigation, we 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. Licenses may not be offered or the terms of any offered
licenses may not be acceptable to us. If we fail to obtain a license from a
third party for technology used by us we could incur substantial liabilities and
to suspend the manufacture of products, or the use by our foundries of certain
processes.
EMPLOYEES
As of September 30, 1999, we had 153 full-time and 28 part-time and contract
employees, including 75 full-time and 25 part-time and contract employees
primarily involved in research and development activities, 49 in marketing and
sales, 25 in finance and administration and 7 in manufacturing control and
quality assurance. We have 88 full-time employees and 25 part-time and contract
employees based in Israel, including 94 employees who are primarily involved in
engineering and research and development. There are 40 individuals at our
facilities in Santa Clara, California. The remaining employees are located in
our international offices in Canada, Japan and China. We believe that our future
success will depend in large part on our ability to attract and retain
highly-skilled, engineering, managerial, sales and marketing personnel.
Competition for such personnel is intense. Our employees are not represented by
any collective bargaining unit, and we have never experienced a work stoppage.
We believe that our employee relations are good.
FACILITIES
Our executive offices, our principal administration, marketing and sales
operations and a portion of our research and development operations are located
in approximately 24,000 square feet of leased space in Santa Clara, California
under a lease expiring in March 2000. We are currently negotiating a renewal of
this lease. Our principal research and development and engineering facilities
and the balance of our administration, marketing and sales operations are
located in approximately 20,000 square feet of leased space in an industrial
park in Haifa, Israel under a lease expiring in 2002. The aggregate annual gross
rent for our facilities was approximately $887,000 in 1998. We also lease sales
offices in Tokyo, Japan and Shenzhen, China. See Note 7 of Notes to Consolidated
Financial Statements. We believe that our
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current facilities are adequate for our needs for the foreseeable future and
that, should it be needed, suitable additional space will be available to
accommodate expansion of our operations on commercially reasonable terms.
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MANAGEMENT
The names of our directors and executive officers and their ages as of
October 31, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- --------
<S> <C> <C>
Levy Gerzberg, Ph.D........................ 54 President, Chief Executive Officer and
Director
Aharon Aharon.............................. 44 Senior Vice President and Chief Operating
Officer
Isaac Shenberg, Ph.D....................... 47 Senior Vice President, Business and
Strategic Development
Bruce Renouard............................. 39 Vice President, Worldwide Sales
Paul R. Goldberg........................... 54 Vice President, Audio Products and
Intellectual Properties
Karl Schneider............................. 44 Vice President, Finance and Chief Financial
Officer
Shmuel Farkash, Ph.D....................... 42 Vice President, Video Products
Alon Ironi................................. 36 Vice President, Engineering, General
Manager, Israel
Uzia Galil................................. 74 Chairman of the Board of Directors
George T. Haber............................ 47 Director
James D. Meindl, Ph.D...................... 66 Director
Arthur B. Stabenow......................... 61 Director
Philip M. Young............................ 59 Director
</TABLE>
LEVY GERZBERG was a co-founder of Zoran in 1981 and has served as our President
and Chief Executive Officer since December 1988 and as a director since 1981.
Dr. Gerzberg also served as our President from 1981 to 1984 and as our Executive
Vice President and Chief Technical Officer from 1985 to 1988. Prior to
co-founding Zoran, 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 in
Haifa, Israel.
AHARON AHARON joined Zoran as Vice President, Engineering-Haifa Operations in
February 1997 and was elected Vice President, Engineering in August 1997 and
Senior Vice President and Chief Operating Officer in October 1998. 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.
ISAAC SHENBERG has served as Vice President, Sales and Marketing of Zoran since
January 1995 and as Senior Vice President, Business and Strategic Development
since October 1998. From August 1990 to January 1995, Dr. Shenberg served as our
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.
BRUCE RENOUARD joined Zoran as Vice President, Worldwide Sales in
September 1999. From August 1997 to September 1999, Mr. Renouard served as
Director of Worldwide Market Development for IDT/ Centour, a semiconductor
company. From December 1995 to August 1997, Mr. Renouard served as National
Distribution Sales Manager of Cyrix Corporation, a semiconducter company. From
April 1993 to December 1995, Mr. Renouard served as District Sales Manager for
Cyrix. Mr. Renouard holds a B.S.E.E. in Electrical Engineering from Southern
Methodist University.
PAUL R. GOLDBERG joined Zoran as Vice President, Systems Solutions in June 1996
and was elected Vice President, Audio Products in October 1998. From April 1991
to June 1996, Mr. Goldberg was employed as film products group leader at Dolby
Laboratories, Inc. From 1988 to 1990, Mr. Goldberg was Director
50
<PAGE>
of the Tandy Electronic Research Center. From 1979 to 1988, Mr. Goldberg was
employed by Wavetek Incorporated and its spin-off, Advanced Image Data, 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.
KARL SCHNEIDER joined Zoran as Corporate Controller in January 1998 and was
elected Vice President, Finance and Chief Financial Officer in July 1998. From
September 1996 through 1997, Mr. Schneider served as Controller for the Film
Measurement and Robotics and Integrated Technologies divisions of KLA-Tencor, a
semiconductor equipment company. Mr. Schneider served as the Corporate
Controller for SCM Microsystems, Inc. from October 1995 to September 1996,
Controller for Reply Corporation from January 1994 to September 1995, Director
of Finance for Digital F/X from October 1992 to January 1994 and Controller for
Flextronics from September 1987 through June 1991. Mr. Schneider holds a B.S. in
Business Administration from San Diego State University.
SHMUEL FARKASH joined Zoran in March 1992 as a senior research and development
engineer. In February 1994 Dr. Farkash became our marketing and sales manager
for Europe. In June 1996 Dr. Farkash became Director of Marketing for the JPEG
product line. In July 1998, Dr. Farkash was elected Vice President, Video
Products, with responsibilities for the JPEG and DVD product lines. Dr. Farkash
holds a Ph.D., M.S., and a B.S. in Electrical Engineering from the Technion.
ALON IRONI joined Zoran as a system engineer in March 1993. Mr. Ironi
subsequently served as our Manager, System Engineering and Manager, Architecture
and Algorithms. Mr. Ironi was elected Vice President, Engineering, Israel in
January 1999. From March 1990 to March 1993, Mr. Ironi served as a DSP software
engineer for the DSP Group. Mr. Ironi holds a B.S. in Electrical Engineering
from the Technion.
UZIA GALIL has been a director of Zoran since 1983 and has served as Chairman of
the Board of Directors since October 1993. From 1962 until his retirement on
November 1, 1999, Mr. Galil served as President and Chief Executive Officer of
Elron Electronic Industries Ltd., an Israeli high technology holding company,
where he also served as Chairman of the Board. Prior to his retirement,
Mr. Galil also served as Chairman of the Board of Directors of Elbit Ltd., an
affiliate of Elron that develops, manufactures and markets advanced
computer-based electronic imaging systems and products for medical imaging,
defense, communications, and multimedia applications, since January 1981. Mr.
Galil served as Chairman of the Executive Committee of Elbit's Board of
Directors from 1978 to 1985 and from May 1986 to November 1999, and as President
of Elbit from 1978 to 1985. Mr. Galil also serves as a director of the Executive
Committee of Elscint Ltd., a manufacturer of computer-based medical diagnostic
imaging systems, and as a member of the Board of Directors of Opal, Inc.,
Orbotech Ltd. and NetManage Inc. From 1980 to 1990, Mr. Galil served as Chairman
of the International Board of Governors of the Technion. Mr. Galil has been a
member of the advisory committee of the Bank of Israel since 1991. Mr. Galil
holds a M.S. in Electrical Engineering from Purdue University and a B.S. from
the Technion. Mr. Galil has also been awarded an honorary doctorate in technical
sciences by the Technion in recognition of his contribution to the development
of science-based industries in Israel, an honorary doctorate in philosophy by
the Weizmann Institute of Science and an honorary doctorate in engineering by
Polytechnic University, New York. Mr. Galil is also a past recipient of the
Israel Industry Prize.
GEORGE T. HABER has been a director of Zoran since December 1996. Mr. Haber also
served as our Executive Vice President from December 1996 to August 1997. Since
August 1997, Mr. Haber has served as President and Chief Executive Officer of
GigaPixel Corporation, a developer of 3-D graphics rendering systems. Mr. Haber
was a founder of CompCore Multimedia, Inc., a developer of multimedia software
and semiconductor products, and served as its President, Chief Executive
Officer, Chief Financial Officer and a director from its founding in
November 1993 until its acquisition by us in December 1996. Prior to founding
CompCore, Mr. Haber held engineering positions at Toshiba/SGI
51
<PAGE>
from January 1993 to August 1993 and Sun Microsystems, Inc. from 1990 to
January 1993. Mr. Haber holds a B.A. from the Technion.
JAMES D. MEINDL has been a director of Zoran since March 1986. Dr. Meindl has
been a professor of microelectronics at Georgia Institute of Technology since
November 1993. From September 1986 to November 1993, Dr. Meindl served as
Provost and Senior Vice President of Academic Affairs at Rensselaer Polytechnic
Institute. Prior thereto, Dr. Meindl was a professor of electrical engineering
and Director of the Stanford Electronics Laboratory and Center for Integrated
Systems at Stanford University. Dr. Meindl is also a director of SanDisk, Inc.
and Digital Microwave.
ARTHUR B. STABENOW has been a director of Zoran since November 1990.
Mr. Stabenow has been principally engaged as a private investor since
January 1999. From March 1986 to January 1999 Mr. Stabenow was employed as Chief
Executive Officer of Micro Linear Corporation, a semiconductor company.
Mr. Stabenow serves as a director of Applied Micro Circuits Corporation.
PHILIP M. YOUNG has been a director of Zoran since January 1986. Mr. Young has
been a general partner of U.S. Venture Partners, a venture capital partnership,
since April 1990. Mr. Young is also a director of The Immune Response
Corporation, CardioThoracic Systems, Inc., Vical Incorporated and 3Dfx
Interactive, Inc.
Members of our Board of Directors are each elected for one year terms at the
annual stockholders' meeting. Officers are elected by and serve at the
discretion of the Board of Directors. There are no family relationships among
our directors and executive officers.
52
<PAGE>
RELATED-PARTY TRANSACTIONS
We have entered into the transactions and arrangements with Oren Semiconductor,
Inc. described below. Oren was a subsidiary of ours until January 1996, when it
was spun off to our stockholders. Elron Electronics Industries Ltd., our largest
stockholder, and The Israel Corporation, which until recently was a beneficial
owner of more than 5% of our outstanding shares of common stock, are each
principal stockholders of Oren. Additionally, several of our directors are
stockholders of Oren and two of our directors, Levy Gerzberg and Uzia Galil, are
also members of Oren's board of directors.
EXPENSES INCURRED ON BEHALF OF OREN
From the time of the spin-off through September 1998, we advanced a substantial
portion of Oren's operating expenses related to its operations in the United
States, all of which were later reimbursed by Oren. These expenses included
payroll, employee benefits, professional fees and other operating expenses.
Until September 1997, we permitted Oren to occupy a portion of our Santa Clara
facility, for which Oren reimbursed us for a pro rata portion of our monthly
facility cost. Since October 1998, we have shared our facility in Japan with
Oren, in return for which Oren reimburses us for 50% of our total operating cost
related to that facility. The expenses we incurred on Oren's behalf during the
years ended December 31, 1996, 1997 and 1998 and the nine months ended September
30, 1999 were $136,000, $405,000, $403,000 and $81,000.
TECHNOLOGY LICENSE AGREEMENT
In March 1999, we entered into a technology license agreement with Oren pursuant
to which we granted Oren a worldwide nonexclusive license to incorporate a Zoran
video decoder core in products sold by Oren to end users, resellers and original
equipment manufacturers and to incorporate our core into Oren's own cores for
license to third parties. The license agreement grants Oren similar rights to
any updates to our core that we develop or release within one year after the
date of the agreement. In return for this license, Oren agreed to pay us
nonrefundable license and maintenance fees totalling $400,000, of which $100,000
has been paid to date and the remainder is payable in three installments ending
February 28, 2000. Oren also agreed to pay us royalties and maintenance fees,
based on the number of units incorporating our core that are sold by Oren or by
licensees of its cores, and additional royalties based on any nonrefundable fee
paid to Oren for the license of any core that incorporates the core we licensed
to Oren. To date, Oren has not paid any royalties or related maintenance fees.
The initial term of the license agreement is two years, and it will be
automatically renewed for three additional one-year terms unless either party
elects otherwise at least 30 days prior to a renewal date. The agreement may be
terminated by either party in the event of a material breach by the other party
or by us in the event of Oren's insolvency. The terms of the license agreement
are comparable to similar agreements that we have entered into with unrelated
third parties based on arm's-length negotiations.
SHORT-TERM LOAN
In April 1999, we made a loan of $350,000 to Oren. The loan bore simple interest
at the rate of 7% per year and had a term of three months. The loan was repaid
in full in July 1999.
53
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to beneficial
ownership of our common stock as of October 31, 1999 and as adjusted to reflect
the sale of the common stock offered by this prospectus, by the following:
- each of the executive officers named in the Summary Compensation table in
our 1999 proxy statement;
- each of our directors;
- all of our directors and executive officers as a group;
- each person or entity who is known by us to beneficially own more than 5% of
our common stock; and
- the selling stockholders.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO OFFERING(1) NUMBER AFTER OFFERING(1)
-------------------- OF SHARES --------------------
DIRECTORS AND EXECUTIVE OFFICERS NUMBER PERCENT OFFERED NUMBER PERCENT
- -------------------------------- --------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Elron Electronic Industries Ltd................... 1,363,965 12.6% 500,000 863,965 6.5%
Advanced Technology Center
P.O. Box 1513
Haifa 31015, Israel
Levy Gerzberg, Ph.D. (2).......................... 442,805 3.9% -- 442,805 3.2%
Aharon Aharon (3)................................. 99,981 * -- 99,981 *
Isaac Shenberg, Ph.D. (4)......................... 97,020 * -- 97,020 *
George T. Haber (5)............................... 60,000 * -- 60,000 *
Paul R. Goldberg (6).............................. 57,878 * -- 57,878 *
Arthur B. Stabenow (7)............................ 54,147 * -- 54,147 *
Uzia Galil (8).................................... 45,889 * -- 45,889 *
James D. Meindl, Ph.D. (9)........................ 44,913 * -- 44,913 *
Philip M. Young (10).............................. 35,695 * -- 35,695 *
Alex Sinar (11)................................... 31,178 * -- 31,178 *
All directors and executive officers as a group
(13 persons) (12)............................... 1,165,493 10.6% 1,165,493 8.1%
</TABLE>
- ---------------------
* Represents less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options or warrants held by that person
that are currently exercisable, or will become exercisable within 60 days
after October 31, 1999, are deemed outstanding. Such shares, however, are
not deemed outstanding for purposes of computing the percentage ownership
of any other person. In general, options granted under our 1993 Stock
Option Plan are fully exercisable from the date of grant, subject to our
right to repurchase any unvested shares at the original exercise price in
the event of termination of the optionee's employment. Options granted
under our 1995 Outside Directors Stock Option Plan generally become vested
and exercisable one year after the date of grant. Unless otherwise
indicated in the footnotes to this table, the persons and entities named in
the table have sole voting and sole investment power with respect to all
shares beneficially owned, subject to community property laws where
applicable.
(2) Includes 381,323 shares subject to stock options that are currently
exercisable.
54
<PAGE>
(3) Includes 98,900 shares subject to stock options that are currently
exercisable.
(4) Includes 95,785 shares subject to stock options that are currently
exercisable.
(5) Includes 20,000 shares held by Mr. Haber as custodian for Sabrina Cismas
and 20,000 shares held by him as custodian for Cristina Cismas.
(6) Includes 48,124 shares subject to stock options that are currently
exercisable.
(7) Includes 43,566 shares subject to stock options that are currently
exercisable or will become exercisable within 60 days after October 31,
1999.
(8) Includes 3,008 shares held by Mr. Galil's spouse. Mr. Galil may be deemed
to be a beneficial owner of these shares, although Mr. Galil disclaims such
beneficial ownership. Also includes 34,400 shares subject to stock options
that are currently exercisable or will become exercisable within 60 days
after October 31, 1999.
(9) Includes 222 shares held jointly with Dr. Meindl's spouse and 1,125 shares
held by James and Frederica Meindl as trustees of the Meindl Trust dated
February 4, 1972. Also includes 43,566 shares subject to stock options that
are currently exercisable or will become exercisable within 60 days after
October 31, 1999.
(10) Includes 35,666 shares subject to stock options that are currently
exercisable or will become exercisable within 60 days after October 31,
1999.
(11) Mr. Sinar was one of the officers named in the Summary Compensation Table
in our 1999 proxy statement, although his employment with us had
terminated in February 1999. The information shown in the table with
respect to Mr. Sinar is based on information that was available to us at
the time of Mr. Sinar's termination.
(12) Includes 1,012,038 shares subject to stock options that are currently
exercisable or will become exercisable within 60 days after October 31,
1999. Excludes shares held by Mr. Sinar, who was no longer employed by us
as of October 31, 1999.
55
<PAGE>
UNDERWRITING
Zoran and the selling stockholders have entered into an underwriting agreement
with the underwriters named below. CIBC World Markets Corp., BancBoston
Robertson Stephens Inc., Salomon Smith Barney Inc. and SoundView Technology
Group, Inc. are acting as representatives of the underwriters.
The underwriting agreement provides for the purchase of a specific number of
shares of common stock by each of the underwriters. The underwriters'
obligations are several, which means that each underwriter is required to
purchase a specified number of shares, but is not responsible for the commitment
of any other underwriter to purchase shares. Subject to the terms and conditions
of the underwriting agreement, each underwriter has severally agreed to purchase
the number of common stock set forth opposite its name below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ----------- ----------------
<S> <C>
CIBC World Markets Corp. ...................................
BancBoston Robertson Stephens Inc...........................
Salomon Smith Barney Inc....................................
SoundView Technology Group, Inc.............................
---------
Total....................................................... 3,000,000
=========
</TABLE>
This is a firm commitment underwriting. This means that the underwriters have
agreed to purchase all of the shares offered by this prospectus (other than
those covered by the over-allotment option described below) if any are
purchased. Under the underwriting agreement, if an underwriter defaults in its
commitment to purchase shares, the commitments of non-defaulting underwriters
may be increased or the underwriting agreement may be terminated, depending on
the circumstances.
The shares should be ready for delivery on or about , 1999 against
payment in immediately available funds. The representatives have advised Zoran
and the selling stockholders that the underwriters propose to offer the shares
directly to the public at the public offering price that appears on the cover
page of this prospectus. In addition, the representatives may offer some of the
shares to certain securities dealers at such price less a concession of
$ per share. The underwriters may also allow, and such dealers may
reallow, a concession not in excess of $ per share to certain
other dealers. After the shares are released for sale to the public, the
representatives may change the offering price and other selling terms at various
times.
Zoran has granted the underwriters an over-allotment option. This option, which
is exercisable for up to 30 days after the date of this prospectus, permits the
underwriters to purchase a maximum of 450,000 additional shares from Zoran to
cover over-allotments. If the underwriters exercise all or part of this option,
they will purchase shares covered by the option at the public offering price
that appears on the cover page of this prospectus, less the underwriting
discount. If this option is exercised in full, the total price to public will be
$ million, and the total proceeds to Zoran will be $ . The
underwriters have severally agreed that, to the extent the over-allotment option
is exercised, they will each purchase a number of additional shares
proportionate to the underwriter's initial amount reflected in the foregoing
table.
The following table provides information regarding the amount of the discount to
be given to the underwriters by Zoran and the selling stockholders:
<TABLE>
<CAPTION>
TOTAL WITHOUT TOTAL WITH FULL
EXERCISE OF EXERCISE OF
OVER-ALLOTMENT OVER-ALLOTMENT
PER SHARE OPTION OPTION
--------- -------------- ---------------
<S> <C> <C> <C>
Zoran.................................................... $ $ $
Selling stockholders.....................................
Total....................................................
</TABLE>
56
<PAGE>
Zoran estimates that its total expenses of the offering, excluding the
underwriting discount, will be approximately $205,000.
Zoran and the selling stockholders have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act of
1933.
Zoran, its officers and directors and some other stockholders have agreed to a
90-day "lock up" with respect to approximately shares of common stock and
certain other Zoran securities that they beneficially own, including securities
that are convertible into shares of common stock and securities that are
exchangeable or exercisable for shares of common stock. This means that, subject
to certain exceptions, for a period of 90 days following the date of this
prospectus, Zoran and such persons may not directly or indirectly offer, sell,
pledge or otherwise dispose of the Zoran securities without the prior written
consent of CIBC World Markets Corp. CIBC World Markets Corp., however may in its
sole discretion and at any time without notice, release all or any portion of
the shares subject to these agreements.
The representatives have informed us that they do not expect discretionary sales
by the underwriters to exceed five percent of the shares offered by this
prospectus.
Rules of the Securities and Exchange Commission may limit the ability of the
underwriters to bid for or purchase shares before the distribution of the shares
is completed. However, the underwriters may engage in the following activities
in accordance with the rules:
- Stabilizing transactions--The representatives may make bids or purchases for
the purpose of pegging, fixing or maintaining the price of the shares, so
long as stabilizing bids do not exceed a specified maximum.
- Over-allotments and syndicate covering transactions--The underwriters may
create a short position in the shares by selling more shares than are set
forth on the cover page of this prospectus. If a short position is created
in connection with the offering, the representatives may engage in syndicate
covering transactions by purchasing shares in the open market. The
representatives may also elect to reduce any short position by exercising
all or part of the over-allotment option.
- Penalty bids--If the representatives purchase shares in the open market in a
stabilizing transaction or syndicate covering transaction, they may reclaim
a selling concession from the underwriters and selling group members who
sold those shares as part of this offering.
- Passive market making--Market makers in the shares who are underwriters or
prospective underwriters may make bids for or purchases of shares, subject
to certain limitations, until the time, if ever, at which a stabilizing bid
is made.
Stabilization and syndicate covering transactions may cause the price of the
shares to be higher than it would be in the absence of such transactions. The
imposition of a penalty bid might also have an effect on the price of the shares
if it discourages resales of the shares.
Neither Zoran nor the underwriters make any representation or prediction as to
the effect that the transactions described above may have on the price of the
shares. These transactions may occur on the Nasdaq National Market or otherwise.
If these transactions are commenced, they may be discontinued without notice at
any time.
57
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us by
Gray Cary Ware & Freidenrich LLP, Palo Alto, California. Certain legal matters
relating to the offering will be passed upon for the underwriters by Gibson,
Dunn & Crutcher LLP, San Francisco, California.
EXPERTS
The financial statements as of December 31, 1998 and 1997 and for each of the
three years in the period ended December 31, 1998 included in this prospectus
have been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION ABOUT ZORAN
We have filed with the SEC a registration statement on Form S-3, including the
exhibits and schedules thereto, under the Securities Act with respect to the
shares to be sold in this offering. This prospectus does not contain all the
information set forth in the registration statement. For further information
about us and the shares to be sold in this offering, please refer to the
registration statement. Statements contained in this prospectus as to the
contents of any contract, agreement or other document referred to, are not
necessarily complete, and in each instance please refer to the copy of the
contract, agreement or other document filed as an exhibit to the registration
statement, each statement being qualified in all respects by this reference.
You may read and copy all or any portion of the registration statement or any
reports, statements or other information we file with the SEC at the SEC's
public reference room at Room 1024, Judiciary Plaza, 450 Fifth Street, N.C.,
Washington, D.C. 20549 and at the regional offices of the SEC located at Seven
World Trade Center, 13th Floor, New York, New York 10048 and the Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You
can request copies of these documents upon payment of a duplicating fee, by
writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. Our SEC filings,
including the registration statement will also be available to you on the SEC's
Web site. The address of this site is http://www.sec.gov.
DOCUMENTS INCORPORATED BY REFERENCE
The SEC allows us to incorporate by reference the information we file with it,
which means that we can disclose important information to you by referring you
to those documents. The information incorporated by reference is considered to
be part of this prospectus, and information we file later with the SEC will
automatically update and supersede this information. We incorporate by reference
the documents listed below and any future filings made by us with the SEC under
Sections 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934 until
the sale of all of the shares of common stock that are part of this offering.
The documents we are incorporating by reference are as follows:
- our Annual Report on Form 10-K for the year ended December 31, 1998;
- our Quarterly Reports on Form 10-Q for the quarters ended March 31, 1999,
June 30, 1999 and September 30, 1999;
- the description of our common stock contained in our registration statement
on Form 8-A (Registration No. 33-98630-LA) declared effective by the SEC on
December 14, 1995, including any amendments or reports filed for the purpose
of updating that description; and
- our Proxy Statement, filed on June 25, 1999.
Any statement contained in a document that is incorporated by reference will be
modified or superseded for all purposes to the extent that a statement contained
in this prospectus (or in any other document
58
<PAGE>
that is subsequently filed with the SEC and incorporated by reference) modifies
or is contrary to that previous statement. Any statement so modified or
superseded will not be deemed a part of this prospectus except as so modified or
superceded.
You may request a copy of these filings at no cost by writing or telephoning our
investor relations department at the following address and telephone number:
Zoran Corporation
3112 Scott Boulevard
Santa Clara, California 95054
(408) 919-4111
59
<PAGE>
ZORAN CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998
and September 30, 1999 (unaudited)........................ F-3
Consolidated Statements of Operations for the three years
ended December 31, 1998 and the nine month periods ended
September 30, 1998 (unaudited) and 1999 (unaudited)....... F-4
Consolidated Statements of Stockholders' Equity for the
three years ended December 31, 1998 and the nine month
period ended September 30, 1999 (unaudited)............... F-5
Consolidated Statements of Cash Flows for the three years
ended December 31, 1998 and the nine month periods ended
September 30, 1998 (unaudited) and 1999 (unaudited)....... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<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, 1998 and 1997, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1998, 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.
PricewaterhouseCoopers LLP
San Jose, California
January 27, 1999
F-2
<PAGE>
ZORAN CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1997 1998 1999
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 9,903 $ 8,221 $ 4,857
Short-term investments.................................. 12,473 10,954 13,591
Accounts receivable, net................................ 16,509 15,558 19,533
Inventory............................................... 4,123 7,063 9,434
Prepaid expenses and other current assets............... 2,232 2,018 2,164
-------- -------- --------
Total current assets.................................. 45,240 43,814 49,579
Property and equipment, net............................... 5,704 5,356 4,573
-------- -------- --------
$ 50,944 $ 49,170 $ 54,152
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................ $ 9,572 $ 6,530 $ 3,684
Accrued expenses and other liabilities.................. 7,086 6,454 8,506
-------- -------- --------
Total current liabilities............................. 16,658 12,984 12,190
-------- -------- --------
Commitments and contingencies (Note 7)
Stockholders' equity:
Common Stock, $0.001 par value; 20,000,000 shares
authorized; 9,800,679, 10,213,394 and 10,834,296
shares issued and outstanding......................... 10 10 10
Additional paid-in capital.............................. 78,664 79,635 81,590
Warrants................................................ 717 717 717
Accumulated other comprehensive income.................. -- -- 483
Accumulated deficit..................................... (45,105) (44,176) (40,838)
-------- -------- --------
Total stockholders' equity............................ 34,286 36,186 41,962
-------- -------- --------
$ 50,944 $ 49,170 $ 54,152
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
ZORAN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales................................. $35,503 $32,717 $33,465 $22,230 $34,728
Software, licensing and development........... 8,606 12,210 10,760 7,859 6,891
------- ------- ------- ------- -------
Total revenues.............................. 44,109 44,927 44,225 30,089 41,619
------- ------- ------- ------- -------
Costs and expenses:
Cost of product sales......................... 20,262 16,032 19,036 12,750 18,497
Research and development...................... 8,954 13,787 13,548 9,654 9,945
Selling, general and administrative........... 10,739 11,209 11,551 8,311 10,232
Merger and related............................ 2,153 -- -- -- --
------- ------- ------- ------- -------
Total costs and expenses.................... 42,108 41,028 44,135 30,715 38,674
------- ------- ------- ------- -------
Operating income (loss)......................... 2,001 3,899 90 (626) 2,945
Interest expense................................ (146) -- -- -- --
Interest and other income....................... 1,173 1,258 1,071 696 1,226
------- ------- ------- ------- -------
Income before income taxes...................... 3,028 5,157 1,161 70 4,171
Provision for income taxes...................... 665 928 232 14 833
------- ------- ------- ------- -------
Net income...................................... $ 2,363 $ 4,229 $ 929 $ 56 $ 3,338
======= ======= ======= ======= =======
Basic net income per share...................... $ 0.27 $ 0.45 $ 0.09 $ 0.01 $ 0.32
======= ======= ======= ======= =======
Diluted net income per share.................... $ 0.22 $ 0.38 $ 0.08 $ 0.01 $ 0.28
======= ======= ======= ======= =======
Shares used to compute basic net income per
share......................................... 8,802 9,412 10,042 9,988 10,578
======= ======= ======= ======= =======
Shares used to compute diluted net income per
share......................................... 10,661 11,072 11,119 10,970 11,865
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
ZORAN CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED GAIN
COMMON STOCK ADDITIONAL ON SECURITIES
------------------- PAID-IN AVAILABLE ACCUMULATED
SHARES AMOUNT CAPITAL WARRANT SALE DEFICIT TOTAL
-------- -------- ---------- -------- --------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Issuance of Common Stock,
net.......................... 412 -- 971 -- -- -- 971
Net income..................... -- -- -- -- -- 929 929
------ --- ------- ---- ---- -------- -------
Balance at December 31, 1998..... 10,213 10 79,635 717 -- (44,176) 36,186
Issuance of Common Stock, net
(unaudited).................. 621 -- 1,955 -- -- -- 1,955
Other comprehensive income
(unaudited).................. -- -- -- -- 483 -- 483
Net income (unaudited)......... -- -- -- -- -- 3,338 3,338
------ --- ------- ---- ---- -------- -------
Balance at September 30, 1999
(unaudited).................... 10,834 $10 $81,590 $717 $483 $(40,838) $41,962
====== === ======= ==== ==== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
ZORAN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.................................... $ 2,363 $ 4,229 $ 929 $ 56 $ 3,338
Adjustments:
Depreciation, amortization and other........ 1,420 1,862 2,306 1,564 1,520
Amortization of deferred compensation....... 218 40 -- -- --
Deferred revenue............................ (1,758) 121 (112) -- --
Changes in current assets and liabilities:
Accounts receivable....................... (5,815) (5,421) 951 3,152 (4,337)
Inventory................................. 456 (2,324) (2,940) (2,688) (2,371)
Prepaid expenses and other current
assets.................................. (686) (356) 214 394 (146)
Accounts payable.......................... 2,868 3,151 (3,042) (3,127) (2,846)
Accrued expenses and other liabilities.... 2,368 534 (700) (4,463) 1,762
-------- ------- ------- ------- -------
Net cash provided by (used in) operating
activities............................ 1,434 1,836 (2,394) (5,112) (3,080)
-------- ------- ------- ------- -------
Cash flows from investing activities:
Capital expenditures for property and
equipment................................... (3,480) (3,649) (1,778) (1,339) (1,085)
Sales (Purchase) of short-term investments,
net......................................... (12,243) (230) 1,519 1,913 (1,154)
-------- ------- ------- ------- -------
Net cash provided by (used in) in
investing activities.................. (15,723) (3,879) (259) 574 (2,239)
-------- ------- ------- ------- -------
Cash flows from financing activities:
Proceeds from debt............................ 1,000 -- -- -- --
Repayments of debt............................ (973) -- -- -- --
Proceeds from issuance of Common Stock, net... 4,000 770 971 492 1,955
-------- ------- ------- ------- -------
Net cash provided by financing
activities............................ 4,027 770 971 492 1,955
-------- ------- ------- ------- -------
Net decrease in cash and cash equivalents....... (10,262) (1,273) (1,682) (4,046) (3,364)
Cash and cash equivalents at beginning of
period........................................ 21,438 11,176 9,903 9,903 8,221
-------- ------- ------- ------- -------
Cash and cash equivalents at end of period...... $ 11,176 $ 9,903 $ 8,221 $ 5,857 $ 4,857
======== ======= ======= ======= =======
Supplemental disclosures:
Interest paid................................. $ 145 $ -- $ -- $ -- $ --
======== ======= ======= ======= =======
Income taxes paid............................. $ 468 $ 368 $ -- $ -- $ --
======== ======= ======= ======= =======
Conversion of debt to Common Stock............ $ 1,032 $ -- $ -- $ -- $ --
======== ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
ZORAN CORPORATION
NOTES TO 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 incorporating Zoran's products and IP include
professional and consumer video editing systems, filmless digital cameras,
standalone and PC-based DVD players, Super VCD players, digital speakers and
audio systems. The Company operates predominantly in one industry segment.
The Company 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.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Zoran and all its
subsidiaries. Intercompany transactions and balances have been eliminated in
consolidation.
INTERIM RESULTS (UNAUDITED)
The accompanying consolidated balance sheet as of September 30, 1999, the
consolidated statements of operations and cash flows for the nine months ended
September 30, 1999 and 1998, the consolidated statements of stockholders' equity
for the nine months ended September 30, 1999 and related note disclosures herein
are unaudited. In the opinion of management, these statements have been prepared
on the same basis as the audited consolidated financial statements and include
all adjustments, consisting only of normal recurring adjustments, necessary for
the fair statement of the results of these periods. Results for the interim
periods presented are not necessarily indicative of the results to be expected
for the full year. The data disclosed in the notes to the consolidated financial
statements for these periods are unaudited.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
Zoran has adopted accounting policies which are generally accepted in the
industry in which it operates. The following is a summary of the Company's
significant accounting policies.
USE OF ESTIMATES
The preparation of these financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the
F-7
<PAGE>
ZORAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
financial statements and accompanying notes. Actual results could differ from
those estimates, although such differences are not expected to be material to
the consolidated financial statements.
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 may take action in the
future to reduce its foreign exchange risk.
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. Under the
percentage-of-completion method, revenue recognized is that portion of the total
contract price equal to the ratio of costs expended to date to the anticipated
final total costs, based on current estimates of the costs to complete the
project. 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 provide customers access to
technical support and minor enhancements to licensed releases 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
tests 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain of Zoran's financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and other current
liabilities, the carrying value amounts approximate their fair value due to the
relatively short maturity of these items.
F-8
<PAGE>
ZORAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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.
All of Zoran'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, included as a separate component of stockholders' equity.
Realized gains and losses on sales of all such securities are reported in
interest and other income and have not been significant to date. At
December 31, 1998, the fair value of the Company's marketable securities
approximates cost.
(unaudited)
At September 30, 1999, the Company's investment portfolio consisted primarily of
commercial paper with maturities of less than one year and the stock acquired as
a result of the MGI transaction (see Note 12). The unrealized gain on securities
available for sale of $483,000 included in comprehensive income represents the
unrealized gain on the stock as of September 30, 1999. The fair value of the
remaining marketable securities approximates cost at September 30, 1999.
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, 1998. As of December 31,
1998, five customers accounted for approximately 20%, 14%, 7%, 7%, and 5% of the
accounts receivable balance. As of December 31, 1997, three customers accounted
for approximately 29%, 17% and 11% of the accounts receivable balance.
INVENTORY
Inventories are stated at the lower of standard cost (which approximates actual
cost on a first-in, first-out basis) or market. Market is based on estimated net
realizable value.
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.
F-9
<PAGE>
ZORAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INCOME TAXES
The Company follows the liability method of accounting for income taxes which
requires recognition of deferred tax liabilities and assets for the expected
future tax consequence of temporary differences between the financial statement
carrying amounts and the tax bases of assets and liabilities.
(unaudited)
For the nine month periods ended September 30, 1998 and 1999 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.
EARNINGS PER SHARE
In accordance with Statement of Financial Accounting Standards no. 128
("SFAS 128") Zoran reports Earnings per Share ("EPS"), both basic and diluted,
on the statement of operations. Basic EPS is based upon the weighted average
number of common shares outstanding. Diluted EPS is computed using the weighted
average common shares outstanding plus any potentially dilutive securities,
except when their effect is anti-dilutive. Dilutive securities include stock
options and warrants. See Note 9.
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 3 and 8.
SEGMENT REPORTING
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information." SFAS 131 supersedes SFAS 14 "Financial Reporting for Segments of a
Business Enterprise," replacing the "Industry Segment" approach with the
"Management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments.
SFAS 131 also requires disclosures about products and services, geographic
areas, and major customers. The Company operates in one industry segment
comprising the development and marketing of integrated circuits and software
products for use in a variety of video and audio products addressing PC and
consumer multimedia markets.
COMPREHENSIVE INCOME
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 130 ("SFAS 130") reporting comprehensive income.
F-10
<PAGE>
ZORAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
The following are the components of comprehensive income (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------ --------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income......................................... $2,363 $4,229 $ 929 $ 56 $3,338
Unrealized gain on short term-investment........... -- -- -- -- 483
------ ------ ------ ------ ------
Comprehensive income............................... $2,363 $4,229 $ 929 $ 56 $3,821
====== ====== ====== ====== ======
</TABLE>
The components of accumulated other comprehensive income are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1997 1998 1999
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Unrealized gain on short term investment.................... -- -- $ 483
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes a new model for
accounting for derivatives and hedging activities and supercedes and amends a
number of existing accounting standards. SFAS 133 requires that all derivatives
be recognized in the balance sheet at their fair market value, and the
corresponding derivative gains or losses be either reported in the statement of
operations or as a deferred item depending on the type of hedge relationship
that exists with respect to such derivative. Adopting the provisions of
SFAS 133, which will be effective for the Company's fiscal year 2000, are not
expected to have a material effect on the Company's consolidated financial
statements.
(unaudited)
In July 1999, the Financial Accounting' Standards Board issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative Instruments
and Hedging Activities--Deferral of the Effective Date of SFAS 133
("SFAS 137"). SFAS 137 defers the effective date of SFAS 133 to fiscal quarters
and years beginning after June 15, 2000. Adopting the provisions of SFAS 133 is
not expected to have a material effect on the Company's consolidated financial
statements.
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.
Net income for 1996 includes $2,153,000 of merger costs and expenses which were
incurred and have been charged to merger and related expenses in 1996. The
charge includes professional fees, costs associated with merging the companies
and other direct transaction costs associated with 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 amortized
approximately $201,000 of compensation expense over their
F-11
<PAGE>
ZORAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--ACQUISITION OF COMPCORE: (CONTINUED)
vesting periods of two and four years, respectively. Due to certain employee
terminations, the compensation expense was fully amortized at December 31, 1998.
NOTE 4--BALANCE SHEET COMPONENTS (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1997 1998 1999
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ACCOUNTS RECEIVABLE, NET:
Trade........................................ $17,253 $14,486 $19,857
Unbilled..................................... 245 1,871 747
------- ------- -------
17,498 16,537 20,604
Less: allowance.............................. (989) (799) (1,071)
------- ------- -------
$16,509 $15,558 $19,533
======= ======= =======
</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.
F-12
<PAGE>
ZORAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--BALANCE SHEET COMPONENTS (IN THOUSANDS): (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1997 1998 1999
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
INVENTORY:
Work-in-process........................................... $ 1,860 $ 1,781 $ 3,037
Finished goods............................................ 2,263 5,282 6,397
------- ------- -------
$ 4,123 $ 7,063 $ 9,434
======= ======= =======
PROPERTY AND EQUIPMENT:
Computer equipment........................................ $ 9,100 $ 9,573 $ 9,005
Office equipment and furniture............................ 702 706 724
Machinery and equipment................................... 824 860 985
Leasehold improvements.................................... 493 544 568
------- ------- -------
11,119 11,683 11,282
Less: accumulated depreciation and amortization........... (5,415) (6,327) (6,709)
------- ------- -------
$ 5,704 $ 5,356 $ 4,573
======= ======= =======
ACCRUED EXPENSES AND OTHER LIABILITIES:
Accrued payroll and related expenses...................... $ 2,765 $ 1,910 $ 2,518
Accrued royalties......................................... 1,187 808 508
Taxes payable............................................. 1,266 1,592 2,993
Deferred revenue.......................................... 464 352 507
Other accrued liabilities................................. 1,404 1,792 1,980
------- ------- -------
$ 7,086 $ 6,454 $ 8,506
======= ======= =======
</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 3% 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.
F-13
<PAGE>
ZORAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--RESEARCH AND DEVELOPMENT ARRANGEMENTS: (CONTINUED)
Gross research and development expenses and the related grants are as follows
(in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Research and development expenses:
Gross research and development expenses.......... $9,136 $13,787 $14,399 $10,254 $10,431
Less: grants earned.............................. (182) -- (851) (600) (486)
------ ------- ------- ------- -------
$8,954 $13,787 $13,548 $ 9,654 $ 9,945
====== ======= ======= ======= =======
</TABLE>
Royalty expenses related to these grants were $1,248,000, $301,000, and $196,000
in 1996, 1997 and 1998, respectively and $177,000 (unaudited) and $4,000
(unaudited) for the nine months ended September 30, 1998 and 1999, 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 $3,698,000, $1,752,000 and $2,960,000 in 1996, 1997
and 1998, respectively and $2,136,000 (unaudited) and $685,000 (unaudited) for
the nine months ended September 30, 1998 and 1999, respectively.
NOTE 7--COMMITMENTS:
The Company rents facilities and equipment under various lease agreements
expiring through 2003. Rent expense for 1996, 1997 and 1998 totaled
approximately $405,000, $748,000 and $887,000 respectively. Future minimum lease
payments required under noncancelable leases at December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
1999........................................................ $ 882,000
2000........................................................ 482,000
2001........................................................ 289,000
2002........................................................ 289,000
2003........................................................ 108,000
----------
Total minimum lease payments................................ $2,050,000
==========
</TABLE>
F-14
<PAGE>
ZORAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--STOCKHOLDERS' EQUITY:
COMMON STOCK
In December 1995, the Company issued shares of Common Stock in conjunction with
the Company's initial public offering ("IPO"). In January 1996, the underwriters
exercised their over-allotment option to purchase additional shares of Common
Stock. In December 1996, the Company acquired CompCore through a merger which
was accounted for as a pooling of interest (see Note 3).
WARRANTS
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 a date beginning one year after the issuance date of the warrant. The
$717,000 estimated value of the warrant, is being amortized over the four-year
period of the license agreement. The unamortized balance at December 31, 1998 of
$477,000 is included in prepaid expenses and other current assets.
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. 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 option price for shares granted under the 1993
Option Plan is typically equal to the fair market value of the common stock at
the date of grant. 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.
In August 1998, substantially all options with an exercise price in excess of
$5.94 were cancelled and replaced with new options having an exercise price of
$5.94, the market price on the date that the employees accepted the repricing. A
total of 924,164 shares were repriced.
At December 31, 1998, shares available for grant under this plan were 142,000.
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
F-15
<PAGE>
ZORAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--STOCKHOLDERS' EQUITY: (CONTINUED)
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.
At December 31, 1998 shares available for future issuance under this plan was
64,000.
The following table summarizes the Company's stock option activity for the years
ended December 31, 1996, 1997 and 1998. The weighted average exercise price for
each category presented is also shown in the table below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------- NINE MONTHS ENDED
1996 1997 1998 SEPTEMBER 30, 1999
-------------------- -------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- ---------- -------- ---------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period............. 1,328,084 $2.09 2,164,208 $ 2.30 2,053,171 $ 8.62 2,226,265 $ 5.11
Granted................. 980,546 2.24 771,890 18.86 1,665,491 7.23 536,600 19.14
Exercised............... (140,253) 0.17 (727,882) 0.39 (329,963) 0.56 (570,092) 2.64
Canceled................ (4,169) 0.29 (155,045) 10.01 (1,162,434) 15.64 (231,350) 6.22
--------- --------- ---------- ----------
Options outstanding at
period end............ 2,164,208 $2.30 2,053,171 $ 8.62 2,226,265 $ 5.11 1,961,423 $ 9.52
========= ========= ========== ==========
Options exercisable at
period end............ 2,132,151 1,940,317
========== ==========
</TABLE>
Significant option groups outstanding as of December 31, 1998 and the related
weighted average exercise price and contractual life information, are as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------- --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE CONTRACTUAL
EXERCISE PRICE NUMBER PRICE NUMBER PRICE LIFE (YEARS)
- -------------- --------- -------- --------- -------- ------------
<S> <C> <C> <C> <C> <C>
$0.13--$0.60.............. 585,803 $ 0.15 561,055 $ 0.15 5.8
$1.57--$4.69.............. 92,019 2.66 41,156 2.94 7.5
$5.94--$5.94.............. 1,292,997 5.94 1,292,997 5.94 9.6
$8.50--$13.50............. 200,396 10.97 181,893 11.13 8.2
$14.00--$24.13............ 55,050 21.12 55,050 21.12 8.3
--------- ---------
2,226,265 $ 5.11 2,132,151 $ 5.19 8.4
========= =========
</TABLE>
F-16
<PAGE>
ZORAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--STOCKHOLDERS' EQUITY: (CONTINUED)
The weighted average grant date fair value of options granted during the years
ended December 31, 1996, 1997 and 1998 as defined by SFAS 123, were $7.05, $9.19
and $7.23 per share, respectively. Included in the grants in 1996 were options
issued by CompCore and assumed by Zoran at exercise prices below market prices
of the Company's Common Stock at the date of grant, of which their weighted
average fair value was $6.41 per share (see Note 3).
1995 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1995 Employee Stock Purchase Plan ("ESPP") was adopted by the
Company's Board of Directors in October 1995, and approved by its stockholders
in December 1995. The ESPP enables 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, 1997 and 1998, 42,669 and 84,354
shares were purchased by employees under the terms of the plan agreements at a
weighted average price of $13.33 and $9.57 per share, respectively. At
December 31, 1998, 148,780 shares were reserved and available for issuance under
this plan.
The weighted average grant date fair value of rights granted during the year
ended December 31, 1996, 1997 and 1998 as defined by SFAS 123, was $5.46, $3.64
and $3.55 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 (loss) and net income (loss) per share for
each of the three years ended December 31, 1998 would have been as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Net income (loss)
As reported....................................... $2,363 $4,229 $ 929
Pro forma......................................... $1,749 $ 547 $(4,144)
Net income (loss) per share:
As reported
Basic........................................... $ 0.27 $ 0.45 $ 0.09
Diluted......................................... $ 0.22 $ 0.38 $ 0.08
Pro forma
Basic........................................... $ 0.20 $ 0.06 $ (0.41)
Diluted......................................... $ 0.17 $ 0.05 $ (0.41)
</TABLE>
F-17
<PAGE>
ZORAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--STOCKHOLDERS' EQUITY: (CONTINUED)
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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Dividend rate..................... 0.0% 0.0% 0.0%
Risk-free interest rates.......... 5.3% to 6.6% 5.1% to 6.3% 4.2% to 5.6%
Volatility........................ 67.0% 67.0% 61.0%
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, 1996, 1997 and 1998.
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:
A reconciliation of the numerators and the denominators of the basic and diluted
per share computation is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------
1996 1997 1998
--------------------------------------- --------------------------------------- ------------
PER PER
INCOME SHARES SHARE INCOME SHARES SHARE INCOME
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR)
------------ ------------- -------- ------------ ------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income......... $2,363 8,802 $0.27 $4,229 9,412 $0.45 $929
===== =====
Effects of Dilutive
Securities:
Stock Options...... -- 1,706 -- 1,539 --
Warrants........... -- 153 -- 121 --
Diluted EPS:
------ ------ ------ ------ ----
Net income......... $2,363 10,661 $0.22 $4,229 11,072 $0.38 $929
====== ====== ===== ====== ====== ===== ====
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998
------------------------
PER
SHARES SHARE
(DENOMINATOR) AMOUNT
------------- --------
<S> <C> <C>
Basic EPS:
Net income......... 10,042 $0.09
=====
Effects of Dilutive
Securities:
Stock Options...... 1,064
Warrants........... 13
Diluted EPS:
------
Net income......... 11,119 $0.08
====== =====
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------
1998 1999
--------------------------------------- ---------------------------------------
PER PER
INCOME SHARES SHARE INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- -------- ------------ ------------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income................................. $56 9,988 $0.01 $3,338 10,578 $0.32
===== =====
Effects of Dilutive Securities:
Stock Options.............................. -- 963 -- 1,287
Warrants................................... -- 19 -- --
Diluted EPS:
--- ------ ------ ------
Net income................................. $56 10,970 $0.01 $3,338 11,865 $0.28
=== ====== ===== ====== ====== =====
</TABLE>
F-18
<PAGE>
ZORAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--INCOME TAXES:
The components of income before income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
U.S.................................................. $ (783) $1,925 $ 475
Foreign.............................................. 3,811 3,232 686
------ ------ ------
$3,028 $5,157 $1,161
====== ====== ======
</TABLE>
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
U.S........................................... $ 103 $ 360 $ 106
State......................................... 66 98 26
Foreign....................................... 496 470 100
-------- -------- --------
Total current............................... 665 928 232
Deferred...................................... -- -- --
-------- -------- --------
Total..................................... $ 665 $ 928 $ 232
======== ======== ========
</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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax at U.S. statutory rate...................... $ 1,030 $ 1,753 $ 395
Utilization of net operating loss carryovers.... (575) (856) (35)
Foreign earnings................................ (309) (213) (156)
State taxes net of federal benefit.............. 13 65 --
Merger expenses................................. 455 -- --
Gain on transfer of holding in LLC.............. 29 -- --
Alternative minimum tax......................... -- 50 --
Other........................................... 22 129 28
-------- -------- --------
$ 665 $ 928 $ 232
======== ======== ========
</TABLE>
F-19
<PAGE>
ZORAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--INCOME TAXES: (CONTINUED)
Deferred income tax assets comprise the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal and state net operating loss
carryforwards................................. $ 13,176 $ 12,286 $ 12,279
Capitalized research and development expenses... 392 216 372
Nondeductible reserves and accruals............. 1,051 886 951
-------- -------- --------
Total deferred tax assets....................... 14,619 13,388 13,602
Deferred tax liabilities........................ -- -- --
-------- -------- --------
Net deferred tax assets......................... 14,619 13,388 13,602
Valuation allowance............................. (14,619) (13,388) (13,602)
-------- -------- --------
$ -- $ -- $ --
======== ======== ========
</TABLE>
As of December 31, 1998, 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 $170,000 in
fiscal 1998 and to increase net income per share by $0.01.
F-20
<PAGE>
ZORAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--SEGMENT REPORTING:
The Company operates in one industry segment comprising the design, development,
manufacture and sale of integrated circuits. The following is a summary of the
Company's operations:
Sales to customers located in (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
------------------------------ SEPTEMBER 30,
1996 1997 1998 1999
-------- -------- -------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
United States..................... $11,617 $25,480 $17,935 $10,117
Pacific Rim....................... 21,374 9,825 15,850 26,048
Europe............................ 11,118 9,622 10,440 5,454
------- ------- ------- -------
$44,109 $44,927 $44,225 $41,619
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1997 1998 1999
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Identifiable assets:
U.S...................................... $37,774 $38,509 $35,821
Israel................................... 13,170 10,661 18,331
------- ------- -------
Total.................................. $50,944 $49,170 $54,152
======= ======= =======
</TABLE>
Significant customers are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, NINE MONTHS ENDED
------------------------------ SEPTEMBER 30,
1996 1997 1998 1999
-------- -------- -------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Customers comprising 10% or more of the
Company's total revenues for the period
indicated:
A....................................... 38% -- 23% 42%
B....................................... 16% 15% -- --
C....................................... -- 15% 14% --
D....................................... -- 15% -- --
</TABLE>
NOTE 12--SALE OF CERTAIN ASSETS (UNAUDITED):
In June 1999, the Company sold to MGI Software of Canada the intellectual
property related to its SoftDVD product line and transferred to MGI certain
related software development and support resources in exchange for cash, MGI
common stock and future royalties. The Company's results for the second quarter
of 1999 include a $732,000 gain realized from this transaction which is reported
as part of interest and other income or expense. In connection with this
transaction, the Company also recorded a charge that reduced software, licensing
and development revenue for the quarter by $517,000 for possible issues related
to receivables associated with the SoftDVD product line. The net impact of the
MGI transaction on the Company's results was an after-tax gain of $172,000, or
$0.01 per share on a diluted basis. This gain does not reflect the potential
future economic benefit that may be derived from
F-21
<PAGE>
ZORAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--SALE OF CERTAIN ASSETS (UNAUDITED): (CONTINUED)
this transaction and realized in future periods in the form of royalties. The
Company does not currently expect, however, that these royalties will have a
material impact on quarterly revenues for the foreseeable future. In addition,
the shares of MGI stock received by the Company as part of this transaction are
subject to future appreciation or depreciation. The Company believes that its
software revenues will decline significantly as a result of the sale of the
SoftDVD product line.
NOTE 13--RELATED-PARTY TRANSACTIONS:
In January 1996, the Company spun off its wholly-owned subsidiary, Oren
Semiconductor, to the Company's stockholders. Two of the Company's directors are
also members of Oren's board of directors. The Company has no ownership interest
in Oren.
(unaudited)
In March 1999, the Company entered into a technology license agreement with
Oren. Under the license arrangement Oren agreed to pay to the Company license
and maintenance fees totalling $400,000 and royalties and maintenance fees based
on related products sold by Oren. License fees of approximately $360,000 were
recognized in the first quarter of 1999.
In April 1999, the company loaned Oren $350,000. The loan plus interest,
computed at 7% per year, was repaid by Oren in July 1999. The Company has no
commitments or plans to loan additional amounts to Oren.
F-22
<PAGE>
- --------------------------------------------------------------------------------
[LOGO]
3,000,000 SHARES
COMMON STOCK
-------------------
PROSPECTUS
-------------------
, 1999
CIBC WORLD MARKETS
ROBERTSON STEPHENS
SALOMON SMITH BARNEY
SOUNDVIEW TECHNOLOGY GROUP
- ------------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO DEALER,
SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE INFORMATION THAT IS NOT
CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT
SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR
SALE IS NOT PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT
ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF THE DELIVERY
OF THIS PROSPECTUS OR ANY SALE OF THESE SECURITIES.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All of the amounts shown are estimates
except the Securities and Exchange Commission registration fees and Nasdaq
filing fee.
<TABLE>
<CAPTION>
TO BE PAID
BY THE REGISTRANT
-----------------
<S> <C>
SEC Registration Fee........................................ $ 33,149
Nasdaq filing fee........................................... $ 17,500
NASD filing fee............................................. $ 12,425
Accounting fees and expenses................................ $ 65,000
Legal fees and expenses..................................... $ 75,000
Miscellaneous expenses...................................... $ 1,926
--------
Total....................................................... $205,000
========
</TABLE>
- ---------------------
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law (the "DGCL") permits
indemnification of officers, directors and other corporate agents under certain
circumstances and subject to certain limitations. The Registrant's Certificate
of Incorporation and Bylaws provide that the Registrant shall indemnify its
directors, officers, employees and agents to the full extent permitted by the
DGCL, including in circumstances in which indemnification is otherwise
discretionary under such law. In addition, with the approval of the Board of
Directors and the stockholders, the Registrant has entered into separate
indemnification agreements with its directors, officers and certain employees
which require the Registrant, among other things, to indemnify them against
certain liabilities which may arise by reason of their status or service (other
than liabilities arising from willful misconduct of a culpable nature) and to
obtain directors' and officers' insurance, if available on reasonable terms.
These indemnification provisions may be sufficiently broad to permit
indemnification of the Registrant's officers, directors and other corporate
agents for liabilities (including reimbursement of expenses incurred) arising
under the Securities Act of 1933.
At present, there is no pending litigation or proceeding involving a director,
officer, employee or other agent of the Registrant in which indemnification is
being sought nor is the Registrant aware of any threatened litigation that may
result in a claim for indemnification by any director, officer, employee or
other agent of the Registrant.
The Registrant has obtained liability insurance for the benefit of its directors
and officers.
II-1
<PAGE>
ITEM 16. EXHIBITS.
The following exhibits are filed with this Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
1.1 Form of Underwriting Agreement
5.1 Opinion of Gray Cary Ware & Freidenrich LLP
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants
23.2 Consent of Gray Cary Ware & Freidenrich LLP (included in
Exhibit 5.1)
24.1 Power of Attorney (included in the Signature Page contained
in Part II of the Registration Statement)
</TABLE>
ITEM 17. UNDERTAKINGS.
A. The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933 (the "Securities Act");
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement; PROVIDED, HOWEVER, that paragraphs (a)(1)(i) and
(a)(1)(ii) do not apply if the information required to be included
in a post-effective amendment by those paragraphs is contained in
periodic reports filed by the Registrant pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
B. The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to section 13(a) or section 15(d) of
the Securities Exchange Act of 1934 that is incorporated by reference in
the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
II-2
<PAGE>
C. The undersigned Registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is
sent or given, the latest annual report to security holders that is
incorporated by reference in the prospectus and furnished pursuant to and
meeting the requirements of Rule 14a-3 or Rule 14c-3 under the Securities
Exchange Act of 1934; and, where interim financial information required
to be presented by Article 3 of Regulation S-X are not set forth in the
prospectus, to deliver, or cause to be delivered to each person to whom
the prospectus is sent or given, the latest quarterly report that is
specifically incorporated by reference in the prospectus to provide such
interim financial information.
D. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a
director, officer, or controlling person of the Registrant in the
successful defense of any action, suit, or proceeding) is asserted by
such director, officer, or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
E. The undersigned Registrant hereby undertakes that:
(1) For the purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of the
registration statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Santa Clara, State of California on November 17, 1999.
<TABLE>
<S> <C> <C>
ZORAN CORPORATION
By: /s/ LEVY GERZBERG
------------------------------------------
Levy Gerzberg
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Levy Gerzberg and Karl Schneider, and each of
them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement on Form S-3, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-facts and agents, or either
of them, or their or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ LEVY GERZBERG
--------------------------------- President and Chief Executive Officer November 17, 1999
Levy Gerzberg (Principal Executive Officer)
/s/ UZIA GALIL
--------------------------------- Chairman of the Board November 17, 1999
Uzia Galil
/s/ KARL SCHNEIDER Vice President Finance and Chief
--------------------------------- Financial Officer (Principal November 17, 1999
Karl Schneider Financial and Accounting Officer)
--------------------------------- Director November 17, 1999
George T. Haber
/s/ JAMES D. MEINDL
--------------------------------- Director November 17, 1999
James D. Meindl
/s/ ARTHUR B. STABENOW
--------------------------------- Director November 17, 1999
Arthur B. Stabenow
/s/ PHILIP M. YOUNG
--------------------------------- Director November 17, 1999
Philip M. Young
</TABLE>
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- --------------------- ----------------------
<C> <S>
1.1 Form of Underwriting Agreement
5.1 Opinion of Gray Cary Ware & Freidenrich LLP
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants
23.2 Consent of Gray Cary Ware & Freidenrich LLP (included in
Exhibit 5.1)
24.1 Power of Attorney (included in the Signature Page contained
in Part II of the Registration Statement)
</TABLE>
<PAGE>
3,000,000 Shares
ZORAN CORPORATION
Common Stock
UNDERWRITING AGREEMENT
----------------------
, 1999
CIBC World Markets Corp.
BancBoston Robertson Stephens Inc.
Salomon Smith Barney Inc.
SoundView Technology Group, Inc.
c/o CIBC World Markets Corp.
One World Financial Center
New York, New York 10281
On behalf of the Several
Underwriters named on
Schedule I attached hereto.
Ladies and Gentlemen:
Zoran Corporation, a Delaware corporation (the "Company") and the
persons listed on Schedule II hereto (the "Selling Stockholders"), propose,
subject to the terms and conditions contained herein, to sell to you and the
other underwriters named on Schedule I to this Agreement (the
"Underwriters"), for whom you are acting as Representatives (the
"Representatives"), an aggregate of 3,000,000 shares (the "Firm Shares") of
the Company's Common Stock, $0.01 par value (the "Common Stock"). Of the
3,000,000 Shares, 2,500,000 are to be issued and sold by the Company and
500,000 are to be sold by the Selling Stockholders. The respective amounts of
the Firm Shares to be purchased by each of the several Underwriters are set
forth opposite their names on Schedule I hereto. In addition, the Company
proposes to grant to the Underwriters an option to purchase up to an
additional 450,000 shares (the "Option Shares") of Common Stock from it for
the purpose of covering overallotments in connection with the sale of the
Firm Shares. The Firm Shares and the Option Shares are together called the
"Shares."
1. SALE AND PURCHASE OF THE SHARES.
On the basis of the representations, warranties and agreements
contained in, and subject to the terms and conditions of, this Agreement:
(a) The Company agrees to sell to each of the
Underwriters, and each of the Underwriters agrees, severally and not
jointly, to purchase from the Company, at a price of $_____ per share
(the "Initial Price"), the number of Firm Shares set forth opposite the
name of such Underwriter under the column "Number of Firm Shares to be
Purchased from the Company" on Schedule I to this Agreement, subject to
adjustment in accordance with Section 11 hereof. The Selling
Stockholders agree to sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the
Selling Stockholders, at the Initial Price, the number of Firm Shares
set forth opposite the name of such Underwriter under the column
"Number of Firm Shares to be Purchased from the Selling Stockholders"
on Schedule I to this Agreement, subject to adjustment in accordance
with Section 11 hereof.
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<PAGE>
(b) The Company grants to the several Underwriters an
option to purchase, severally and not jointly, all or any part of the
Option Shares at the Initial Price. The number of Option Shares to be
purchased by each Underwriter shall be the same percentage (adjusted by
the Representatives to eliminate fractions) of the total number of
Option Shares to be purchased by the Underwriters as such Underwriter
is purchasing of the Firm Shares. Such option may be exercised only to
cover over-allotments in the sales of the Firm Shares by the
Underwriters and may be exercised in whole or in part at any time on or
before 12:00 noon, New York City time, on the business day before the
Firm Shares Closing Date (as defined below), and from time to time
thereafter within 30 days after the date of this Agreement, in each
case upon written, facsimile or telegraphic notice, or verbal or
telephonic notice confirmed by written, facsimile or telegraphic
notice, by the Representatives to the Company no later than 12:00 noon,
New York City time, on the business day before the Firm Shares Closing
Date or at least two business days before the Option Shares Closing
Date (as defined below), as the case may be, setting forth the number
of Option Shares to be purchased and the time and date (if other than
the Firm Shares Closing Date) of such purchase.
2. DELIVERY AND PAYMENT. Delivery by the Company and the
Selling Stockholders of the Firm Shares to the Representatives for the
respective accounts of the Underwriters, and payment of the purchase price by
certified or official bank check or checks payable in New York Clearing House
(same day) funds drawn to the order of the Company for the shares purchased
from the Company and to the Selling Stockholders for the shares purchased
from the Selling Stockholders, against delivery of the respective
certificates therefor to the Representatives, shall take place at the offices
of CIBC World Markets Corp., One World Financial Center, New York, New York
10281, at 10:00 a.m., New York City time, on the third business day following
the date of this Agreement, or at such time on such other date, not later
than 10 business days after the date of this Agreement, as shall be agreed
upon by the Company and the Representatives (such time and date of delivery
and payment are called the "Firm Shares Closing Date").
In the event the option with respect to the Option Shares is
exercised in whole or in part on one or more occasions, delivery by the
Company of the Option Shares to the Representatives for the respective
accounts of the Underwriters and payment of the purchase price thereof in
immediately available funds by wire transfer or by certified or official bank
check or checks payable in New York Clearing House (same day) funds to the
Company shall take place at the offices of CIBC World Markets Corp. specified
above at the time and on the date (which may be the same date as, but in no
event shall be earlier than, the Firm Shares Closing Date) specified in the
notice referred to in Section 1(b) (such time and date of delivery and
payment are called the "Option Shares Closing Date"). The Firm Shares Closing
Date and the Option Shares Closing Date are called, individually, a "Closing
Date" and, together, the "Closing Dates."
Certificates evidencing the Shares shall be registered in such names
and shall be in such denominations as the Representatives shall request at
least two full business days before the Firm Shares Closing Date or, in the
case of Option Shares, on the day of notice of exercise of the option as
described in Section l(b) and shall be made available to the Representatives
for checking and packaging, at such place as is designated by the
Representatives, on the full business day before the Firm Shares Closing Date
(or the Option Shares Closing Date in the case of the Option Shares).
3. REGISTRATION STATEMENT AND PROSPECTUS; PUBLIC OFFERING. The
Company has prepared and filed in conformity with the requirements of the
Securities Act of 1933, as amended (the "Securities Act"), and the published
rules and regulations thereunder (the "Rules") adopted by the Securities and
Exchange Commission (the "Commission") a Registration Statement (as
hereinafter defined) on Form S-3 (No. 333-_____), including a preliminary
prospectus relating to the Shares, and such amendments thereof as may have
been required to the date of this Agreement. Copies of such Registration
Statement (including all amendments thereof) and of
2
<PAGE>
the related Preliminary Prospectus (as hereinafter defined) have heretofore
been delivered by the Company to you. The term "Preliminary Prospectus" means
any preliminary prospectus (as described in Rule 430 of the Rules) included
at any time as a part of the Registration Statement or filed with the
Commission by the Company with the consent of the Representatives pursuant to
Rule 424(a) of the Rules. The term "Registration Statement" as used in this
Agreement means the initial registration statement (including all exhibits,
financial schedules and information deemed to be a part of the Registration
Statement through incorporation by reference or otherwise), as amended at the
time and on the date it becomes effective (the "Effective Date") including
the information (if any) deemed to be part thereof at the time of
effectiveness pursuant to Rule 430A of the Rules. If the Company has filed an
abbreviated registration statement to register additional Shares pursuant to
Rule 462(b) under the Rules (the "462(b) Registration Statement") then any
reference herein to the Registration Statement shall also be deemed to
include such 462(b) Registration Statement. The term "Prospectus" as used in
this Agreement means the prospectus in the form included in the Registration
Statement at the time of effectiveness or, if Rule 430A of the Rules is
relied on, the term Prospectus shall also include the final prospectus filed
with the Commission pursuant to Rule 424(b) of the Rules (in each case,
including all information deemed to be a part of the Prospectus through
incorporation by reference or otherwise).
The Company and the Selling Stockholders understand that the
Underwriters propose to make a public offering of the Shares, as set forth in
and pursuant to the Prospectus, as soon after the Effective Date and the date
of this Agreement as the Representatives deem advisable. The Company and the
Selling Stockholders hereby confirm that the Underwriters and dealers have
been authorized to distribute or cause to be distributed each Preliminary
Prospectus and are authorized to distribute the Prospectus (as from time to
time amended or supplemented if the Company furnishes amendments or
supplements thereto to the Underwriters).
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING
STOCKHOLDERS. The Company and the Selling Stockholders hereby, jointly and
severally, represent and warrant to each Underwriter as follows:
(a) On the Effective Date, the Registration Statement
complied, and on the date of the Prospectus, the date any
post-effective amendment to the Registration Statement becomes
effective, the date any supplement or amendment to the Prospectus is
filed with the Commission and each Closing Date, the Registration
Statement and the Prospectus (and any amendment thereof or supplement
thereto) will comply, in all material respects, with the applicable
provisions of the Securities Act and the Rules and the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the rules
and regulations of the Commission thereunder. The Registration
Statement did not, as of the Effective Date, contain any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the
statements therein not misleading; and on the Effective Date and the
other dates referred to above neither the Registration Statement nor
the Prospectus, nor any amendment thereof or supplement thereto, will
contain any untrue statement of a material fact or will omit to state
any material fact required to be stated therein or necessary in order
to make the statements therein not misleading. When any related
preliminary prospectus was first filed with the Commission (whether
filed as part of the Registration Statement or any amendment thereto or
pursuant to Rule 424(a) of the Rules) and when any amendment thereof or
supplement thereto was first filed with the Commission, such
preliminary prospectus as amended or supplemented complied in all
material respects with the applicable provisions of the Securities Act
and the Rules and did not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein not misleading.
Notwithstanding the foregoing, none of the representations and
warranties in this paragraph 4(a) shall apply to statements in, or
omissions from, the Registration Statement or the Prospectus made in
3
<PAGE>
reliance upon, and in conformity with, information herein or otherwise
furnished in writing by the Representatives on behalf of the several
Underwriters for use in the Registration Statement or the Prospectus.
With respect to the preceding sentence, the Company acknowledges that
the only information furnished in writing by the Representatives on
behalf of the several Underwriters for use in the Registration
Statement or the Prospectus is the paragraph with respect to
stabilization and the concession and reallowance figures appearing
under the caption "Underwriting" in the Prospectus.
(b) The Registration Statement is effective under the
Securities Act and no stop order preventing or suspending the
effectiveness of the Registration Statement or suspending or preventing
the use of the Prospectus has been issued and no proceedings for that
purpose have been instituted or are threatened under the Securities
Act. Any required filing of the Prospectus and any supplement thereto
pursuant to Rule 424(b) of the Rules has been or will be made in the
manner and within the time period required by such Rule 424(b).
(c) The documents incorporated by reference in the
Registration Statement and the Prospectus, at the time they were filed
with the Commission, complied in all material respects with the
requirements of the Exchange Act and, when read together and with the
other information in the Registration Statement and the Prospectus, do
not contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading.
(d) The financial statements of the Company (including
all notes and schedules thereto) included or incorporated by reference
in the Registration Statement and Prospectus present fairly the
financial position, the results of operations, the statements of cash
flows and the statements of stockholders' equity and the other
information purported to be shown therein of the Company at the
respective dates and for the respective periods to which they apply;
and such financial statements and related schedules and notes have been
prepared in conformity with generally accepted accounting principles,
consistently applied throughout the periods involved, and all
adjustments necessary for a fair presentation of the results for such
periods have been made. The summary and selected financial data
included in the Prospectus present fairly the information shown therein
as at the respective dates and for the respective periods specified and
the summary and selected financial data have been presented on a basis
consistent with the consolidated financial statements so set forth in
the Prospectus and other financial information.
(e) PriceWaterhouseCoopers LLP, whose reports are filed
with the Commission as a part of the Registration Statement, are and,
during the periods covered by their reports, were independent public
accountants to the Company as required by the Securities Act and the
Rules.
(f) The Company and each of its Subsidiaries (as
hereinafter defined) is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its
incorporation. The Company and each such subsidiary or other entity
controlled directly or indirectly by the Company (collectively,
"Subsidiaries") is duly qualified to do business and is in good
standing as a foreign corporation in each jurisdiction in which the
nature of the business conducted by it or location of the assets or
properties owned, leased or licensed by it requires such qualification,
except for such jurisdictions where the failure to so qualify would not
have a material adverse effect on the assets or properties, business,
results of operations or financial condition of the Company and its
Subsidiaries, taken as a whole (a "Material Adverse Effect"). The
4
<PAGE>
Company and each of its Subsidiaries has all requisite corporate power
and authority, and all necessary authorizations, approvals, consents,
orders, licenses, certificates and permits of and from all governmental
or regulatory bodies or any other person or entity (collectively, the
"Permits"), to own, lease and license its assets and properties and
conduct its business, all of which are valid and in full force and
effect, as described in the Registration Statement and the Prospectus,
except where the lack of such Permits, individually or in the
aggregate, would not have a Material Adverse Effect. The Company and
each of its Subsidiaries has fulfilled and performed in all material
respects all of its material obligations with respect to such Permits
and no event has occurred that allows, or after notice or lapse of time
would allow, revocation or termination thereof or results in any other
material impairment of the rights of the Company thereunder. Except as
may be required under the Securities Act and state and foreign Blue Sky
laws, no other Permits are required to enter into, deliver and perform
this Agreement and to issue and sell the Shares.
(g) The Company and each of its Subsidiaries owns or
possesses adequate and enforceable rights to use all trademarks,
trademark applications, trade names, service marks, copyrights,
copyright applications, licenses, know-how and other similar rights and
proprietary knowledge (collectively, "Intangibles") described in the
Prospectus as being owned by it necessary for the conduct of its
business. Except as disclosed in the Registration Statement and the
Prospectus, neither the Company nor any of its Subsidiaries has
received any notice of, or is not aware of, any infringement of or
conflict with asserted rights of others with respect to any
Intangibles.
(h) The Company and each of its Subsidiaries has good and
marketable title in fee simple to all items of real property and good
and marketable title to all personal property described in the
Prospectus as being owned by it. Any real property and buildings
described in the Prospectus as being held under lease by the Company or
any of its Subsidiaries is held by it under valid, existing and
enforceable leases, free and clear of all liens, encumbrances, claims,
security interests and defects, except such as are described in the
Registration Statement and the Prospectus or would not have a Material
Adverse Effect.
(i) There are no litigation or governmental proceedings
to which the Company or any of its Subsidiaries is subject or which is
pending or, to the knowledge of the Company, threatened, against the
Company or any of its Subsidiaries, which, individually or in the
aggregate, might have a Material Adverse Effect, affect the
consummation of this Agreement or which is required to be disclosed in
the Registration Statement and the Prospectus that is not so disclosed.
(j) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus,
except as described therein, (a) there has not been any material
adverse change with regard to the assets or properties, business,
results of operations or financial condition of the Company or any of
its Subsidiaries; (b) neither the Company nor any of its Subsidiaries
has sustained any loss or interference with its assets, businesses or
properties (whether owned or leased) from fire, explosion, earthquake,
flood or other calamity, whether or not covered by insurance, or from
any labor dispute or any court or legislative or other governmental
action, order or decree which would have a Material Adverse Effect; and
(c) since the date of the latest balance sheet included in the
Registration Statement and the Prospectus, except as reflected therein,
neither the Company nor any of its Subsidiaries has (i) issued any
securities or incurred any liability or obligation, direct or
contingent, for borrowed money, except such liabilities or obligations
incurred in the ordinary course of business, (ii) entered into any
transaction not in the ordinary course of business or (iii) declared or
paid any dividend or
5
<PAGE>
made any distribution on any shares of its stock or redeemed, purchased
or otherwise acquired or agreed to redeem, purchase or otherwise
acquire any shares of its stock.
(k) There is no document, contract or other agreement of
a character required to be described in the Registration Statement or
Prospectus or to be filed as an exhibit to the Registration Statement
which is not described or filed as required by the Securities Act or
Rules. Each description of a contract, document or other agreement in
the Registration Statement and the Prospectus accurately reflects in
all respects the terms of the underlying document, contract or
agreement. Each agreement described in the Registration Statement and
Prospectus or listed in the Exhibits to the Registration Statement or
incorporated by reference is in full force and effect and is valid and
enforceable by and against the Company or one of its Subsidiaries, as
the case may be, in accordance with its terms. Neither the Company nor
any Subsidiary, if such Subsidiary is a party, nor to the Company's
knowledge, any other party is in default in the observance or
performance of any term or obligation to be performed by it under any
such agreement, and no event has occurred which with notice or lapse of
time or both would constitute such a default, in any such case which
default or event, individually or in the aggregate, would have a
Material Adverse Effect. No default exists, and no event has occurred
which with notice or lapse of time or both would constitute a default,
in the due performance and observance of any term, covenant or
condition, by the Company or any Subsidiary, if such Subsidiary is a
party thereto, of any other agreement or instrument to which the
Company or any Subsidiary is a party or by which the Company, any
Subsidiary or their properties or business may be bound or affected
which default or event, individually or in the aggregate, would have a
Material Adverse Effect.
(l) Neither the Company nor any of its Subsidiaries is in
violation of any term or provision of its charter or by-laws or of any
franchise, license, permit, judgment, decree, order, statute, rule or
regulation, where the consequences of such violation, individually or
in the aggregate, would have a Material Adverse Effect.
(m) Neither the execution, delivery and performance of
this Agreement by the Company nor the consummation of any of the
transactions contemplated hereby (including, without limitation, the
issuance and sale by the Company of the Shares) will give rise to a
right to terminate or accelerate the due date of any payment due under,
or conflict with or result in the breach of any term or provision of,
or constitute a default (or an event which with notice or lapse of time
or both would constitute a default) under, or require any consent or
waiver under, or result in the execution or imposition of any lien,
charge or encumbrance upon any properties or assets of the Company or
any Subsidiary pursuant to the terms of, any indenture, mortgage, deed
of trust or other agreement or instrument to which the Company or any
Subsidiary is a party or by which either the Company or any Subsidiary
or any of their properties or businesses is bound, or any franchise,
license, permit, judgment, decree, order, statute, rule or regulation
applicable to the Company or any Subsidiary or violate any provision of
the charter or by-laws of the Company or any Subsidiary, except for
such consents or waivers which have already been obtained and are in
full force and effect.
(n) The Company has authorized and outstanding capital
stock as set forth under the caption "Capitalization" in the
Prospectus. The certificates evidencing the Shares are in due and
proper legal form and have been duly authorized for issuance by the
Company. All of the issued and outstanding shares of Common Stock have
been duly and validly issued and are fully paid and nonassessable.
There are no statutory preemptive or other similar rights to subscribe
for or to purchase or acquire any shares of Common Stock of the Company
or its Subsidiaries or any such rights pursuant to its Certificate of
Incorporation or by-laws or any agreement or instrument to or by which
the Company or any of its Subsidiaries is a party or bound. The Shares,
when issued and
6
<PAGE>
sold pursuant to this Agreement, will be duly and validly issued,
fully paid and nonassessable and none of them will be issued in
violation of any preemptive or other similar right. Except as
disclosed in the Registration Statement and the Prospectus, there is
no outstanding option, warrant or other right calling for the
issuance of, and there is no commitment, plan or arrangement to
issue, any share of stock of the Company or any of its Subsidiaries
or any security convertible into, or exercisable or exchangeable
for, such stock. The Common Stock and the Shares conform in all
material respects to all statements in relation thereto contained in
the Registration Statement and the Prospectus. All outstanding
shares of capital stock of each Subsidiary have been duly authorized
and validly issued, and are fully paid and nonassessable and are
owned directly by the Company or by another wholly-owned subsidiary
of the Company free and clear of any security interests, liens,
encumbrances, equities or claims, other than those described in the
Prospectus.
(o) No holder of any security of the Company has the
right to have any security owned by such holder included in the
Registration Statement or to demand registration of any security owned
by such holder during the period ending 90 days after the date of this
Agreement. Each stockholder, director and executive officer of the
Company has delivered to the Representatives his enforceable written
lock-up agreement in the form attached to this Agreement ("Lock-Up
Agreement").
(p) All necessary corporate action has been duly and
validly taken by the Company to authorize the execution, delivery and
performance of this Agreement and the issuance and sale of the Shares
by the Company. This Agreement has been duly and validly authorized,
executed and delivered by the Company and constitute and will
constitute legal, valid and binding obligations of the Company
enforceable against the Company in accordance with their respective
terms, except as the enforceability thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar
laws affecting the enforcement of creditors' rights generally and by
general equitable principles.
(q) Neither the Company nor any of its Subsidiaries are
involved in any labor dispute nor, to the knowledge of the Company, is
any such dispute threatened, which dispute would have a Material
Adverse Effect. The Company is not aware of any existing or imminent
labor disturbance by the employees of any of its principal suppliers or
contractors which would have a Material Adverse Effect. The Company is
not aware of any threatened or pending litigation between the Company
or its Subsidiaries and any of its executive officers which, if
adversely determined, could have a Material Adverse Effect and has no
reason to believe that such officers will not remain in the employment
of the Company.
(r) No transaction has occurred between or among the
Company and any of its officers or directors or five percent
stockholders or any affiliate or affiliates of any such officer or
director or five percent stockholders that is required to be described
in and is not described in the Registration Statement and the
Prospectus.
(s) The Company has not taken, nor will it take, directly
or indirectly, any action designed to or which might reasonably be
expected to cause or result in, or which has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation
of the price of the Common Stock to facilitate the sale or resale of
any of the Shares.
(t) The Company and its Subsidiaries have filed all
Federal, state, local and foreign tax returns which are required to be
filed through the date hereof, or has received extensions thereof, and
has paid all taxes shown on such returns and all assessments
7
<PAGE>
received by it to the extent that the same are material and have
become due. There are no tax audits or investigations pending, which
if adversely determined would have a Material Adverse Effect; nor
are there any material proposed additional tax assessments against
the Company or any of its Subsidiaries.
(u) The Shares have been duly authorized for quotation on
the National Association of Securities Dealers Automated Quotation
("Nasdaq") National Market System, subject to official Notice of
Issuance. A registration statement has been filed on Form 8-A pursuant
to Section 12 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), which registration statement complies in all material
respects with the Exchange Act.
(v) The Company has complied with all of the requirements
and filed the required forms as specified in Florida Statutes Section
517.075.
(w) The books, records and accounts of the Company and
its Subsidiaries accurately and fairly reflect, in reasonable detail,
the transactions in, and dispositions of, the assets of, and the
results of operations of, the Company and its Subsidiaries. The Company
and each of its Subsidiaries maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or
specific authorizations, (ii) transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles and to maintain asset accountability,
(iii) access to assets is permitted only in accordance with
management's general or specific authorization and (iv) the recorded
accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to
any differences.
(x) The Company and its Subsidiaries are insured by
insurers of recognized financial responsibility against such losses and
risks and in such amounts as are customary in the businesses in which
they are engaged or propose to engage after giving effect to the
transactions described in the Prospectus; all policies of insurance and
fidelity or surety bonds insuring the Company or any of its
subsidiaries or the Company's or its Subsidiaries' respective
businesses, assets, employees, officers and directors are in full force
and effect; the Company and each of its Subsidiaries are in compliance
with the terms of such policies and instruments in all material
respects; and neither the Company nor any Subsidiary has any reason to
believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar
coverage from similar insurers as may be necessary to continue its
business at a cost that would not have a Material Adverse Effect.
Neither the Company nor any Subsidiary has been denied any insurance
coverage which it has sought or for which it has applied.
(y) Each approval, consent, order, authorization,
designation, declaration or filing of, by or with any regulatory,
administrative or other governmental body necessary in connection with
the execution and delivery by the Company of this Agreement and the
consummation of the transactions herein contemplated required to be
obtained or performed by the Company (except such additional steps as
may be required by the National Association of Securities Dealers, Inc.
(the "NASD") or may be necessary to qualify the Shares for public
offering by the Underwriters under the state securities or Blue Sky
laws) has been obtained or made and is in full force and effect.
(z) There are no affiliations with the NASD among the
Company's officers, directors or, to the best of the knowledge of the
Company, any five percent or greater stockholder of the Company, except
as set forth in the Registration Statement or otherwise disclosed in
writing to the Representatives.
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(aa) (i) Each of the Company and its Subsidiaries is in
compliance in all material respects with all rules, laws and regulation
relating to the use, treatment, storage and disposal of toxic
substances and protection of health or the environment ("Environmental
Law") which are applicable to its business; (ii) neither the Company
nor any of its Subsidiaries has received any notice from any
governmental authority or third party of an asserted claim under
Environmental Laws; (iii) each of the Company and its Subsidiaries has
received all permits, licenses or other approvals required of it under
applicable Environmental Laws to conduct its business and is in
compliance with all terms and conditions of any such permit, license or
approval; (iv) to the Company's knowledge, no facts currently exist
that will require the Company or its Subsidiaries to make future
material capital expenditures to comply with Environmental Laws; and
(v) no property which is or has been owned, leased or occupied by the
Company or its Subsidiaries has been designated as a Superfund site
pursuant to the Comprehensive Environmental Response, Compensation of
Liability Act of 1980, as amended (42 U.S.C. Section 9601, et. seq.) or
otherwise designated as a contaminated site under applicable state or
local law. Neither the Company nor any of its Subsidiaries has been
named as a "potentially responsible party" under the CER, CLA 1980.
(bb) In the ordinary course of its business, the Company
periodically reviews the effect of Environmental Laws on the business,
operations and properties of the Company and its subsidiaries, in the
course of which the Company identifies and evaluates associated costs
and liabilities (including, without limitation, any capital or
operating expenditures required for clean-up, closure of properties or
compliance with Environmental Laws, or any permit, license or approval,
any related constraints on operating activities and any potential
liabilities to third parties). On the basis of such review, the Company
has reasonably concluded that such associated costs and liabilities
would not, singly or in the aggregate, have a Material Adverse Effect.
(cc) The Company is not and, after giving effect to the
offering and sale of the Shares and the application of proceeds thereof
as described in the Prospectus, will not be an "investment company"
within the meaning of the Investment Company Act of 1940, as amended
(the "Investment Company Act").
(dd) None of the Company, its Subsidiaries or any other
person associated with or acting on behalf of the Company or its
Subsidiaries including, without limitation, any director, officer,
agent or employee of the Company or its Subsidiaries has, directly or
indirectly, while acting on behalf of the Company or its Subsidiaries
(i) used any corporate funds for unlawful contributions, gifts,
entertainment or other unlawful expenses relating to political
activity; (ii) made any unlawful payment to foreign or domestic
government officials or employees or to foreign or domestic political
parties or campaigns from corporate funds; (iii) violated any provision
of the Foreign Corrupt Practices Act of 1977, as amended; or (iv) made
any other unlawful payment.
(ee) The Company has reviewed its operations and those of
its Subsidiaries to evaluate the extent to which the business or
operations of the Company or any of its subsidiaries will be affected
by the Year 2000 Problem (that is, any significant risk that computer
hardware or software applications used by the Company and its
subsidiaries will not, in the case of dates or time periods occurring
after December 31, 1999, function at least as effectively as in the
case of dates or time periods occurring prior to January 1, 2000); as a
result of such review, (i) the Company has no reason to believe, and
does not believe, that (A) there are any issues related to the
Company's preparedness to address the Year 2000 Problem that are of a
character required to be described or referred to in the Registration
Statement or Prospectus which have not been accurately described in the
Registration Statement or Prospectus and (B) the Year 2000 Problem will
have a Material Adverse Effect, or result in any material loss or
interference with the business or
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operations of the Company and its subsidiaries, taken as a whole;
and (ii) the Company reasonably believes, after due inquiry, that
the suppliers, vendors, customers or other material third parties
used or served by the Company and such subsidiaries are addressing
or will address the Year 2000 Problem in a timely manner, except to
the extent that a failure to address the Year 2000 by a supplier,
vendor, customer or material third party would not have a Material
Adverse Effect.
(ff) The Company and each of its Subsidiaries maintain a
system of internal accounting controls sufficient to provide reasonable
assurance that (1) transactions are executed in accordance with
management's general or specific authorizations; (2) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to
maintain asset accountability; (3) access to assets is permitted only
in accordance with management's general or specific authorization; and
(4) the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
5. ADDITIONAL REPRESENTATIONS AND WARRANTIES OF THE SELLING
STOCKHOLDERS. Each Selling Stockholder hereby severally represents and warrants
to each Underwriter as follows:
(a) Such Selling Stockholder has caused certificates for
the number of Shares set forth on Schedule II to be sold by such
Selling Stockholder hereunder to be delivered to _______________ (the
"Custodian"), endorsed in blank or with blank stock powers duly
executed, with a signature appropriately guaranteed, such certificates
to be held in custody by the Custodian for delivery, pursuant to the
provisions of this Agreement and an agreement dated _____, 1999 among
the Custodian and the Selling Stockholders (the "Custody Agreement").
(b) Such Selling Stockholder has granted an irrevocable
power of attorney (the "Power of Attorney") to the person named
therein, on behalf of such Selling Stockholder, to execute and deliver
this Agreement and any other document necessary or desirable in
connection with the transactions contemplated hereby and to deliver the
shares to be sold by such Selling Stockholder pursuant hereto.
(c) This Agreement, the Custody Agreement, the Power of
Attorney and the Lock-Up Agreement have each been duly authorized,
executed and delivered by or on behalf of such Selling Stockholder and,
assuming due authorization, execution and delivery by the other parties
hereto, constitutes the valid and legally binding agreement of such
Selling Stockholder, enforceable against such Selling Stockholder in
accordance with its terms.
(d) The execution and delivery by such Selling
Stockholder of this Agreement and the performance by such Selling
Stockholder of its obligations under this Agreement (i) will not
contravene any provision of applicable law, statute, regulation or
filing or any agreement or other instrument binding upon such Selling
Stockholder or any judgment, order or decree of any governmental body,
agency or court having jurisdiction over such Selling Stockholder, (ii)
does not require any consent, approval, authorization or order of or
registration or filing with any court or governmental agency or body
having jurisdiction over it, except such as may be required by the Blue
Sky laws of the various states in connection with the offer and sale of
the Shares which have been or will be effected in accordance with this
Agreement, (iii) does not and will not violate any statute, law,
regulation or filing or judgment, injunction, order or decree
applicable to such Selling Stockholder or (iv) will not result in the
creation or imposition of any lien, charge or encumbrance upon any
property or assets of such Selling Stockholder pursuant to the terms of
any agreement or instrument to which such Selling Stockholder is a
party or by
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<PAGE>
which such Selling Stockholder may be bound or to which any of the
property or assets of such Selling Stockholder is subject.
(e) Such Selling Stockholder has, and on the Firm Shares
Closing Date will have, valid and marketable title to the Shares to be
sold by such Selling Stockholder free and clear of any lien, claim,
security interest or other encumbrance, including, without limitation,
any restriction on transfer, except as otherwise described in the
Registration Statement and Prospectus.
(f) Such Selling Stockholder has, and on the Firm Shares
Closing Date will have, full legal right, power and authorization, and
any approval required by law, to sell, assign, transfer and deliver the
Shares to be sold by such Selling Stockholder in the manner provided by
this Agreement.
(g) Upon delivery of and payment for the Shares to be
sold by such Selling Stockholder pursuant to this Agreement, the
several Underwriters will receive valid and marketable title to such
Shares free and clear of any lien, claim, security interest or other
encumbrance.
(h) All information relating to such Selling Stockholder
furnished in writing by such Selling Stockholder expressly for use in
the Registration Statement and Prospectus is, and on each Closing Date
will be, true, correct, and complete, and does not, and on each Closing
Date will not, contain any untrue statement of a material fact or omit
to state any material fact necessary to make such information not
misleading.
(i) The sale of Shares by such Selling Stockholder
pursuant to this Agreement is not prompted by such Selling
Stockholder's knowledge of any material information concerning the
Company or its Subsidiaries which is not set forth in the Prospectus.
(j) Such Selling Stockholder has not taken and will not
take, directly or indirectly, any action designed to or that might
reasonably be expected to cause or result in stabilization or
manipulation of the price of any security of the Company to facilitate
the sale or resale of the Shares.
(k) The representations and warranties of such Selling
Stockholder in the Custody Agreement are and on each Closing Date will
be, true and correct.
6. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations
of the Underwriters under this Agreement are several and not joint. The
respective obligations of the Underwriters to purchase the Shares are subject to
each of the following terms and conditions:
(a) Notification that the Registration Statement has
become effective shall have been received by the Representatives and
the Prospectus shall have been timely filed with the Commission in
accordance with Section 7(a) of this Agreement.
(b) No order preventing or suspending the use of any
preliminary prospectus or the Prospectus shall have been or shall be in
effect and no order suspending the effectiveness of the Registration
Statement shall be in effect and no proceedings for such purpose shall
be pending before or threatened by the Commission, and any requests for
additional information on the part of the Commission (to be included in
the Registration Statement or the Prospectus or otherwise) shall have
been complied with to the satisfaction of the Commission and the
Representatives.
(c) The representations and warranties of the Company and
the Selling Stockholders contained in this Agreement and in the
certificates delivered pursuant to
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Section 6(d) shall be true and correct when made and on and as of
each Closing Date as if made on such date. The Company and the
Selling Stockholders shall have performed all covenants and
agreements and satisfied all the conditions contained in this
Agreement required to be performed or satisfied by them at or before
such Closing Date.
(d) The Representatives shall have received on each
Closing Date a certificate, addressed to the Representatives and dated
such Closing Date, of the chief executive or chief operating officer
and the chief financial officer or chief accounting officer of the
Company to the effect that (i) the signers of such certificate have
carefully examined the Registration Statement, the Prospectus and this
Agreement and that the representations and warranties of the Company in
this Agreement are true and correct on and as of such Closing Date with
the same effect as if made on such Closing Date and the Company has
performed all covenants and agreements and satisfied all conditions
contained in this Agreement required to be performed or satisfied by it
at or prior to such Closing Date, and (ii) no stop order suspending the
effectiveness of the Registration Statement has been issued and to the
best of their knowledge, no proceedings for that purpose have been
instituted or are pending under the Securities Act.
(e) The Representatives shall have received on each
Closing Date a certificate, addressed to the Representatives and dated
such Closing Date, of the Selling Stockholders, to the effect that the
Selling Stockholders have carefully examined the Registration
Statement, the Prospectus and this Agreement and that the
representations and warranties of the Selling Stockholders in this
Agreement are true and correct on and as of such Closing Date with the
same effect as if made on such Closing Date and the Selling
Stockholders have performed all covenants and agreements and satisfied
all conditions contained in this Agreement required to be performed or
satisfied by it at or prior to such Closing Date.
(f) The Representatives shall have received, at the time
this Agreement is executed and on each Closing Date a signed letter
from PriceWaterhouseCoopers LLP addressed to the Representatives and
dated, respectively, the date of this Agreement and each such Closing
Date, in form and substance reasonably satisfactory to the
Representatives.
(g) The Representatives shall have received on each
Closing Date from Gray Cary Ware & Freidenrich LLP, counsel for the
Company, an opinion, addressed to the Representatives and dated such
Closing Date, and stating in effect that:
(i) Each of the Company and its Subsidiaries has
been duly organized and is validly existing as a corporation
in good standing under the laws of the jurisdiction of its
incorporation. Each of the Company and its Subsidiaries is
duly qualified and in good standing as a foreign corporation
in each jurisdiction in which the character or location of its
assets or properties (owned, leased or licensed) or the nature
of its businesses makes such qualification necessary, except
for such jurisdictions where the failure to so qualify,
individually or in the aggregate, would not have a Material
Adverse Effect.
(ii) Each of the Company and its Subsidiaries has
all requisite corporate power and authority to own, lease and
license its assets and properties and conduct its business as
now being conducted and as described in the Registration
Statement and the Prospectus and with respect to the Company
to enter into, deliver and perform this Agreement and to issue
and sell the Shares other than those required under the state
and foreign Blue Sky laws.
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<PAGE>
(i) The Company has authorized and issued
capital stock as set forth in the Registration Statement and
the Prospectus under the caption "Capitalization"; the
certificates evidencing the Shares are in due and proper legal
form and have been duly authorized for issuance by the
Company; all of the outstanding shares of Common Stock of the
Company have been duly and validly authorized and issued and
are fully paid and nonassessable and none of them was issued
in violation of any preemptive or other similar right. The
Shares when issued and sold pursuant to this Agreement will be
duly and validly issued, outstanding, fully paid and
nonassessable and none of them will have been issued in
violation of any preemptive or other similar right. To the
best of such counsel's knowledge, except as disclosed in the
Registration Statement and the Prospectus, there are no
preemptive or other rights to subscribe for or to purchase or
any restriction upon the voting or transfer of any securities
of the Company pursuant to the Company's Certificate of
Incorporation or by-laws or other governing documents or any
agreements or other instruments to which the Company is a
party or by which it is bound. To the best of such counsel's
knowledge, except as disclosed in the Registration Statement
and the Prospectus, there is no outstanding option, warrant or
other right calling for the issuance of, and no commitment,
plan or arrangement to issue, any share of stock of the
Company or any security convertible into, exercisable for, or
exchangeable for stock of the Company. The Common Stock and
the Shares conform in all material respects to the
descriptions thereof contained in the Registration Statement
and the Prospectus. The issued and outstanding shares of
capital stock of each of the Company's Subsidiaries have been
duly authorized and validly issued, are fully paid and
nonassessable and are owned by the Company or by another
wholly owned subsidiary of the Company, free and clear of any
perfected security interest or, to the knowledge of such
counsel, any other security interests, liens, encumbrances,
equities or claims, other than those contained in the
Registration Statement and the Prospectus.
(ii) Each of the Lock-Up Agreements executed by
the Company's stockholders, directors and officers has been
duly and validly delivered by such persons and constitutes the
legal, valid and binding obligation of each such person
enforceable against each such person in accordance with its
terms, except as the enforceability thereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium
or other similar laws affecting the enforcement of creditors'
rights generally and by general equitable principles.
(iii) All necessary corporate action has been duly
and validly taken by the Company to authorize the execution,
delivery and performance of this Agreement and the issuance
and sale of the Shares. This Agreement has been duly and
validly authorized, executed and delivered by the Company and
this Agreement constitutes the legal, valid and binding
obligation of the Company enforceable against the Company in
accordance with their respective terms except as such
enforceability may be limited by applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium
and other similar laws affecting the enforcement of creditors'
rights generally and by general equitable principles.
(iv) Neither the execution, delivery and
performance of this Agreement by the Company nor the
consummation of any of the transactions contemplated hereby
(including, without limitation, the issuance and sale by the
Company of the Shares will give rise to a right to terminate
or accelerate the due date of any payment due under, or
conflict with or result in the breach of any term or provision
of, or constitute a default (or any event which with notice or
lapse of
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<PAGE>
time, or both, would constitute a default) under, or
require consent or waiver under, or result in the execution or
imposition of any lien, charge, claim, security interest or
encumbrance upon any properties or assets of the Company or
its Subsidiary pursuant to the terms of any indenture,
mortgage, deed trust, note or other agreement or instrument of
which such counsel is aware and to which the Company or any
Subsidiary is a party or by which it either the Company or any
Subsidiary or any of their properties or businesses is bound,
or any franchise, license, permit, judgment, decree, order,
statute, rule or regulation of which such counsel is aware or
violate any provision of the charter or by-laws of the Company
or any Subsidiary.
(v) To the best of such counsel's knowledge, no
default exists, and no event has occurred which with notice or
lapse of time, or both, would constitute a default, in the due
performance and observance of any term, covenant or condition
by the Company of any indenture, mortgage, deed of trust, note
or any other agreement or instrument to which the Company is a
party or by which it or any of its assets or properties or
businesses may be bound or affected, where the consequences of
such default, individually or in the aggregate, would have a
Material Adverse Effect.
(vi) To the best of such counsel's knowledge,
none the Company or any Subsidiary is in violation of any term
or provision of its respective charter or by-laws or any
franchise, license, permit, judgment, decree, order, statute,
rule or regulation, where the consequences of such violation,
individually or in the aggregate, would have a Material
Adverse Effect.
(vii) No consent, approval, authorization or order
of any court or governmental agency or regulatory body is
required for the execution, delivery or performance of this
Agreement by the Company or the consummation of the
transactions contemplated hereby or thereby, except such as
have been obtained under the Securities Act and such as may be
required under state securities or Blue Sky laws in connection
with the purchase and distribution of the Shares by the
several Underwriters.
(viii) To the best of such counsel's knowledge,
there is no litigation or governmental or other proceeding or
investigation, before any court or before or by any public
body or board pending or threatened against, or involving the
assets, properties or businesses of, the Company which would
have a Material Adverse Effect.
(ix) The statements in the Prospectus under the
caption "Certain Transactions," insofar as such statements
constitute a summary of documents referred to therein or
matters of law, are fair summaries in all material respects
and accurately present the information called for with respect
to such documents and matters. Accurate copies of all
contracts and other documents required to be filed as exhibits
to, or described in, the Registration Statement have been so
filed with the Commission or are fairly described in the
Registration Statement, as the case may be.
(xii) The Registration Statement, all preliminary
prospectuses and the Prospectus and each amendment or
supplement thereto (except for the financial statements and
schedules and other financial and statistical data included
therein, as to which such counsel expresses no opinion) comply
as to form in all material respects with the requirements of
the Securities Act and the Rules.
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<PAGE>
(xiii) The Registration Statement is effective
under the Securities Act, and no stop order suspending the
effectiveness of the Registration Statement has been issued
and no proceedings for that purpose have been instituted or
are threatened, pending or contemplated. Any required filing
of the Prospectus and any supplement thereto pursuant to Rule
424(b) under the Securities Act has been made in the manner
and within the time period required by such Rule 424(b).
(xiv) The Shares have been approved for listing on
the Nasdaq National Market.
(xv) The capital stock of the Company conforms in
all material respects to the description thereof incorporated
by reference in the Prospectus from the registration statement
on Form 8-A (Registration No. ________).
(xvi) The Company is not an "investment company"
or an entity controlled by an "investment company" as such
terms are defined in the Investment Company Act of 1940, as
amended.
To the extent deemed advisable by such counsel, they
may rely as to matters of fact on certificates of responsible
officers of the Company and public officials and on the
opinions of other counsel satisfactory to the Representatives
as to matters which are governed by laws other than the laws
of the State of New York, the State of California, the General
Corporation Law of the State of Delaware and the Federal laws
of the United States; provided that such counsel shall state
that in their opinion the Underwriters and they are justified
in relying on such other opinions. Copies of such certificates
and other opinions shall be furnished to the Representatives
and counsel for the Underwriters.
In addition, such counsel shall state that such
counsel has participated in conferences with officers and
other representatives of the Company, representatives of the
Representatives and representatives of the independent
certified public accountants of the Company, at which
conferences the contents of the Registration Statement and the
Prospectus and related matters were discussed and, although
such counsel is not passing upon and does not assume any
responsibility for the accuracy, completeness or fairness of
the statements contained in the Registration Statement and the
Prospectus (except as specified in the foregoing opinion), on
the basis of the foregoing, no facts have come to the
attention of such counsel which lead such counsel to believe
that the Registration Statement at the time it became
effective (except with respect to the financial statements and
notes and schedules thereto and other financial data, as to
which such counsel need express no belief) contained any
untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to
make the statements therein not misleading, or that the
Prospectus as amended or supplemented (except with respect to
the financial statements, notes and schedules thereto and
other financial data, as to which such counsel need make no
statement) on the date thereof contained any untrue statement
of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not
misleading.
(h) The Representatives shall have received on the Firm
Shares Closing Date from [Gray Cary Ware & Freidenrich], counsel for
the Selling Stockholders, an opinion, addressed to the Representatives
and dated such Closing Date, and stating in effect that:
(i) This Agreement has been duly and validly
executed and delivered by or on behalf of the Selling
Stockholders.
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<PAGE>
(ii) This Agreement, the Custody Agreement, the
Power of Attorney and the Lock-Up Agreement each constitute
the legal, valid and binding obligation of each Selling
Stockholder, enforceable against each Selling Stockholder in
accordance with its terms except as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting the enforcement of
creditors' rights generally and by general equitable
principles; and each Selling Stockholder has full legal right
and authority to enter into this Agreement and to sell,
transfer and deliver in the manner provided in this Agreement,
the Shares to be sold by such Selling Stockholder hereunder.
(iii) The transfer and sale by each Selling
Stockholder of the Shares to be sold by such Selling
Stockholder as contemplated by this Agreement will not
conflict with, result in a breach of, or constitute a default
under any agreement or instrument known to such counsel to
which such Selling Stockholder is a party or by which such
Selling Stockholder or any of its properties may be bound, or
any franchise, license, permit, judgment, decree, order,
statute, rule or regulation.
(iv) All of each Selling Stockholder's rights in
the Shares to be sold by such Selling Stockholder pursuant to
this Agreement, have been transferred to the Underwriters who
have severally purchased such Shares pursuant to this
Agreement, free and clear of adverse claims, assuming for
purposes of this opinion that the Underwriters purchased the
same in good faith without notice of any adverse claims.
(v) No consent, approval, authorization,
license, certificate, permit or order of any court,
governmental or regulatory agency, authority or body or
financial institution is required in connection with the
performance of this Agreement by the Selling Stockholders or
the consummation of the transactions contemplated hereby,
including the delivery and sale of the Shares to be delivered
and sold by the Selling Stockholders, except such as may be
required under state securities or blue sky laws in connection
with the purchase and distribution of the Shares by the
several Underwriters.
To the extent deemed advisable by such counsel, they
may rely as to matters of fact on certificates of the Selling
Stockholders and on the opinions of other counsel satisfactory
to the Representatives as to matters which are governed by
laws other than the laws of the State of California, the State
of New York, the General Corporation Law of the State of
Delaware or the Federal laws of the United States; provided
that such counsel shall state that in their opinion the
Underwriters and they are justified in relying on such other
opinions. Copies of such certificates and other opinions shall
be furnished to the Representatives and counsel for the
Underwriters.
In addition, such counsel shall state that such
counsel has participated in conferences with officers and
other representatives of the Company, representatives of the
Representatives and representatives of the independent public
accountants of the Company, at which conferences the contents
of the Registration Statement and the Prospectus and related
matters were discussed. While such counsel has not undertaken
to independently verify and does not assume any responsibility
for the accuracy, completeness or fairness of the statements
contained in the Registration Statement and the Prospectus
(except as specified in the foregoing opinion), on the basis
of the foregoing, no facts have come to the attention of such
counsel which lead such counsel to believe that the
Registration Statement at the time it became effective (except
with respect to the
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<PAGE>
financial statements, notes and schedules thereto and other
financial data, as to which such counsel need express no
belief) contained any untrue statement of a material fact
or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not
misleading, or that the Prospectus as amended or
supplemented (except with respect to the financial
statements, notes and schedules thereto and other financial
data, as to which such counsel need make no statement) on
the date thereof and the date of such opinion contained any
untrue statement of a material fact or omitted to state a
material fact necessary in order to make the statements
therein, in the light of the circumstances under which they
were made, not misleading.
(i) All proceedings taken in connection with the sale of
the Firm Shares and the Option Shares as herein contemplated shall be
reasonably satisfactory in form and substance to the Representatives,
and their counsel and the Underwriters shall have received from Gibson,
Dunn & Crutcher LLP a favorable opinion, addressed to the
Representatives and dated such Closing Date, with respect to the
Shares, the Registration Statement and the Prospectus, and such other
related matters, as the Representatives may reasonably request, and the
Company shall have furnished to Gibson, Dunn & Crutcher LLP such
documents as they may reasonably request for the purpose of enabling
them to pass upon such matters.
(j) If the Shares have been qualified for sale in
Florida, the Representatives shall have received on each Closing Date
certificates, addressed to the Representatives, and dated such Closing
Date, of an executive officer of the Company, to the effect that the
signer of such certificate has reviewed and understands the provisions
of Section 517.075 of the Florida Statutes, and represents that the
Company has complied, and at all times will comply, with all provisions
of Section 517.075 and further, that as of such Closing Date, neither
the Company nor any of its affiliates does business with the government
of Cuba or with any person or affiliate located in Cuba.
(k) The Representatives shall have received copies of the
Lock-up Agreements executed by each entity or person described in
Section 4(o).
(l) The Company and the Selling Stockholders shall have
furnished or caused to be furnished to the Representatives such further
certificates or documents as the Representatives shall have reasonably
requested.
7. COVENANTS OF THE COMPANY.
(a) The Company covenants and agrees as follows:
(i) The Company will use its best efforts to
cause the Registration Statement, if not effective at the time
of execution of this Agreement, and any amendments thereto, to
become effective as promptly as possible. The Company shall
prepare the Prospectus in a form approved by the
Representatives and file such Prospectus pursuant to Rule
424(b) under the Securities Act not later than the
Commission's close of business on the second business day
following the execution and delivery of this Agreement, or, if
applicable, such earlier time as may be required by Rule
430A(a)(3) under the Securities Act.
(ii) The Company shall promptly advise the
Representatives in writing (i) when any amendment to the
Registration Statement shall have become effective, (ii) of
any request by the Commission for any amendment of the
Registration Statement or the Prospectus or for any additional
information, (iii) of the prevention or suspension of the use
of any preliminary prospectus or the
17
<PAGE>
Prospectus or of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration
Statement or the institution or threatening of any
proceeding for that purpose and (iv) of the receipt by the
Company of any notification with respect to the suspension
of the qualification of the Shares for sale in any
jurisdiction or the initiation or threatening of any
proceeding for such purpose. The Company shall not file any
amendment of the Registration Statement or supplement to
the Prospectus unless the Company has furnished the
Representatives a copy for its review prior to filing and
shall not file any such proposed amendment or supplement to
which the Representatives reasonably object. The Company
shall use its best efforts to prevent the issuance of any
such stop order and, if issued, to obtain as soon as
possible the withdrawal thereof.
(iii) If, at any time when a prospectus relating
to the Shares is required to be delivered under the Securities
Act and the Rules, any event occurs as a result of which the
Prospectus as then amended or supplemented would include any
untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein in the
light of the circumstances under which they were made not
misleading, or if it shall be necessary to amend or supplement
the Prospectus to comply with the Securities Act or the Rules,
the Company promptly shall prepare and file with the
Commission, subject to the second sentence of paragraph (ii)
of this Section 7(a), an amendment or supplement which shall
correct such statement or omission or an amendment which shall
effect such compliance.
(iv) The Company shall make generally available
to its security holders and to the Representatives as soon as
practicable, but not later than 45 days after the end of the
12 month period beginning at the end of the fiscal quarter of
the Company during which the Effective Date occurs (or 90 days
if such 12 month period coincides with the Company's fiscal
year), an earning statement (which need not be audited) of the
Company, covering such 12 month period, which shall satisfy
the provisions of Section 11(a) of the Securities Act or Rule
158 of the Rules.
(v) The Company shall furnish to the
Representatives and counsel for the Underwriters, without
charge, signed copies of the Registration Statement (including
all exhibits thereto and amendments thereof) and to each other
Underwriter a copy of the Registration Statement (without
exhibits thereto) and all amendments thereof and, so long as
delivery of a prospectus by an Underwriter or dealer may be
required by the Securities Act or the Rules, as many copies of
any preliminary prospectus and the Prospectus and any
amendments thereof and supplements thereto as the
Representatives may reasonably request.
(vi) The Company shall cooperate with the
Representatives and their counsel in endeavoring to qualify
the Shares for offer and sale in connection with the offering
under the laws of such jurisdictions as the Representatives
may designate and shall maintain such qualifications in effect
so long as required for the distribution of the Shares;
provided, however, that the Company shall not be required in
connection therewith, as a condition thereof, to qualify as a
foreign corporation or to execute a general consent to service
of process in any jurisdiction or subject itself to taxation
as doing business in any jurisdiction.
(vii) Without the prior written consent of CIBC
World Markets Corp., for a period of 90 days after the date of
this Agreement, the Company and each of its individual
directors and executive officers shall not issue, sell or
register with the Commission (other than on Form S-8 or on any
successor form), or otherwise
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<PAGE>
dispose of, directly or indirectly, any equity securities
of the Company (or any securities convertible into,
exercisable for or exchangeable for equity securities of
the Company), except for the issuance of the Shares
pursuant to the Registration Statement and the issuance of
shares pursuant to the Company's existing stock option plan
or bonus plan as described in the Registration Statement
and the Prospectus. In the event that during this period,
(i) any shares are issued pursuant to the Company's
existing stock options plan or bonus plans that are
exercisable during such 90 day period or (ii) any
registration is effected on Form S-8 or on any successor
form relating to shares that are exercisable during such 90
period, the Company shall obtain the written agreement of
such grantee or purchaser or holder of such registered
securities that, for a period of 90 days after the date of
this Agreement, such person will not, without the prior
written consent of CIBC World Markets Corp., offer for
sale, sell, distribute, grant any option for the sale of,
or otherwise dispose of, directly or indirectly, or
exercise any registration rights with respect to, any
shares of Common Stock (or any securities convertible into,
exercisable for, or exchangeable for any shares of Common
Stock) owned by such person.
(viii) On or before completion of this offering,
the Company shall make all filings required under applicable
securities laws and by the Nasdaq National Market (including
any required registration under the Exchange Act).
(ix) The Company shall file timely and accurate
reports in accordance with the provisions of Florida Statutes
Section 517.075, or any successor provision, and any
regulation promulgated thereunder, if at any time after the
Effective Date, the Company or any of its affiliates commences
engaging in business with the government of Cuba or any person
or affiliate located in Cuba.
(x) The Company will apply the net proceeds from
the offering of the Shares in the manner set forth under "Use
of Proceeds" in the Prospectus.
(b) The Company agrees to pay, or reimburse if paid by
the Representatives, whether or not the transactions contemplated
hereby are consummated or this Agreement is terminated, all costs and
expenses incident to the public offering of the Shares and the
performance of the obligations of the Company under this Agreement
including those relating to: (i) the preparation, printing, filing and
distribution of the Registration Statement including all exhibits
thereto, each preliminary prospectus, the Prospectus, all amendments
and supplements to the Registration Statement and the Prospectus, and
the printing, filing and distribution of this Agreement; (ii) the
preparation and delivery of certificates for the Shares to the
Underwriters; (iii) the registration or qualification of the Shares for
offer and sale under the securities or Blue Sky laws of the various
jurisdictions referred to in Section 7(a)(vi), including the reasonable
fees and disbursements of counsel for the Underwriters in connection
with such registration and qualification and the preparation, printing,
distribution and shipment of preliminary and supplementary Blue Sky
memoranda; (iv) the furnishing (including costs of shipping and
mailing) to the Representatives and to the Underwriters of copies of
each preliminary prospectus, the Prospectus and all amendments or
supplements to the Prospectus, and of the several documents required by
this Section to be so furnished, as may be reasonably requested for use
in connection with the offering and sale of the Shares by the
Underwriters or by dealers to whom Shares may be sold; (v) the filing
fees of the NASD in connection with its review of the terms of the
public offering and reasonable fees and disbursements of counsel for
the Underwriters in connection with such review; (vi) the furnishing
(including costs of shipping and mailing) to the Representatives and to
the Underwriters of copies of all reports and information required by
Section 7(a)(vii); (vii) inclusion of the Shares for quotation on the
Nasdaq National Market; and (viii) all transfer taxes, if any,
19
<PAGE>
with respect to the sale and delivery of the Shares by the Company
to the Underwriters. Subject to the provisions of Section 10, the
Underwriters agree to pay, whether or not the transactions
contemplated hereby are consummated or this Agreement is terminated,
all costs and expenses incident to the performance of the
obligations of the Underwriters under this Agreement not payable by
the Company pursuant to the preceding sentence, including, without
limitation, the fees and disbursements of counsel for the
Underwriters.
8. INDEMNIFICATION.
(a) Each of the Company and each Selling Stockholder
agrees, jointly and severally, to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter
within the meaning of Section 15 of the Securities Act or Section 20 of
the Exchange Act against any and all losses, claims, damages and
liabilities, joint or several (including any reasonable investigation,
legal and other expenses incurred in connection with, and any amount
paid in settlement of, any action, suit or proceeding or any claim
asserted), to which they, or any of them, may become subject under the
Securities Act, the Exchange Act or other Federal or state law or
regulation, at common law or otherwise, insofar as such losses, claims,
damages or liabilities arise out of or are based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in
any preliminary prospectus, the Registration Statement or the
Prospectus or any amendment thereof or supplement thereto, or in any
Blue Sky application or other information or other documents executed
by the Company filed in any state or other jurisdiction to qualify any
or all of the Shares under the securities laws thereof (any such
application, document or information being hereinafter referred to as a
"Blue Sky Application") or arise out of or are based upon any omission
or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, (ii) in whole or in part upon any breach of the
representations and warranties set forth in Section 4 hereof, or (iii)
in whole or in part upon any failure of the Company to perform any of
its obligations hereunder or under law; provided, however, that such
indemnity shall not inure to the benefit of any Underwriter (or any
person controlling such Underwriter) on account of any losses, claims,
damages or liabilities arising from the sale of the Shares to any
person by such Underwriter if such untrue statement or omission or
alleged untrue statement or omission was made in such preliminary
prospectus, the Registration Statement or the Prospectus, or such
amendment or supplement thereto, or in any Blue Sky Application in
reliance upon and in conformity with information furnished in writing
to the Company by the Representatives on behalf of any Underwriter
specifically for use therein. Notwithstanding the foregoing, the
liability of the Selling Stockholders pursuant to the provisions of
Section 8(a) shall be limited to an amount equal to the aggregate net
proceeds received by the Selling Stockholders from the sale of the
Shares sold by the Selling Stockholders hereunder. This indemnity
agreement will be in addition to any liability which the Company and
Selling Stockholders may otherwise have.
(b) Each Underwriter agrees, severally and not jointly,
to indemnify and hold harmless the Company, the Selling Stockholders
and each person, if any, who controls the Company within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act,
each director of the Company, and each officer of the Company who signs
the Registration Statement, to the same extent as the foregoing
indemnity from the Company and the Selling Stockholders to each
Underwriter, but only insofar as such losses, claims, damages or
liabilities arise out of or are based upon any untrue statement or
omission or alleged untrue statement or omission which was made in any
preliminary prospectus, the Registration Statement or the Prospectus,
or any amendment thereof or supplement thereto, contained in the (i)
concession and reallowance figures appearing under the caption
"Underwriting" and (ii) the stabilization information contained under
the caption "Underwriting" in the Prospectus; provided, however, that
the obligation of
20
<PAGE>
each Underwriter to indemnify the Company or the Selling
Stockholders (including any controlling person, director or officer
thereof) shall be limited to the net proceeds received by the
Company from such Underwriter.
(c) Any party that proposes to assert the right to be
indemnified under this Section will, promptly after receipt of notice
of commencement of any action, suit or proceeding against such party in
respect of which a claim is to be made against an indemnifying party or
parties under this Section, notify each such indemnifying party of the
commencement of such action, suit or proceeding, enclosing a copy of
all papers served. No indemnification provided for in Section 8(a) or
8(b) shall be available to any party who shall fail to give notice as
provided in this Section 8(c) if the party to whom notice was not given
was unaware of the proceeding to which such notice would have related
and was prejudiced by the failure to give such notice but the omission
so to notify such indemnifying party of any such action, suit or
proceeding shall not relieve it from any liability that it may have to
any indemnified party for contribution or otherwise than under this
Section. In case any such action, suit or proceeding shall be brought
against any indemnified party and it shall notify the indemnifying
party of the commencement thereof, the indemnifying party shall be
entitled to participate in, and, to the extent that it shall wish,
jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof and
the approval by the indemnified party of such counsel, the indemnifying
party shall not be liable to such indemnified party for any legal or
other expenses, except as provided below and except for the reasonable
costs of investigation subsequently incurred by such indemnified party
in connection with the defense thereof. The indemnified party shall
have the right to employ its counsel in any such action, but the fees
and expenses of such counsel shall be at the expense of such
indemnified party unless (i) the employment of counsel by such
indemnified party has been authorized in writing by the indemnifying
parties, (ii) the indemnified party shall have been advised by counsel
that there may be one or more legal defenses available to it which are
different from or in addition to those available to the indemnifying
party (in which case the indemnifying parties shall not have the right
to direct the defense of such action on behalf of the indemnified
party) or (iii) the indemnifying parties shall not have employed
counsel to assume the defense of such action within a reasonable time
after notice of the commencement thereof, in each of which cases the
fees and expenses of counsel shall be at the expense of the
indemnifying parties. An indemnifying party shall not be liable for any
settlement of any action, suit, proceeding or claim effected without
its written consent, which consent shall not be unreasonably withheld
or delayed.
9. CONTRIBUTION. In order to provide for just and equitable
contribution in circumstances in which the indemnification provided for in
Section 8(a) or 8(b) is due in accordance with its terms but for any reason is
held to be unavailable to or insufficient to hold harmless an indemnified party
under Section 8(a) or 8(b), then each indemnifying party shall contribute to the
aggregate losses, claims, damages and liabilities (including any investigation,
legal and other expenses reasonably incurred in connection with, and any amount
paid in settlement of, any action, suit or proceeding or any claims asserted,
but after deducting any contribution received by any person entitled hereunder
to contribution from any person who may be liable for contribution) to which the
indemnified party may be subject in such proportion as is appropriate to reflect
the relative benefits received by the Company and the Selling Stockholders on
the one hand and the Underwriters on the other from the offering of the Shares
or, if such allocation is not permitted by applicable law or indemnification is
not available as a result of the indemnifying party not having received notice
as provided in Section 8 hereof, in such proportion as is appropriate to reflect
not only the relative benefits referred to above but also the relative fault of
the Company and the Selling Stockholders on the one hand and the Underwriters on
the other in connection with the statements or omissions which resulted in such
losses, claims,
21
<PAGE>
damages, liabilities or expenses, as well as any other relevant equitable
considerations. The relative benefits received by the Company, the Selling
Stockholders and the Underwriters shall be deemed to be in the same
proportion as (x) the total proceeds from the offering (net of underwriting
discounts but before deducting expenses) received by the Company or the
Selling Stockholders, as set forth in the table on the cover page of the
Prospectus, bear to (y) the underwriting discounts received by the
Underwriters, as set forth in the table on the cover page of the Prospectus.
The relative fault of the Company and the Selling Stockholders or the
Underwriters shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact related to
information supplied by the Company and the Selling Stockholders or the
Underwriters and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company, the Selling Stockholders and the Underwriters agree that it
would not be just and equitable if contribution pursuant to this Section 9
were determined by pro rata allocation (even if the Underwriters were treated
as one entity for such purpose) or by any other method of allocation which
does not take account of the equitable considerations referred to above.
Notwithstanding the provisions of this Section 9, (i) in no case shall any
Underwriter (except as may be provided in the Agreement Among Underwriters)
be liable or responsible for any amount in excess of the underwriting
discount applicable to the Shares purchased by such Underwriter hereunder;
(ii) the Company shall be liable and responsible for any amount in excess of
such underwriting discount; and (iii) in no case shall the Selling
Stockholders be liable and responsible for any amount in excess of the
aggregate net proceeds of the sale of Shares received by the Selling
Stockholder; provided, however, that no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 9, each person, if
any, who controls an Underwriter within the meaning of Section 15 of the
Securities Act or Section 20(a) of the Exchange Act shall have the same
rights to contribution as such Underwriter, and each person, if any, who
controls the Company within the meaning of the Section 15 of the Securities
Act or Section 20(a) of the Exchange Act, each officer of the Company who
shall have signed the Registration Statement and each director of the Company
shall have the same rights to contribution as the Company, subject in each
case to clauses (i) and (ii) in the immediately preceding sentence of this
Section 9. Any party entitled to contribution will, promptly after receipt of
notice of commencement of any action, suit or proceeding against such party
in respect of which a claim for contribution may be made against another
party or parties under this Section, notify such party or parties from whom
contribution may be sought, but the omission so to notify such party or
parties from whom contribution may be sought shall not relieve the party or
parties from whom contribution may be sought from any other obligation it or
they may have hereunder or otherwise than under this Section. No party shall
be liable for contribution with respect to any action, suit, proceeding or
claim settled without its written consent. The Underwriter's obligations to
contribute pursuant to this Section 9 are several in proportion to their
respective underwriting commitments and not joint.
10. TERMINATION. This Agreement may be terminated with respect to
the Shares to be purchased on a Closing Date by the Representatives by notifying
the Company and the Selling Stockholders at any time:
(a) in the absolute discretion of the Representatives at
or before any Closing Date: (i) if on or prior to such date, any
domestic or international event or act or occurrence has materially
disrupted, or in the opinion of the Representatives will in the future
materially disrupt, the securities markets; (ii) if there has occurred
any new outbreak or material escalation of hostilities or other
calamity or crisis the effect of which on the financial markets of the
United States is such as to make it, in the judgment of the
Representatives, inadvisable to proceed with the offering; (iii) if
there shall be such a material adverse change in general financial,
political or economic conditions or the effect of international
conditions on the financial markets in the United States is such as to
make it, in the judgment of the Representatives, inadvisable or
impracticable to market
22
<PAGE>
the Shares; (iv) if trading in the Shares has been suspended by the
Commission or trading generally on the New York Stock Exchange,
Inc., on the American Stock Exchange, Inc. or the Nasdaq National
Market has been suspended or limited, or minimum or maximum ranges
for prices for securities shall have been fixed, or maximum ranges
for prices for securities have been required, by said exchanges or
by order of the Commission, the National Association of Securities
Dealers, Inc., or any other governmental or regulatory authority; or
(v) if a banking moratorium has been declared by any state or
Federal authority; or (vi) if, in the judgment of the
Representatives, there has occurred a Material Adverse Effect, or
(b) at or before any Closing Date, that any of the
conditions specified in Section 6 shall not have been fulfilled when
and as required by this Agreement.
If this Agreement is terminated pursuant to any of its provisions,
neither the Company nor the Selling Stockholders shall be under any liability to
any Underwriter, and no Underwriter shall be under any liability to the Company,
except that (y) if this Agreement is terminated by the Representatives or the
Underwriters because of any failure, refusal or inability on the part of the
Company or the Selling Stockholders to comply with the terms or to fulfill any
of the conditions of this Agreement, the Company will reimburse the Underwriters
for all out-of-pocket expenses (including the reasonable fees and disbursements
of their counsel) incurred by them in connection with the proposed purchase and
sale of the Shares or in contemplation of performing their obligations hereunder
and (z) no Underwriter who shall have failed or refused to purchase the Shares
agreed to be purchased by it under this Agreement, without some reason
sufficient hereunder to justify cancellation or termination of its obligations
under this Agreement, shall be relieved of liability to the Company, the Selling
Stockholders or to the other Underwriters for damages occasioned by its failure
or refusal.
11. SUBSTITUTION OF UNDERWRITERS. If one or more of the
Underwriters shall fail (other than for a reason sufficient to justify the
cancellation or termination of this Agreement under Section 10) to purchase on
any Closing Date the Shares agreed to be purchased on such Closing Date by such
Underwriter or Underwriters, the Representatives may find one or more substitute
underwriters to purchase such Shares or make such other arrangements as the
Representatives may deem advisable or one or more of the remaining Underwriters
may agree to purchase such Shares in such proportions as may be approved by the
Representatives, in each case upon the terms set forth in this Agreement. If no
such arrangements have been made by the close of business on the business day
following such Closing Date,
(a) if the number of Shares to be purchased by the
defaulting Underwriters on such Closing Date shall not exceed 10% of
the Shares that all the Underwriters are obligated to purchase on such
Closing Date, then each of the nondefaulting Underwriters shall be
obligated to purchase such Shares on the terms herein set forth in
proportion to their respective obligations hereunder; provided, that in
no event shall the maximum number of Shares that any Underwriter has
agreed to purchase pursuant to Section 1 be increased pursuant to this
Section 11 by more than one-ninth of such number of Shares without the
written consent of such Underwriter, or
(b) if the number of Shares to be purchased by the
defaulting Underwriters on such Closing Date shall exceed 10% of the
Shares that all the Underwriters are obligated to purchase on such
Closing Date, then the Company shall be entitled to one additional
business day within which it may, but is not obligated to, find one or
more substitute underwriters reasonably satisfactory to the
Representatives to purchase such Shares upon the terms set forth in
this Agreement.
In any such case, either the Representatives or the Company shall have
the right to postpone the applicable Closing Date for a period of not more than
five business days in order
23
<PAGE>
that necessary changes and arrangements (including any necessary amendments
or supplements to the Registration Statement or Prospectus) may be effected
by the Representatives and the Company. If the number of Shares to be
purchased on such Closing Date by such defaulting Underwriter or Underwriters
shall exceed 10% of the Shares that all the Underwriters are obligated to
purchase on such Closing Date, and none of the nondefaulting Underwriters or
the Company shall make arrangements pursuant to this Section within the
period stated for the purchase of the Shares that the defaulting Underwriters
agreed to purchase, this Agreement shall terminate with respect to the Shares
to be purchased on such Closing Date without liability on the part of any
nondefaulting Underwriter to the Company or the Selling Stockholder and
without liability on the part of the Company, except in both cases as
provided in Sections 7(b), 8, 9 and 10. The provisions of this Section shall
not in any way affect the liability of any defaulting Underwriter to the
Company or the nondefaulting Underwriters arising out of such default. A
substitute underwriter hereunder shall become an Underwriter for all purposes
of this Agreement.
12. MISCELLANEOUS. The respective agreements, representations,
warranties, indemnities and other statements of the Company or its officers, of
the Selling Stockholders and of the Underwriters set forth in or made pursuant
to this Agreement shall remain in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter or the Company or the
Selling Stockholders or any of the officers, directors or controlling persons
referred to in Sections 8 and 9 hereof, and shall survive delivery of and
payment for the Shares. The provisions of Sections 7(b), 8, 9 and 10 shall
survive the termination or cancellation of this Agreement.
This Agreement has been and is made for the benefit of the
Underwriters, the Company and the Selling Stockholders and their respective
successors and assigns, and, to the extent expressed herein, for the benefit of
persons controlling any of the Underwriters, or the Company, and directors and
officers of the Company, and their respective successors and assigns, and no
other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" shall not include any purchaser of
Shares from any Underwriter merely because of such purchase.
All notices and communications hereunder shall be in writing and
mailed or delivered or by telephone or telegraph if subsequently confirmed in
writing, (a) if to the Representatives, c/o CIBC World Markets Corp., One
World Financial Center, New York, New York 10281 Attention: ______________,
with a copy to Gibson, Dunn & Crutcher LLP, One Montgomery Street, San
Francisco, California 94104, Attention: Kenneth R. Lamb, and (b) if to the
Company, to its agent for service as such agent's address appears on the
cover page of the Registration Statement with a copy to Gray Cary Ware &
Freidenrich LLP, 400 Hamilton Avenue, Palo Alto, California 94301, and (c) if
to the Selling Stockholder to ______________ with a copy to Gray Cary Ware &
Freidenrich LLP, 400 Hamilton Avenue, Palo Alto, California 94301.
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York without regard to principles of conflict of
laws.
This Agreement may be signed in any number of counterparts, each of
which shall be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument.
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<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
among us.
Very truly yours,
ZORAN CORPORATION
By ________________________________
Title: ____________________________
SELLING STOCKHOLDERS
By ________________________________
Title: Attorney-in-Fact
Confirmed:
CIBC WORLD MARKETS CORP.
_______________________
Acting severally on behalf of itself and as representative of the
several Underwriters named in Schedule I annexed hereto.
By CIBC WORLD MARKETS CORP.
By _______________________________
Title: ___________________________
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<PAGE>
SCHEDULE I
Number of Firm Shares
to be Purchased
Name from the Company
---- ----------------
CIBC World Markets Corp.........................
BancBoston Robertson Stephens Inc...............
Salomon Smith Barney Inc........................
SoundView Technology Group, Inc.................
------------------------
TOTAL 2,500,000
=========
Number of Firm Shares
to be Purchased from
Name the Selling Stockholders
---- ------------------------
CIBC World Markets Corp.........................
BancBoston Robertson Stephens Inc...............
Salomon Smith Barney Inc........................
SoundView Technology Group, Inc.................
------------------------
TOTAL 500,000
=======
<PAGE>
SCHEDULE II
SELLING STOCKHOLDERS
Name Number of Firm Shares to be Sold
---- --------------------------------
------------------------
TOTAL 500,000
=======
27
<PAGE>
EXHIBIT 5.1
[Gray Cary Ware Freidenrich LLP Letterhead]
November 18, 1999
Securities and Exchange Commission
450 Fifth Street, N.W
Washington, D.C. 20549
RE: ZORAN CORPORATION
REGISTRATION STATEMENT ON FORM S-3
Ladies and Gentlemen:
As legal counsel for Zoran Corporation, a Delaware corporation (the "Company"),
we are rendering this opinion in connection with the preparation and filing of a
registration statement on Form S-3 (the "Registration Statement") relating to
the registration under the Securities Act of 1933, as amended, of up to
3,450,000 shares of Common Stock, including 2,500,000 shares to be issued and
sold by the Company (the "Company Shares"), 450,000 shares for which the
Underwriters have been granted an over-allotment option, and 500,000 shares to
be sold by certain selling stockholders (the "Selling Stockholder Shares" and
together with the Company Shares, the "Shares")
We have examined such instruments, documents and records as we deemed relevant
and necessary for the basis of our opinion herein after expressed. In such
examination, we have assumed the genuineness of all signatures and the
authenticity of all documents submitted to us as originals and the conformity to
the originals of all documents submitted to us as copies.
Based on such examination, we are of the opinion that the Selling Stockholder
Shares are, and the Company Shares, when sold and issued in accordance with the
terms of the Registration Statement and related Prospectus, will be, duly
authorized, validly issued, fully paid, and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement referred to above and the use of our name wherever it
appears in said Registration Statement.
This opinion is to be used only in connection with the issuance of the Shares
while the Registration Statement is in effect.
Respectfully submitted,
GRAY CARY WARE & FREIDENRICH LLP
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-3 of our
report dated January 27, 1999, relating to the consolidated financial statements
of Zoran Corporation for the year ended December 31, 1998, which appear in such
Registration Statement. We also consent to the reference to us under the
headings "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers, LLP
San Jose, California
November 17, 1999
