<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from__________ to__________
Commission File Number: 0-27246
ZORAN CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-2794449
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3112 SCOTT BOULEVARD, SANTA CLARA, CALIFORNIA 95054
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 919-4111
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of outstanding shares of the registrant's Common Stock, $.001 par
value, as of April 29, 1999 was 10,380,053.
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ZORAN CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
March 31, 1999 and December 31, 1998 3
Condensed Consolidated Income Statements
Three Months Ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
</TABLE>
2
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ZORAN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,671 $ 8,221
Short-term investments 11,431 10,954
Accounts receivable 16,756 15,558
Inventory 7,587 7,063
Prepaid expenses and other current assets 2,258 2,018
-------- --------
Total current assets 44,703 43,814
Property & equipment, net 5,097 5,356
-------- --------
$ 49,800 $ 49,170
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,231 $ 6,530
Accrued expenses and other liabilities 6,033 6,454
-------- --------
Total current liabilities 13,264 12,984
Stockholders' equity:
Common Stock, $0.001 par value;
20,000,000 shares authorized; 10,330,438
and 10,213,394 shares issued and outstanding 10 10
Additional paid-in capital 79,883 79,635
Warrants 717 717
Accumulated deficit (44,074) (44,176)
-------- --------
Total stockholders' equity 36,536 36,186
-------- --------
$ 49,800 $ 49,170
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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ZORAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------
1999 1998
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<S> <C> <C>
Revenues:
Product sales $ 9,282 $ 8,634
Software, licensing and development 2,610 2,534
------- -------
Total revenues 11,892 11,168
Costs and expenses:
Cost of product sales 5,093 4,657
Research and development 3,524 3,234
Selling, general and administrative 3,247 2,748
------- -------
Total costs and expenses 11,864 10,639
Operating income 28 529
Interest and other income (expense), net 99 245
------- -------
Income before income taxes 127 774
Provision for income taxes 25 155
------- -------
Net income $ 102 $ 619
======= =======
Basic net income per share $ 0.01 $ 0.06
======= =======
Diluted net income per share $ 0.01 $ 0.06
======= =======
Shares used to compute basic net income per share 10,278 9,856
======= =======
Shares used to compute diluted net income per share 11,776 10,952
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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ZORAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 102 $ 619
Adjustments to reconcile net income to net cash used by
operations:
Depreciation, amortization and other 564 537
Changes in current assets and liabilities:
Accounts receivable (1,022) 4,668
Inventory (524) (3,477)
Prepaid expenses and other current assets (240) 171
Accounts payable 701 (701)
Accrued expenses and other liabilities (642) (4,394)
------- -------
Net cash used in operating activities (1,061) (2,577)
------- -------
Cash flows from investing activities:
Capital expenditures for property and equipment (260) (553)
Sale (purchase) of short-term investments, net (477) 1,634
------- -------
Net cash provided by (used in) investing activities (737) 1,081
Cash flows from financing activities:
Proceeds from issuance of Common Stock, net 248 35
------- -------
Net cash provided by financing activities 248 35
Net decrease in cash and cash equivalents (1,550) (1,461)
Cash and cash equivalents at beginning of period 8,221 9,903
------- -------
Cash and cash equivalents at end of period $ 6,671 $ 8,442
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
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ZORAN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
contain all adjustments (consisting only of normal recurring adjustments) which,
in the opinion of management, are necessary to present fairly the financial
information included therein. While the Company believes that the disclosures
are adequate to make the information not misleading, it is suggested that these
financial statements be read in conjunction with the audited consolidated
financial statements and accompanying notes included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998. Results for the
interim periods presented are not necessarily indicative of the results to be
expected for the full year.
2. BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- -----------
<S> <C> <C>
Inventory:
Work-in-process $ 1,640 $ 1,781
Finished goods 5,947 5,282
----------- -----------
$ 7,587 $ 7,063
=========== ===========
</TABLE>
3. INCOME TAXES
The provision for income taxes reflects the estimated annualized effective
tax rate applied to earnings for the interim periods. The effective tax rate
differs from the U.S. statutory rate due to utilization of net operating losses
and State of Israel tax benefits on foreign earnings. The provision includes
primarily taxes on income in excess of net operating loss carryover limitations
and foreign withholding taxes.
4. EARNINGS PER SHARE
A reconciliation of the numerators and the denominators of the basic and
diluted per share computation is as follows: (in thousands except per share
amounts)
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------------------------------------------------------------
1999 1998
------------------------------------------- -------------------------------------------
Income Shares Per Share INCOME SHARES PER SHARE
(Numerator) (Denominator) Amount (NUMERATOR) (DENOMINATOR) AMOUNT
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income available
to common stockholders $ 102 10,278 $ 0.01 $ 619 9,856 $ 0.06
========= =========
Effects of dilutive securities:
Stock options -- 1,498 -- 1,038
Warrants -- -- -- 58
Diluted EPS:
Income available to ------------- ------------- ------------- -------------
common stockholders $ 102 11,776 $ 0.01 $ 619 10,952 $ 0.06
============= ============= ============= ============= ============= =============
</TABLE>
5. RECENTLY ISSUED ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). 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 on the balance sheet at their fair market value, and the
corresponding derivative gains or losses be either reported on 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 year ending December 31, 2000, is
not expected to have a material effect on the Company's consolidated financial
statements.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO THE
COMPANY'S FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY
FROM THOSE CURRENTLY ANTICIPATED DEPENDING UPON A VARIETY OF FACTORS, INCLUDING
THOSE DESCRIBED BELOW UNDER THE SUB-HEADING, "FUTURE PERFORMANCE AND RISK
FACTORS" AND DISCUSSED MORE FULLY IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998.
OVERVIEW
Zoran Corporation ("Zoran" or the "Company") develops and markets
integrated circuits ("ICs"), integrated circuit cores and software for digital
video and audio applications enabled by compression. The Company's product lines
address the PC and consumer multimedia market and include JPEG-based codecs,
MPEG-based video decoders including DVD, Dolby Digital and MPEG-based audio
decoders and real-time video CD and DVD decoder software for PC applications.
The Company's software is bundled by PC and graphic systems manufacturers for
software-only or hardware-assisted video CD, DVD and JPEG compressed video
playback on the PC. Current applications for the Company's IC products include
professional and consumer video editing systems, filmless digital cameras,
PC-based or stand-alone video CD and DVD players and digital audio systems.
Historically, average selling prices ("ASPs") in the semiconductor industry
in general, and for the Company's products in particular, have decreased over
the life of a particular product. Although ASPs for the Company's hardware
products have fluctuated substantially from period to period, these fluctuations
have been driven principally by changes in customer mix (original equipment
manufacturer ("OEM") sales versus sales to distributors) and the transition from
low-volume to high-volume production sales rather than by factors related to
product life cycles. Since 1996, the Company has peridically reduced its ASPs on
certain products to better penetrate its target markets and remain competitive.
The Company believes that, as its product lines continue to mature and
competitive markets evolve, it is likely to experience further declines in the
ASPs of its products, although the timing and amount of such future changes
cannot be predicted with any certainty. There can be no assurance that costs
will decrease at the same rate as such declines in ASPs, or at all.
The Company sells its products to OEMs worldwide directly and through
distributors and independent sales representatives. Sales prices to distributors
are generally lower than prices for direct sales, as distributors are
responsible for certain sales and marketing expenses, maintenance of inventories
and customer support and training. Lower gross margins on sales to distributors
are partially offset by reduced selling and marketing expenses related to such
sales. Product sales in Japan are primarily made through Fujifilm Microdevices
Co., Ltd. ("Fujifilm"), the Company's strategic partner and distributor in
Japan. Fujifilm provides more sales and marketing support than Zoran's other
distributors.
Zoran has historically generated a significant percentage of its total
revenues from development contracts, primarily with key customers. These
development contracts have provided the Company with partial funding for the
development of certain of its products. Payments received by the Company under
these development contracts are recorded as development revenue. The Company
classifies all development costs, including costs related to these development
contracts, as research and development expenses. The Company retains ownership
of the intellectual property developed by it under these development contracts.
While the Company intends to continue to enter into development contracts with
certain strategic partners, it expects development revenue to decrease as a
percentage of total revenues.
7
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The Company conducts a substantial portion of its research and development
and certain sales and marketing and administrative operations in Israel through
its wholly-owned Israeli subsidiary. As a result, certain expenses are incurred
in Israeli shekels, and a portion of its products are sold directly from its
facility in Israel. To date, substantially all of the Company's revenues have
been denominated in U.S. dollars and most costs of product sales have been
incurred in U.S. dollars. The Company expects that most of its revenues and
costs of product sales will continue to be denominated and incurred in U.S.
dollars for the foreseeable future. The Company has not experienced material
losses or gains as a result of currency exchange rate fluctuations and has not
engaged in hedging transactions to reduce its exposure to such fluctuations. The
Company intends to actively monitor its foreign exchange exposure and to take
appropriate action to reduce its foreign exchange risk, if such risk becomes
material.
RESULTS OF OPERATIONS
REVENUES
Total revenues for the quarter ended March 31, 1999 increased by 6.5% to
$11.9 million from $11.2 million for the same period in 1998. Product sales for
the quarter increased by 7.5% to $9.3 million from $8.6 million for first
quarter of 1998. The increase in product sales was driven by the Company's DVD
and Super VCD product line where unit sales increased by approximately 400%
compared to the same period in 1998. Software, licensing and development
revenues increased by 3% to $2.6 million compared to $2.5 million for the first
quarter of 1998. This increase was primarily due to the timing of significant
new licensing contracts for software and hardware design and as well as the
timing of revenue recognition on long-term development contracts
Product sales consist of revenues from sales of the Company's integrated
circuits. Software, licensing and development revenue consists of revenue from
license and royalty agreements, primarily for audio and video decoder software,
that generally provide for the license of software for a specified period of
time for either a single fee or a fee based on the number of units distributed
by the licensee. Development revenue is derived from hardware design contracts
that provide for license and milestone payments to be made at specified times.
PRODUCT GROSS MARGIN
Product gross margin for the quarter ended March 31, 1999 decreased by 1%
to 45.1% from 46.1% for the same period in 1998. The decrease was due to a
product sales mix that included an increased percentage of lower-margin products
compared to the same quarter in 1998.
The Company's product gross margin is dependent on product mix and on the
percentage of products sold directly to the Company's OEM customers versus
indirectly through its marketing partners who purchase the Company's products at
lower prices but absorb most of the associated marketing and sales support
expenses. The Company expects product and customer mix to continue to fluctuate
in future periods, causing further fluctuations in margins.
RESEARCH AND DEVELOPMENT
Research and development ("R&D") expenses for the quarter ended March
31, 1999 increased by 9.0% to $3.5 million from $3.2 million for the same
period in 1998. R&D expenses increased as a result of the Company's planned
enhancement to its technology and development capabilities. R&D expenses
increased as a percentage of total revenues for the quarter from 29.0% for
the first quarter of 1998 to 29.6% for the first quarter of 1999.
The Company continues to believe that significant investments in R&D are
required for it to remain competitive and expects to continue to devote
significant resources to product development, although such expenses as a
percentage of total revenues may fluctuate from period to period.
8
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expenses for the quarter ended
March 31, 1999 increased by 18.2% to $3.2 million from $2.7 million for the same
period in 1998. The increase was primarily due to increased sales and marketing
expenses related to product market development and to support planned revenue
growth particularly in the China market.
The Company expects that SG&A expenses will continue to increase to support
the anticipated growth of the Company.
INTEREST AND OTHER INCOME, NET
Net interest and other income for the quarter ended March 31, 1999
decreased by 59.6% to $99,000 from $245,000 for the same period in 1998. The
decrease resulted primarily from decreased interest income due to lower cash
balances during the quarter, compared to the same quarter in 1998.
PROVISION FOR INCOME TAXES
The Company's estimated effective tax rate remained at 20% for the current
quarter, the same as last year's effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had $6.7 million of cash and cash
equivalents, $11.4 million of short-term investments and $31.4 million of
working capital. Cash used in operations for the three month period was $1.1
million, primarily reflecting changes in inventory, accounts receivable and
accrued liabilities and offset in part by net income, which includes non-cash
charges for depreciation and amortization. The Company's capital expenditures
for the quarter ended March 31, 1999 totaled $260,000. The Company had no bank
debt at March 31, 1999 or at December 31, 1998.
The Company believes that its current balances of cash, cash equivalents
and short-term investments, together with anticipated cash flow from operations,
will satisfy the Company's anticipated working capital and capital equipment
requirements through at least the next 12 months.
YEAR 2000 READINESS
In the next year, most companies could face potentially serious
consequences due to the inability of many older software applications and
operational programs to properly recognize calendar dates beginning in the Year
2000. The risk for Zoran exists in three areas: systems used by the Company to
run its business, embedded software and software products sold to its customers,
and the Year 2000 readiness of the Company's key suppliers and customers. The
Company is currently evaluating its exposure in all of these areas based on a
Year 2000 compliance plan it has developed.
The Company is conducting a comprehensive inventory and evaluation of the
systems used in running its business. These systems include the Company's
information technology, or IT systems, as well as equipment and facilities. To
date, the Company has not found any potential Year 2000 issues that would have a
material impact on its operations. The Company believes that this portion of the
investigation is approximately 90% complete and expects to complete the
remainder in the second quarter of 1999. Since the Company has not yet
identified any significant non-compliance problems there are currently no
contingency plans in place for Year 2000 issues. As the Company continues
through its investigation, however, it may find it necessary to create
contingency plans in order to address Year 2000 compliance problems. The Company
expects to complete any necessary contingency planning by the second quarter of
1999.
9
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The Company believes that its current software products are Year 2000
compliant. This is based on extensive testing of the software in Year 2000
simulated conditions. However, since all customer situations cannot be
anticipated, particularly those involving third party products, the Company's
software products could prove to be non-compliant in some circumstances. The
impact of these claims could have a material impact on the Company's results of
operations or financial condition.
Zoran is in the process of contacting each of its critical suppliers to
determine that the suppliers' operations and the products and services they
provide are Year 2000 compliant. Where practicable, Zoran will attempt to
mitigate its risks with respect to the failure of suppliers to be Year 2000
ready. For instance, the Company may seek alternative suppliers who are found to
be in Year 2000 conformance. To date, no supplier has been identified that will
not be Year 2000 ready by the appropriate timeframe. However, the Company has
not yet completed contacting all of its key suppliers and does not anticipate
completing this portion of the investigation until the second quarter of 1999.
The Company has begun to contact its key customers in order to ascertain their
Year 2000 compliance status. Failure of the Company's 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. The Company expects to complete contacting
all of its key customers by the second quarter of 1999.
The Company has not incurred material costs in connection with its
investigation to date. Based on its investigation to date, the Company does not
anticipate incurring costs that would materially impact the Company's operating
results or financial condition. However, the investigation is ongoing and no
assurances can be given that unidentified non-compliance issues will not be
discovered or that their remediation will not have a material impact on the
Company's operations or financial condition. Failure to ensure that the Company
has fully identified and addressed the Year 2000 problem could result in the
Company or any of its key vendors being unable for a period of time to conduct
critical business activities, which include but are not restricted to, shipping
product to customers, invoicing customers and paying vendors.
FUTURE PERFORMANCE AND RISK FACTORS
THE COMPANY'S FUTURE BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION
ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES, INCLUDING THOSE DESCRIBED BELOW.
PRODUCT CONCENTRATION; EVOLVING MARKETS. Current applications for the
Company's products and intellectual property include professional and consumer
video editing systems, filmless digital cameras, standalone and PC-based DVD
players, Super VCD players, digital speakers and audio systems. During 1994 and
1995, the Company derived a majority of its product revenues from the sale of
integrated circuits for video editing applications, and video editing
applications continued to account for the largest percentage of the Company's
product sales from 1996 through 1998. However, in the first quarter of 1999 the
Company derived a majority of its product revenues from the sale of integrated
circuits for DVD and Super VCD applications. The Company expects that sales of
its devices for DVD and Super VCD applications, video capture and editing
applications, and digital audio applications will continue to account for a
significant portion of its revenues for the near future. Over the longer term,
the Company's ability to generate increased revenues will be dependent on the
expansion of sales of its products for use in other existing applications, as
well as the development and acceptance of new applications for the Company's
technologies and products. The potential size of the markets for new
applications and the timing of their development and acceptance is uncertain.
The Company's future success will depend upon whether manufacturers select the
Company's integrated circuits and software for incorporation into their
products, and upon the successful marketing of these products by the
manufacturers. There can be no assurance that demand for existing applications
will be sustained, that new markets will develop or that manufacturers
developing products for any of these markets will design the Company's
integrated circuits into their products or successfully market them. The failure
of existing and new markets to develop or to be receptive to the Company's
products would have a material adverse effect on the Company's business,
operating results and financial condition.
The emergence of markets for the Company's products will be affected by a
variety of factors beyond the Company's control. In particular, the Company's
products are designed to conform with certain current industry standards. There
can be no assurance that manufacturers will continue to follow these standards
or
10
<PAGE>
that competing standards will not emerge which will be preferred by
manufacturers. The emergence of markets for the Company's products is also
dependent in part upon third-party content providers developing and marketing
content for end user systems, such as video and audio playback systems, in a
format compatible with the Company's products. There can be no assurance that
these or other factors beyond the Company's control will not adversely affect
the development of markets for the Company's products.
RELIANCE ON INDEPENDENT FOUNDRIES AND CONTRACTORS. The Company does not
operate any manufacturing facilities, and from time to time shortages of foundry
capacity develop for certain process technologies in the semiconductor industry.
The Company currently relies on independent foundries to manufacture
substantially all of its products. The Company's independent foundries fabricate
products for other companies and may also produce products of their own design.
The Company does not have a long-term supply contract with either TSMC or
Motorola, its principal suppliers, and, therefore, neither TSMC nor Motorola is
obligated to supply products to the Company for any specific period, in any
specific quantity or at any specified price, except as may be provided in a
particular purchase order.
The Company's reliance on independent foundries involves a number of risks,
including the inability to obtain adequate capacity, the unavailability of or
interruption in access to certain process technologies, reduced control over
delivery schedules, quality assurance, manufacturing yields and cost, and
potential misappropriation of the Company's intellectual property. The loss of
any of the Company's foundries as a supplier, the inability of the Company in a
period of increased demand for its products to expand supply or the Company's
inability to obtain timely and adequate deliveries from its current or future
suppliers could reduce or delay shipments of the Company's products. Any of
these developments could damage relationships with the Company's current and
prospective customers and have a material adverse effect on the Company's
business, operating results or financial condition.
At present, all of the Company's semiconductor products are assembled by
one of two independent contractors, ASAT, Inc. and Anam Industrial, and tested
by those contractors or other independent contractors. The Company's reliance on
independent assembly and testing houses limits its control over delivery
schedules, quality assurance and product cost. Disruptions in the provision of
services by the Company's assembly or testing houses or other circumstances that
would require the Company to seek alternative sources of assembly or testing
could lead to supply constraints or delays in the delivery of the Company's
products. These constraints or delays could damage relationships with current
and prospective customers and have a material adverse effect on the Company's
business, operating results or financial condition.
NEW PRODUCT DEVELOPMENT AND TIMELY INTRODUCTION OF NEW AND ENHANCED
PRODUCTS. The markets for the Company's products are characterized by rapidly
changing technologies, evolving industry standards, frequent new product
introductions and short product life cycles. The Company expects to increase its
expenses relating to product development, and its future success will depend to
a substantial degree upon its ability to develop and introduce, on a timely and
cost-effective basis, new and enhanced products that meet changing customer
requirements and industry standards. There can be no assurance that the Company
will successfully develop, introduce or manage the transition to new products.
Future delays in the introduction or shipment of new or enhanced products, the
inability of such products to gain market acceptance or problems associated with
new product transitions could adversely affect the Company's business, operating
results and financial condition.
COMPETITION; PRICING PRESSURES. The Company's existing and potential
competitors include many large domestic and international companies that have
substantially greater financial, manufacturing, technical, marketing,
distribution and other resources, broader product lines and longer standing
relationships with customers than the Company. The markets in which the Company
competes are intensely competitive and are characterized by rapid technological
change, declining ASPs and rapid product obsolescence. There can be no assurance
that the Company's products will continue to compete favorable or that the
Company will be successful in the face of increasing competition from new
products and enhancements introduced by existing or new competitors. In
addition, increased competition may result in price reductions, reduced margins
and loss of market share, any of which could have a material adverse effect on
the Company's business, operating results and financial condition.
11
<PAGE>
CUSTOMER CONCENTRATION; CHANGES IN CUSTOMER MIX. The Company's largest
customers have accounted for a substantial percentage of its revenues, and
sales to these large customers have varied materially from year to year.
There can be no assurance that the Company will be able to retain its key
customers or that such customers will not cancel purchase orders or
reschedule or decrease their level of purchases. In addition, sales to these
key customers may fluctuate significantly from quarter to quarter. Any
development that would result in a substantial decrease or delay in sales to
one or more key customers, including actions by competitors or technological
changes, could have a material adverse effect on the Company's business,
operating results or financial condition. In addition, any development that
would adversely affect the collectability of account balances from one or
more key customers could have a material adverse effect on the Company's
business, operating results or financial condition.
FLUCTUATIONS IN OPERATING RESULTS; NET OPERATING LOSS CARRYFORWARDS. The
Company's quarterly operating results have varied significantly due to a number
of factors, including the timing of new product introductions by the Company and
its competitors, market acceptance of new and enhanced versions of the Company's
products and products of its customers, the timing of large customer orders, the
availability of development funding and the timing of development revenue,
changes in the mix of products sold, and competitive pricing pressures. The
Company expects that its operating results will fluctuate in the future as a
result of these factors and a variety of other factors, including the
availability of adequate foundry capacity, fluctuations in manufacturing yields,
the emergence of new industry standards, product obsolescence, changes in
pricing policies by the Company, its competitors or its suppliers, the cyclical
nature of the semiconductor industry, the evolving and unpredictable nature of
the markets for products incorporating the Company's integrated circuits and
software and the amount of research and development expenses associated with new
product introductions. The Company's operating results could also be adversely
affected by economic conditions generally or in various geographic areas where
the Company or its customers do business, other conditions affecting the timing
of customer orders, a downturn in the markets for its customer's products,
particularly the consumer electronics market, or order cancellations or
reschedulings. These factors are difficult or impossible to forecast, and these
or other factors could materially affect the Company's quarterly or annual
operating results. The Company places orders to purchase its products from
independent foundries several months in advance of the scheduled delivery date,
often in advance of receiving non-cancelable orders from its customers. If
anticipated shipments or development revenue in any quarter are canceled or do
not occur as quickly as expected, expense and inventory levels could be
disproportionately high. A significant portion of the Company's expenses is
relatively fixed, and the timing of increases in expenses is based in large part
on the Company's forecast of future revenues. As a result, if revenues do not
meet the Company's expectations it may be unable to quickly adjust expenses to
levels appropriate to actual revenues, which could have a material adverse
effect on the Company's business, operating results or financial condition.
Increasingly, the Company's operating results have been affected by seasonal
factors. As markets for consumer products incorporating the Company's products
have matured, the Company's sales have been stronger during the last several
months of the calendar year than at other times due to increased demand for
consumer products during the holiday season. As a result of the foregoing, the
Company's operating results and stock price may be subject to significant
volatility, particularly on a quarterly basis. Any shortfall in revenues or net
income from levels expected by securities analysts could have an immediate and
significant adverse effect on the trading price of the Company's Common Stock.
MANAGEMENT OF GROWTH. The Company anticipates that future growth, if any,
will require it to recruit and hire a substantial number of new engineering,
managerial, sales and marketing personnel. The Company's ability to manage its
growth successfully will also require the Company to expand and improve its
administrative, operational, management and financial systems and controls. Many
of the Company's key operations, including the major portion of its research and
development operations and a significant portion of its sales and administrative
operations, are located in Israel, while a majority of its sales and marketing
and certain of its research and development and administrative personnel,
including its President and Chief Executive Officer and other officers, are
based in the United States. The geographic separation of these operations places
additional strain on the Company's resources and its ability to effectively
manage its growth. If the Company's management is unable to manage growth
effectively, the Company's business, operating results or financial condition
could be materially and adversely affected.
12
<PAGE>
DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a
significant degree upon the continuing contributions of its senior
management. The loss of key management personnel could delay product
development cycles or otherwise have a material adverse effect on the
Company's business, operating results or financial condition. There can be no
assurance that the Company will be able to retain the services of any of its
key employees. The Company believes that its future success will also depend
in large part on its ability to attract and retain highly-skilled
engineering, managerial, sales and marketing personnel, both in the United
States and in Israel. Competition for such personnel is intense, and there
can be no assurance that the Company will be successful in attracting,
integrating and retaining such personnel. Failure to attract and retain key
personnel could have a material adverse effect on the Company's business,
operating results or financial condition.
RELIANCE ON INTERNATIONAL SALES AND OPERATIONS; RELIANCE ON OPERATIONS IN
ISRAEL. The Company anticipates that international sales will continue to
represent a significant portion of total revenues. In addition, substantially
all of the Company's semiconductor products are manufactured, assembled and
tested outside of the United States by independent foundries and subcontractors.
The Company is subject to the risks of doing business internationally, including
unexpected changes in regulatory requirements, fluctuations in exchange rates,
imposition of tariffs and other barriers and restrictions and the burdens of
complying with a variety of foreign laws. The Company is also subject to general
geopolitical risks, such as political and economic instability and changes in
diplomatic and trade relationships, in connection with its international
operations.
A substantial portion of the Company's research and development and sales
operations are located in the State of Israel. Therefore, the Company is
directly affected by the political, economic and military conditions to which
that country is subject. In addition, many of the Company's expenses in Israel
are paid in Israeli shekels, thereby subjecting the Company to the risk of
foreign currency fluctuations and to economic pressures resulting from Israel's
generally high rate of inflation. There can be no assurance that such factors
will not have a material adverse effect of the Company's business, operating
results or financial condition.
VOLATILITY OF STOCK PRICE. The market price of the Company's Common Stock
has fluctuated significantly since the Common Stock began to trade publicly and
is subject to material fluctuations in the future in response to announcements
concerning the Company or its competitors or customers, quarterly variations in
operating results, announcements of technological innovations, the introduction
of new products or changes in product pricing policies by the Company or its
competitors, proprietary rights or other litigation, changes in analysts'
earnings estimates, general conditions in the semiconductor industry,
developments in the financial markets and other factors. In addition, the stock
market has, from time to time, experienced extreme price and volume fluctuations
that have particularly affected the market prices for semiconductor companies or
technology companies generally and which have been unrelated to the operating
performance of the affected companies. Broad market fluctuations of this type
may adversely affect the future market price of the Common Stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has an investment portfolio of securities that are classified
as "available-for-sale". These securities are subject to interest rate risk and
will fall in value if market interest rates increase. The Company attempts to
limit this exposure by investing primarily in short-term securities. From time
to time, the Company makes certain capital equipment or other purchases
denominated in foreign currencies. As a result, cash flows and earnings are
exposed to fluctuations in interest rates and foreign currency exchange rates.
The Company attempts to limit these exposures through operational strategies and
generally has not hedged currency exposures.
13
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
March 31, 1999.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZORAN CORPORATION
Date: May 17, 1999 /s/ Levy Gerzberg
-----------------------------------
Levy Gerzberg
President
Chief Executive Officer
15
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