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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 31, 1999 was 10,853,063.
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ZORAN CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE NO.
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations
Three and Nine Months Ended September 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 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 8
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 15
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
</TABLE>
2
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ZORAN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash & cash equivalents $ 4,857 $ 8,221
Short-term investments 13,591 10,954
Accounts receivable, net 19,533 15,558
Inventory 9,434 7,063
Prepaid expenses and other current assets 2,164 2,018
--------------------- ---------------------
Total current assets 49,579 43,814
Property and equipment, net 4,573 5,356
--------------------- ---------------------
$ 54,152 $ 49,170
===================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,684 $ 6,530
Accrued expenses and other liabilities 8,506 6,454
--------------------- ---------------------
Total current liabilities 12,190 12,984
Stockholders' equity:
Common Stock, $0.001 par value;
20,000,000 shares authorized; 10,834,296
and 10,213,394 shares issued and outstanding 10 10
Additional paid-in capital 81,590 79,635
Warrants 717 717
Unrealized gain on securities available for sale 483 -
Accumulated deficit (40,838) (44,176)
--------------------- ---------------------
Total stockholders' equity 41,962 36,186
--------------------- ---------------------
$ 54,152 $ 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 Nine Months Ended
September 30, September 30,
--------------------------- -------------------------
1999 1998 1999 1998
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 14,519 $ 8,986 $ 34,728 $ 22,230
Software, licensing and development 1,577 2,860 6,891 7,859
------------- ------------- ------------ ------------
Total revenues 16,096 11,846 41,619 30,089
Costs and expenses:
Cost of product sales 7,720 5,153 18,497 12,750
Research and development 2,430 3,476 9,945 9,654
Selling, general and administrative 3,683 2,877 10,232 8,311
------------- ------------- ------------ ------------
Total costs and expenses 13,833 11,506 38,674 30,715
Operating income (loss) 2,263 340 2,945 (626)
Interest and other income, net 249 176 1,226 696
------------- ------------- ------------ ------------
Income before income taxes 2,512 516 4,171 70
Provision for income taxes 502 103 833 14
------------- ------------- ------------ ------------
Net income $ 2,010 $ 413 $ 3,338 $ 56
============= ============= ============ ============
Basic net income per share $ 0.19 $ 0.04 $ 0.32 $ 0.01
============= ============= ============ ============
Diluted net income per share $ 0.17 $ 0.04 $ 0.28 $ 0.01
============= ============= ============ ============
Shares used to compute basic net income per share 10,681 10,064 10,578 9,988
============= ============= ============ ============
Shares used to compute diluted net income per share 12,083 10,941 11,865 10,970
============= ============= ============ ============
</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)
NINE MONTHS ENDED
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------------------
1999 1998
-------------------- --------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,338 $ 56
Adjustments to reconcile net income to net cash used by
operations:
Depreciation, amortization and other 1,520 1,564
Changes in current assets and liabilities:
Accounts receivable (4,337) 3,152
Inventory (2,371) (2,688)
Prepaid expenses and other current assets (146) 394
Accounts payable (2,846) (3,127)
Accrued expenses and other liabilities 1,762 (4,463)
-------------------- --------------------
Net cash used in operating activities (3,080) (5,112)
-------------------- --------------------
Cash flows from investing activities:
Capital expenditures for property and equipment (1,085) (1,339)
(Purchases)/Sales of short-term investments, net (1,154) 1,913
-------------------- --------------------
Net cash (used in) provided by investing activities (2,239) 574
Cash flows from financing activities:
Proceeds from issuance of Common Stock, net 1,955 492
-------------------- --------------------
Net cash provided by financing activities 1,955 492
-------------------- --------------------
Net decrease in cash and cash equivalents (3,364) (4,046)
Cash and cash equivalents at beginning of period 8,221 9,903
-------------------- --------------------
Cash and cash equivalents at end of period $ 4,857 $ 5,857
==================== ====================
</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>
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------------- --------------------
<S> <C> <C>
INVENTORY:
Work-in-process $ 3,037 $ 1,781
Finished goods 6,397 5,282
-------------------- --------------------
$ 9,434 $ 7,063
==================== ====================
</TABLE>
3. INCOME TAXES
The provision for or benefit from income taxes reflects the
estimated annualized effective tax rate applied to earnings for the interim
periods. The effective tax rate differs from the U.S. statutory rate due to
utilization of net operating losses and State of Israel tax benefits on
foreign earnings. The provision includes primarily taxes on income in excess
of net operating loss carryover limitations and foreign withholding taxes.
4. EARNINGS PER SHARE
A reconciliation of the numerators and the denominators of the basic
and diluted per share computation is as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30,
1999 1998
---------------------------------------- ----------------------------------------
Income Shares Per Share (Loss) Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------ -------------- ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income available
to common stockholders $ 2,010 10,681 $ 0.19 $ 413 10,064 $ 0.04
============ ============
Effects of Dilutive Securities:
Stock Options 1,395 877
Warrants 7 -
------------ -------------- ------------ -----------
Diluted EPS:
Income available to
common stockholders $ 2,010 12,083 $ 0.17 $ 413 10,941 $ 0.04
============ ============== ============ ============ ============ ============
---------------------------------------------------------------------------------
Nine Months Ended September 30,
1999 1998
---------------------------------------- ----------------------------------------
Income Shares Per Share (Loss) Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------ -------------- ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income available
to common stockholders $ 3,338 10,578 $ 0.32 $ 56 9,988 $ 0.01
============ ===========
Effects of Dilutive Securities:
Stock Options 1,287 963
Warrants - 19
------------ -------------- ----------- -----------
Diluted EPS:
Income available to
common stockholders $ 3,338 11,865 $ 0.28 $ 56 10,970 $ 0.01
============ ============== ============ =========== ============ ============
</TABLE>
6
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5. RECENTLY ISSUED ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). 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.
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.
6. SALE OF CERTAIN ASSETS
In June, 1999 the Company sold to MGI Software of Canada ("MGI") the
intellectual property related to Zoran's 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 revenues for the
quarter by $517,000 for possible issues related to receivables associated
with the SoftDVD product line. When viewed in total, the net impact of the
MGI transaction on the Company's results was effectively a net gain of
$215,000, or $0.01 per share, on a diluted basis after tax.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO
THE COMPANY'S FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE CURRENTLY ANTICIPATED DEPENDING UPON A VARIETY OF
FACTORS, INCLUDING THOSE DESCRIBED BELOW UNDER THE SUB-HEADING, "FUTURE
PERFORMANCE AND RISK FACTORS" AND DISCUSSED MORE FULLY IN THE COMPANY'S
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998.
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, which are not expected to
contribute significant revenues in future periods. Our current lines of
multimedia compression products include MPEG 2 and Dolby Digital-based
products used in DVD players, Dolby Digital-based audio products used in
movie and home theater systems, and JPEG-based products used in 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 a designer of cores for video and
audio 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. Although average selling prices for our
hardware products have fluctuated substantially from period to period, these
fluctuations have been driven principally by changes in our customer mix of
original equipment manufacturer sales versus sales to distributors and the
transition from low-volume to high-volume production sales rather than by
factors related to product life cycles. During 1997 and 1998, we reduced our
average selling prices on certain 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 costs may
not decrease at the same rate as average selling prices decline or at all.
Our cost of product sales consists primarily of fabrication costs,
assembly and test costs, and the cost of materials and overhead from
operations. Our product gross margin is dependent on product mix and on the
percentage of products sold directly to our original equipment manufacturer
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. We expect product and customer mix to continue to
fluctuate in future periods, causing further fluctuations in margins.
We also derive revenue from licensing our software. Licensing
revenue includes one-time license fees and royalties based on the number of
units distributed by the licensee.
We sell our products, either directly or through distributors or
independent sales representatives, to original equipment manufacturers
worldwide. Sales prices to distributors are generally lower than prices for
direct sales, as distributors are responsible for certain sales and marketing
expenses, maintenance of inventories, customer support and training. Lower
gross margins on sales to distributors are partially offset by reduced
selling and marketing expenses related to such sales. Product sales in Japan
are primarily made through Fujifilm, our strategic partner and distributor in
Japan. Fujifilm provides more sales and marketing support than our other
distributors.
8
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We have historically generated a significant percentage of our total
revenues from development contracts, primarily with key customers. 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 intend to continue to enter into development contracts with certain
strategic partners, we expect development revenue to decrease 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
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.
We are a party to certain 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.
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, certain expenses are
incurred in 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 intend to actively monitor our foreign
exchange exposure and to take appropriate action to reduce our foreign
exchange risk, if such risk becomes material.
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 results was a gain of $215,000 or after tax, $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. We believe that our software revenues will decline
significantly as a result of the sale of the SoftDVD product line.
RESULTS OF OPERATIONS
REVENUES
Total revenues were $16.1 million and $41.6 million for the three
and nine month periods ended September 30, 1999, compared to $11.8 million
and $30.1 million for the same periods of the prior fiscal
9
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year, representing an increase of 35.9% and 38.3% for the respective periods.
For the three and nine month periods ended September 30, 1999, product
revenues were $14.5 million and $34.7 million, compared to $9.0 million and
$22.2 million for the same periods in 1998, increases of 61.6% and 56.2%,
respectively. The increase in product sales resulted primarily from increased
unit sales of DVD and Super VCD products. Software, licensing and development
revenues were $1.6 million and $6.9 million for the three and nine month
periods ended September 30, 1999, compared to $2.9 million and $7.9 million
for the same periods of the prior fiscal year, representing a decrease of
44.9% and 12.3% for the respective periods. This decrease was due principally
to our sale of the SoftDVD product line in June 1999.
PRODUCT GROSS MARGIN
Product gross margins were 46.8% and 46.7% of product revenues for
the three and nine month periods ended September 30, 1999, compared to 42.7%
and 42.6% for the same periods of the prior fiscal year, an increase of 4.1
percentage points each. The increase was due to a product sales mix that
included an increased percentage of higher-margin products, a greater
percentage of products sold directly to OEM customers and lower manufacturing
costs as a function of increased product shipments.
RESEARCH AND DEVELOPMENT
Research and development ("R&D") expenses were $2.4 million and $9.9
million for the three and nine month periods ended September 30, 1999,
compared to $3.5 million and $9.7 million for the same periods of the prior
fiscal year. The decrease in quarter over quarter expenses is the result of
transferring to MGI certain software development and support resources. The
increase in year over year expenses is a result of the timing and recognition
of project funding from external sources, timing of major project expenses,
such as tape-outs, and costs associated with some internal restructuring in
the quarter ended June 30, 1999. As a percentage of revenues, R&D expenses
decreased to 15.1% and 23.9% for the three and nine month periods ended
September 30, 1999, compared to 29.3% and 32.1% for the same periods of the
prior fiscal year. The decrease in R&D expenses as a percentage of revenues
for the current quarter compared to the same period in 1998 was due to
increased revenues in 1999 and the reduction of engineering expense
associated with the transfer of certain software development and support
resources to MGI.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expenses were $3.7
million and $10.2 million for the three and nine month periods ended
September 30, 1999, compared to $2.9 million and $8.3 million for the same
periods of the prior fiscal year. The increase in expenses was primarily due
to increased efforts in the development of the China market and greater
commission expense related to increased sales volume. As a percentage of
revenues, SG&A expenses were 22.9% and 24.6% for the three and nine month
periods ended September 30, 1999, compared to 24.3% and 27.6% for the same
periods of the prior fiscal year. The decrease as a percent of revenues,
period to period, was due to the increase in revenues in 1999.
INTEREST AND OTHER INCOME, NET
Net interest and other income for the three and nine month periods
ended September 30, 1999 was $249,000 and $1,226,000, respectively, an
increase of 41.5% and 76.1% compared to the same periods in 1998. The
increase year over year was primarily the result of the $732,000 gain
realized from the sale of the Company's SoftDVD product line to MGI.
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 September 30, 1999, the Company had $4.9 million of cash and cash
equivalents, $13.6 million of short-term investments and $37.4 million of
working capital. Cash used in operations for the first nine months
10
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of 1999 was $3.4 million, compared to $4.0 million for the same period in
1998. Cash used primarily reflects changes in inventory, accounts receivable
and accrued liabilities. The Company's capital expenditures for the nine
months ended September 30, 1999 totaled $1.1 million. The Company had no bank
debt at September 30, 1999 or at December 31, 1998.
The Company believes that its current balances of cash, cash
equivalents and short-term investments, and anticipated cash flow from
operations, will satisfy the Company's anticipated working capital and
capital expenditure requirements through at least the next 12 months.
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
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;
- 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.
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 some of these transactions are denominated in 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 would have an immaterial affect on our financial
condition.
11
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YEAR 2000 READINESS
Many companies 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 us
exists in three areas:
- systems used by us to run our business;
- embedded software and software products sold to our customers; and
- the year 2000 readiness of our key suppliers and customers.
The Company has conducted 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 identified any potential Year 2000
issues that would have a material impact on its operations. The Company
believes that it has essentially completed this portion of its plan. Since
the Company did not identify any significant non-compliance problems there
are currently no contingency plans in place for Year 2000 issues. However,
the Company may still find it necessary to create contingency plans in order
to address unidentified Year 2000 compliance problems that may yet arise. The
Company expects it would complete any necessary contingency planning prior to
the end of the year.
The Company believes that its current products are Year 2000
compliant. This is based on the fact that none of the products process or
store date information.
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. To date, the Company has received
responses from 100% of its identified critical suppliers. None of these
suppliers have indicated that they will not be Year 2000 ready by the
appropriate timeframe. The Company is contacting 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 end of
November 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
nine months 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
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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 embedded software for incorporation
into their products, and upon the successful marketing of these products by
the manufacturers. There can be no assurance that demand for existing
applications will be sustained, that new markets will develop or that
manufacturers developing products for any of these markets will design the
Company's integrated circuits into their products or successfully market
them. The failure of existing and new markets to develop or to be receptive
to the Company's products would have a material adverse effect on the
Company's business, operating results and financial condition.
The emergence of markets for the Company's integrated circuits will
be affected by a variety of factors beyond the Company's control. In
particular, the Company's products are designed to conform with certain
current industry standards. There can be no assurance that manufacturers will
continue to follow these standards or that competing standards will not
emerge which will be preferred by manufacturers. The emergence of markets for
the Company's products is also dependent in part upon third-party content
providers developing and marketing content for end user systems, such as
video and audio playback systems, in a format compatible with the Company's
products. There can be no assurance that these or other factors beyond the
Company's control will not adversely affect the development of markets for
the Company's products.
RELIANCE ON INDEPENDENT FOUNDRIES AND CONTRACTORS. The Company does
not operate any manufacturing facilities, and from time to time shortages of
foundry capacity develop for certain process technologies in the
semiconductor industry. The Company currently relies on independent foundries
to manufacture substantially all of its products. The Company's independent
foundries fabricate products for other companies and may also produce
products of their own design. The Company does not have a long-term supply
contract with either TSMC or Motorola Inc., its principal suppliers, and,
therefore, neither TSMC nor Motorola is obligated to supply products to the
Company for any specific period, in any specific quantity or at any specified
price, except as may be provided in a particular purchase order.
The Company's reliance on independent foundries involves a number of
risks, including the inability to obtain adequate capacity, the
unavailability of or interruption in access to certain process technologies,
reduced control over delivery schedules, quality assurance, manufacturing
yields and cost, and potential misappropriation of the Company's intellectual
property. The loss of any of the Company's foundries as a supplier, the
inability of the Company, in a period of increased demand for its products,
to expand supply or the Company's inability to obtain timely and adequate
deliveries from its current or future suppliers could reduce or delay
shipments of the Company's products. Any of these developments could damage
relationships with the Company's current and prospective customers and have a
material adverse effect on the Company's business, operating results or
financial condition.
At present, all of the Company's semiconductor products are
assembled by one of three independent contractors, ASAT, Inc., Anam
Industrial, and Advanced Semiconductor Engineering, Inc. ("ASE") 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
13
<PAGE>
problems associated with new product transitions could adversely affect the
Company's business, operating results and financial condition.
COMPETITION; PRICING PRESSURES. The Company's existing and potential
competitors include many large domestic and international companies that have
substantially greater financial, manufacturing, technical, marketing,
distribution and other resources, broader product lines and longer standing
relationships with customers than the Company. The markets in which the
Company competes are intensely competitive and are characterized by rapid
technological change, declining ASPs and rapid product obsolescence.
CUSTOMER CONCENTRATION; CHANGES IN CUSTOMER MIX. The Company's
largest customers have accounted for a substantial percentage of its
revenues, and sales to these large customers have varied materially from year
to year. There can be no assurance that the Company will be able to retain
its key customers or that such customers will not cancel purchase orders or
reschedule or decrease their level of purchases. In addition, sales to these
key customers may fluctuate significantly from quarter to quarter. Any
development that would result in a substantial decrease or delay in sales to
one or more key customers, including actions by competitors or technological
changes, could have a material adverse effect on the Company's business,
operating results or financial condition. In addition, any development that
would adversely affect the collectability of account balances from one or
more key customers could have a material adverse effect on the Company's
business, operating results or financial condition.
FLUCTUATIONS IN OPERATING RESULTS; NET OPERATING LOSS CARRYFORWARDS.
The Company's quarterly operating results have varied significantly due to a
number of factors, including the timing of new product introductions by the
Company and its competitors, market acceptance of new and enhanced versions
of the Company's products and products of its customers, the timing of large
customer orders, the availability of development funding and the timing of
development revenue, changes in the mix of products sold, and 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 are 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
14
<PAGE>
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.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a
significant degree upon the continuing contributions of its senior
management. The loss of key management personnel could delay product
development cycles or otherwise have a material adverse effect on the
Company's business, operating results or financial condition. There can be no
assurance that the Company will be able to retain the services of any of its
key employees. The Company believes that its future success will also depend
in large part on its ability to attract and retain highly-skilled
engineering, managerial, sales and marketing personnel, both in the United
States and in Israel. Competition for such personnel is intense, and there
can be no assurance that the Company will be successful in attracting,
integrating and retaining such personnel. Failure to attract and retain key
personnel could have a material adverse effect on the Company's business,
operating results or financial condition.
RELIANCE ON INTERNATIONAL SALES AND OPERATIONS; RELIANCE ON
OPERATIONS IN ISRAEL. The Company anticipates that international sales will
continue to represent a significant portion of total revenues. In addition,
substantially all of the Company's semiconductor products are manufactured,
assembled and tested outside of the United States by independent foundries
and subcontractors. The Company is subject to the risks of doing business
internationally, including unexpected changes in regulatory requirements,
fluctuations in exchange rates, imposition of tariffs and other barriers and
restrictions and the burdens of complying with a variety of foreign laws. The
Company is also subject to general geopolitical risks, such as political and
economic instability and changes in diplomatic and trade relationships, in
connection with its international operations.
A substantial portion of the Company's research and development and
sales operations are located in the State of Israel. Therefore, the Company
is directly affected by the political, economic and military conditions to
which that country is subject. In addition, many of the Company's expenses in
Israel are paid in Israeli shekels, thereby subjecting the Company to the
risk of foreign currency fluctuations and to economic pressures resulting
from Israel's generally high rate of inflation. There can be no assurance
that such factors will not have a material adverse effect of the Company's
business, operating results or financial condition.
VOLATILITY OF STOCK PRICE. The market price of the Company's Common
Stock has fluctuated significantly since the Company's initial public
offering 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.
15
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a vote of Security Holders
The Company's 1999 Annual Meeting of Stockholders was held on
July 16, 1999. At the meeting the following six persons nominated by
management were elected to serve as directors of the Company:
<TABLE>
<CAPTION>
Shares
--------------------------
Nominee Voted For Withheld
------------------------------- --------------------------
<S> <C> <C>
Levy Gerzberg 7,813,712 41,219
Uzia Galil 7,813,712 41,219
George T. Haber 7,813,712 41,219
James D. Meindl 7,813,712 41,219
Arthur B Stabenow 7,813,712 41,219
Philip M. Young 7,813,712 41,219
</TABLE>
The following additional items were voted upon at the meeting:
1. A proposal to amend the Company's 1993 Stock Option Plan to
increase the number of shares of Common Stock reserved for
issuance thereunder by 350,000 shares was approved by a vote of
7,647,658 shares for; 187,623 shares against; 19,650 shares
abstaining.
2. A proposal to amend the Company's 1995 Employee Stock Purchase
Plan to increase the number of shares of Common Stock reserved for
issuance thereunder by 100,000 shares was approved by a vote of
7,704,662 shares for; 132,719 shares against; 17,550 shares
abstaining.
3. A proposal to ratify the appointment of PricewaterhouseCoopers LLP
as the independent accountants of the Company for the fiscal year
ending December 31, 1999 was approved by a vote of 7,832,800
shares for; 15,601 shares against; 6,530 shares abstaining.
16
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the nine months ended
September 30, 1999.
17
<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: October 14, 1999 /s/ Levy Gerzberg
-----------------------------------
Levy Gerzberg
President
Chief Executive Officer
/s/ Karl Schneider
Karl Schneider -----------------------------------
Vice President of Finance
Chief Financial Officer
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED INCOME STATEMENTS, THE CONSOLIDATED BALANCE SHEETS AND THE
ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 4,857
<SECURITIES> 13,591
<RECEIVABLES> 19,533
<ALLOWANCES> 0
<INVENTORY> 9,434
<CURRENT-ASSETS> 49,579
<PP&E> 11,282
<DEPRECIATION> 6,709
<TOTAL-ASSETS> 54,152
<CURRENT-LIABILITIES> 12,190
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 41,952
<TOTAL-LIABILITY-AND-EQUITY> 54,152
<SALES> 34,728
<TOTAL-REVENUES> 41,619
<CGS> 18,497
<TOTAL-COSTS> 18,497
<OTHER-EXPENSES> 9,945
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,171
<INCOME-TAX> 833
<INCOME-CONTINUING> 3,338
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,338
<EPS-BASIC> 0.32
<EPS-DILUTED> 0.28
</TABLE>
