<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, 2000
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, 2000 was 14,089,785.
<PAGE>
ZORAN CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE NO.
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
March 31, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2000 and 1999 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 21
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
</TABLE>
2
<PAGE>
ZORAN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15,300 $ 12,665
Short-term investments 132,162 132,967
Accounts receivable 19,812 21,869
Inventory 7,196 7,159
Prepaid expenses and other current assets 2,666 1,946
--------- ---------
Total current assets 177,136 176,606
Property and equipment, net 5,806 5,662
Other 2,450 200
--------- ---------
$ 185,392 $ 182,468
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,856 $ 7,987
Accrued expenses and other liabilities 10,650 11,036
--------- ---------
Total current liabilities 17,506 19,023
--------- ---------
Stockholders' equity:
Common Stock, $0.001 par value;
20,000,000 shares authorized; 14,051,106
and 13,919,270 shares issued and outstanding 14 14
Additional paid-in capital 196,112 195,269
Warrants 717 717
Accumulated other comprehensive income 5,070 4,962
Accumulated deficit (34,027) (37,517)
--------- ---------
Total stockholders' equity 167,886 163,445
--------- ---------
$ 185,392 $ 182,468
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
ZORAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
2000 1999
------- --------
<S> <C> <C>
Revenues:
Product sales $14,222 $ 9,282
Software, licensing and development 3,420 2,610
------- -------
Total revenues 17,642 11,892
------- -------
Costs and expenses:
Cost of product sales 8,136 5,093
Research and development 3,269 3,524
Selling, general and administrative 4,137 3,247
------- -------
Total costs and expenses 15,542 11,864
------- -------
Operating income 2,100 28
Interest and other income, net 2,006 99
------- -------
Income before income taxes 4,106 127
Provision for income taxes 616 25
------- -------
eNt income $ 3,490 $ 102
======= =======
Basic net income per share $ 0.25 $ 0.01
======= =======
Diluted net income per share $ 0.23 $ 0.01
======= =======
Shares used to compute basic net income per share 13,988 10,278
======= =======
Shares used to compute diluted net income per share 15,486 11,776
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
ZORAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,490 $ 102
Adjustments to reconcile net income to net cash used by
operations:
Depreciation, amortization and other 627 564
Changes in current assets and liabilities:
Accounts receivable 2,297 (1,022)
Inventory (37) (524)
Prepaid expenses and other current assets (765) (240)
Accounts payable (1,131) 701
Accrued expenses and other liabilities (645) (642)
-------- --------
Net cash provided by (used in) operating activities 3,836 (1,061)
-------- --------
Cash flows from investing activities:
Capital expenditures for property and equipment (726) (260)
Purchases of short-term investments (113,379) (517)
Sales and maturities of short-term investments 114,311 40
Purchases of long-term investments (2,250) --
-------- --------
Net cash used in investing activities (2,044) (737)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of Common Stock, net 843 248
-------- --------
Net cash provided by financing activities 843 248
-------- --------
Net increase (decrease) in cash and cash equivalents 2,635 (1,550)
Cash and cash equivalents at beginning of period 12,665 8,221
-------- --------
Cash and cash equivalents at end of period $ 15,300 $ 6,671
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
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, 1999. Results for the interim periods
presented are not necessarily indicative of the results to be expected for the
full year.
2. COMPREHENSIVE INCOME
In 1998, the Company adopted Statement of Financial Accounting Standards No. 130
("SFAS 130"), "Reporting Comprehensive Income."
The following are the components of comprehensive income (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
------ ------
<S> <C> <C>
Net income ........................................... $3,490 $ 102
Unrealized gain on short-term investment ............. 5,070 --
------ ------
Comprehensive income ................................. $8,560 $ 102
====== ======
</TABLE>
The components of accumulated other comprehensive income are as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
---- ----
<S> <C> <C>
Unrealized gain on short-term investment ............... $5,070 --
</TABLE>
3. BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------ ------
<S> <C> <C>
INVENTORY:
Work-in-process $2,015 $1,135
Finished goods 5,181 6,024
------ ------
$7,196 $7,159
====== ======
</TABLE>
4. 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.
5. 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,
--------------------------------------------------------------------------------------------------
2000 1999
------------------------------------------------ -------------------------------------------------
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 $ 3,490 13,988 $ 0.25 $ 102 10,278 $ 0.01
============== ===============
Effects of dilutive securities:
Stock options - 1,456 - 1,498
Warrants - 42 - -
Diluted EPS:
Income available to
--------------- ----------------- --------------- -----------------
common stockholders $ 3,490 15,486 $ 0.23 $ 102 11,776 $ 0.01
=============== ================= ============== =============== ================= ===============
</TABLE>
6. 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 in the balance sheet at their fair market value, and the
6
<PAGE>
corresponding derivative gains or losses be either reported in the statement of
operations or as a deferred item depending on the type of hedge relationship
that exists with respect to such derivative. Adopting the provisions of SFAS
133, which will be effective for the Company's fiscal year 2000, are not
expected to have a material effect on the Company's consolidated financial
statements.
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.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin: No. 101 "Revenue Recognition in Financial Statements" (SAB 101). SAB
101 summarizes certain of the Staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. We have
until the second quarter of 2000 to comply with the guidance in SAB 101. We
believe that the impact of SAB 101 will not have a material effect on our
financial position or results of operations.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44 (FIN 44) "Accounting for Certain Transactions involving Stock
Compensation," an interpretation of APB Opinion No. 25. FIN 44 clarifies the
application of Opinion 25 for (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of
various modifications to the terms of a previously fixed stock option or
award, and (d) the accounting for an exchange of stock compensation awards in
a business combination. FIN 44 is effective July 1, 2000, but certain
conclusions cover specific events that occur after either December 15, 1998,
or January 12, 2000. We believe that the impact of FIN 44 will not have a
material effect on our financial position or results of operations.
7
<PAGE>
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, 1999.
OVERVIEW
From our inception in 1981 through 1991, we derived the substantial majority of
our revenue from digital filter processors and vector signal processors used
principally in military, industrial and medical applications. In 1989, we
repositioned our business to develop and market data compression products for
the evolving multimedia markets and discontinued development of digital filter
processor and vector signal processor products. In 1994, we discontinued
production of these products. Our current lines of digital audio and video
products include integrated circuits and related products used in digital
versatile disc players, movie and home theater systems, filmless digital cameras
and video editing systems.
We derive most of our revenues from the sale of our integrated circuit
products. Historically, average selling prices in the semiconductor industry
in general, and for our products in particular, have decreased over the life
of a particular product. Average selling prices for our hardware products
have fluctuated substantially from period to period, primarily as a result of
changes in our customer mix of original equipment manufacturer, or OEM, sales
versus sales to distributors and the transition from low-volume to
high-volume production. In the past, we reduced the prices of some of our
products in order to better penetrate the consumer market. We believe that,
as our product lines continue to mature and competitive markets evolve, we
are likely to experience further declines in the average selling prices of
our products, although we cannot predict the timing and amount of such future
changes with any certainty.
Our cost of product sales consists primarily of fabrication costs, assembly and
test costs, and the cost of materials and overhead from operations. If we are
unable to reduce our cost of product sales to offset anticipated decreases in
average selling prices, our product gross margins will decrease. Our product
gross margin is also dependent on product mix and on the percentage of products
sold directly to our OEM customers versus indirectly through our marketing
partners who purchase our products at lower prices but absorb most of the
associated marketing and sales support expenses, maintain inventories and
provide customer support and training. Lower gross margins on sales to
distributors are partially offset by reduced selling and marketing expenses
related to such sales. Product sales in Japan are primarily made through
Fujifilm, our strategic partner and distributor in Japan. Fujifilm provides more
sales and marketing support than our other distributors. We expect both product
and customer mix to continue to fluctuate in future periods, causing further
fluctuations in margins.
We also derive revenue from licensing our software and other intellectual
property. Licensing revenue includes one-time license fees and royalties based
on the number of units distributed by the licensee. In addition, we have
historically generated a significant percentage of our total revenues from
development contracts, primarily with key customers, although development
revenue has declined as a percentage of total revenues over the past several
years. These development contracts have provided us with partial funding for the
development of some of our products. These development contracts provide for
license and milestone payments which are recorded as development revenue. We
classify all development costs, including costs related to these development
contracts, as research and development expenses. We retain ownership of the
intellectual property developed by us under these development contracts. While
we intend to continue to enter into development contracts with certain strategic
partners, we expect development revenue to continue to decline as a percentage
of total revenues.
8
<PAGE>
Our research and development expenses consist of salaries and related costs of
employees engaged in ongoing research, design and development activities and
costs of engineering materials and supplies. We are also a party to research and
development agreements with the Chief Scientist in Israel's Ministry of Industry
and Trade and the Israel-United States Binational Industrial Research and
Development Foundation, which fund up to 50% of incurred project costs for
approved products up to specified contract maximums. These agreements require us
to use our best efforts to achieve specified results and require us to pay
royalties at rates of 3% to 5% of resulting product sales, and up to 30% of
resulting license revenues, up to a maximum of 100% to 150% of total funding
received. Reported research and development expenses are net of these grants,
which fluctuate from period to period. We believe that significant investments
in research and development are required for us to remain competitive and we
expect to continue to devote significant resources to product development,
although such expenses as a percentage of total revenues may fluctuate.
Our selling, general and administrative expenses consist primarily of
employee-related expenses, royalties, sales commissions, product promotion and
other professional services. We expect that selling, general and administrative
expenses will continue to increase to support our anticipated growth.
We conduct a substantial portion of our research and development and certain
sales and marketing and administrative operations in Israel through our
wholly-owned Israeli subsidiary. As a result, some of our expenses are incurred
in New Israeli Shekels. To date, substantially all of our product sales and our
development and licensing revenue have been denominated in U.S. dollars and most
costs of product sales have been incurred in U.S. dollars. We expect that most
of our sales and costs of sales will continue to be denominated and incurred in
U.S. dollars for the foreseeable future. We have not experienced material losses
or gains as a result of currency exchange rate fluctuations and have not engaged
in hedging transactions to reduce our exposure to such fluctuations. We may in
the future elect to take appropriate action to reduce our foreign exchange risk.
Our effective income tax rate has benefited from the availability of net
operating losses which we have utilized to reduce taxable income for U.S.
federal income tax purposes and by our Israeli subsidiary's status as an
"Approved Enterprise" under Israeli law, which provides a ten-year tax holiday
for income attributable to a portion of our operations in Israel. Our U.S.
federal net operating losses expire at various times between 2000 and 2009, and
the benefits from our subsidiary's Approved Enterprise status expire at various
times beginning in 2003.
In June 1999, we sold to MGI Software of Canada the intellectual property
related to our SoftDVD product line and transferred to MGI certain related
software development and support resources in exchange for cash, MGI common
stock and future royalties. We do not currently expect, however, that these
royalties will have a material impact on quarterly revenues for the foreseeable
future. In addition, the shares of MGI stock received by us as part of this
transaction are subject to future appreciation or depreciation. Our software
revenues have declined significantly as a result of the sale of the SoftDVD
product line.
RESULTS OF OPERATIONS
REVENUES
Total revenues for the quarter ended March 31, 2000 increased by 48.4% to
$17.6 million from $11.9 million for the same period in 1999. Product sales
for the quarter increased by 53.2% to $14.2 million from $9.3 million for
first quarter of 1999. The increase in product sales was driven by the
Company's DVD and Super VCD product line where unit sales increased by
approximately 115% compared to the same period in 1999. Software, licensing
and development revenues increased by 31% to $3.4 million compared to $2.6
million for the first quarter of 1999. This increase was primarily due to the
timing of revenue recognition on long-term development contracts. Such
revenue is recognized on a percentage of completion basis.
PRODUCT GROSS MARGIN
Product gross margin for the quarter ended March 31, 2000 decreased by 2.3%
to 42.8% from 45.1% for the same period in 1999. The decrease was due to a
product sales mix that included an increased percentage of lower-margin
products and a shift in customer mix to a lower percentage of direct sales to
original equipment manufacturer customers compared to the same quarter in
1999.
RESEARCH AND DEVELOPMENT
Research and development ("R&D") expenses for the quarter ended March 31, 2000
decreased by 7.2% to $3.3 million from $3.5 million for the same period in 1999.
R&D expenses decreased as a result of a decline in software development
activities following the sale of our SoftDVD product line in June 1999. R&D
expenses decreased as a
9
<PAGE>
percentage of total revenues for the quarter from 29.6% for the first quarter of
1999 to 18.5% for the first quarter of 2000.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses for the quarter ended March 31,
2000 increased by 27.4% to $4.1 million from $3.2 million for the same period
in 1999. 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.
INTEREST AND OTHER INCOME, NET
Net interest and other income for the quarter ended March 31, 2000 increased
to $2.0 million from $99,000 for the same period in 1999. The increase
resulted primarily from increased interest income on higher cash balances
following our follow-on public offering of common stock in December 1999.
PROVISION FOR INCOME TAXES
The Company's estimated effective tax rate was 15% for the current quarter, the
same as last year's effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 2000, our capital requirements were satisfied
primarily by cash flows from operations. At March 31, 2000, we had $15.3 million
of cash and cash equivalents, $132.2 million of short-term investments and
$159.6 million of working capital.
Our operating activities provided cash of $3.8 million during the three months
ended March 31, 2000, primarily due to net income. A decrease in accounts
receivable and the non-cash impact of depreciation and amortization, was
partially offset by decreases in accounts payable, accrued expenses and by an
increase in prepaid expenses.
Cash used in investing activities was $2.0 million during the three months
ended March 31, 2000, principally reflecting purchases of long-term equity
investments.
Cash provided by financing activities was $843,000 for the three months ended
March 31, 2000 and consisted substantially of proceeds from the issuance of
common stock under our incentive stock option plan.
We believe that our current balances of cash, cash equivalents and short-term
investments, and anticipated cash flow from operations, will satisfy our
anticipated working capital and capital expenditure requirements at least
through 2000. Nonetheless, our future capital requirements may vary materially
from those now planned and will depend on many factors including, but not
limited to:
- the levels at which we maintain inventory and accounts receivable;
- the market acceptance of our products;
- the levels of promotion and advertising required to launch our new
products or to enter markets and attain a competitive position in the
marketplace;
- our business, product, capital expenditure and research and
development plans and technology roadmap;
- volume pricing concessions;
- capital improvements to new and existing facilities;
- technological advances;
10
<PAGE>
- the response of competitors to our products; and
- our relationships with our suppliers and customers.
In addition, we may require an increase in the level of working capital to
accommodate planned growth, hiring and infrastructure needs. Additional capital
may also be required for consummation of any acquisitions of businesses,
products or technologies.
To the extent that our existing resources and cash generated from operations,
are insufficient to fund our future activities, we may need to raise additional
funds through public or private financings or borrowings. If additional funds
are raised through the issuance of debt securities, these securities could have
rights, preferences and privileges senior to holders of common stock, and the
terms of this debt could impose restrictions on our operations. The sale of
additional equity or convertible debt securities could result in additional
dilution to our stockholders. We cannot be certain that additional financing
will be available in amounts or on terms acceptable to us, if at all. If we are
unable to obtain this additional financing, we may be required to reduce the
scope of our planned product development and sales and marketing efforts, which
could harm our business, financial condition and operating results.
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.
OUR QUARTERLY REVENUES AND OPERATING RESULTS FLUCTUATE DUE TO A VARIETY
OF FACTORS, WHICH MAY RESULT IN VOLATILITY OR A DECLINE IN THE PRICE OF OUR
STOCK.
Our quarterly operating results have varied significantly due to a number of
factors, including:
- fluctuation in demand for our products;
- the timing of new product introductions by us and our competitors;
- the level of market acceptance of new and enhanced versions of our
products and our customers' products;
- the timing of large customer orders;
- the length and variability of the sales cycle for our products;
- the cyclical nature of the semiconductor industry;
- the availability of development funding and the timing of development
revenue;
- changes in the mix of products sold;
- seasonality in demand for our products;
- competitive pricing pressures; and
- the evolving and unpredictable nature of the markets for products
incorporating our integrated circuits and embedded software.
We expect that our operating results will continue to fluctuate in the future as
a result of these factors and a variety of other factors, including:
- the cost and availability of adequate foundry capacity;
- fluctuations in manufacturing yields;
11
<PAGE>
- the emergence of new industry standards;
- product obsolescence; and
- the amount of research and development expenses associated with new
product introductions.
Our operating results could also be harmed by:
- economic conditions generally or in various geographic areas where we
or our customers do business;
- other conditions affecting the timing of customer orders; or
- a downturn in the markets for our customers' products, particularly
the consumer electronics market.
These factors are difficult or impossible to forecast. We place orders to
purchase our products from independent foundries several months in advance of
the scheduled delivery date, often in advance of receiving non-cancelable orders
from our customers. If anticipated shipments in any quarter are canceled or do
not occur as quickly as expected, expense and inventory levels could be
disproportionately high. If anticipated license revenues in any quarter are
canceled or do not occur, gross margins may be reduced. A significant portion of
our expenses are relatively fixed, and the timing of increases in expenses is
based in large part on our forecast of future revenues. As a result, if revenues
do not meet our expectations we may be unable to quickly adjust expenses to
levels appropriate to actual revenues, which could harm our operating results.
As a result of these factors, our operating results may vary significantly from
quarter to quarter. Any shortfall in revenues or net income from levels expected
by securities analysts could cause a decline in the trading price of our stock.
OUR SUCCESS FOR THE FORESEEABLE FUTURE WILL BE DEPENDENT ON GROWTH IN DEMAND FOR
INTEGRATED CIRCUITS FOR DIGITAL VERSATILE DISC, OR DVD, SUPER VIDEO CD, DIGITAL
AUDIO, VIDEO EDITING AND FILMLESS DIGITAL CAMERA APPLICATIONS AND OUR ABILITY TO
MARKET AND SELL OUR PRODUCTS TO MANUFACTURERS WHO INCORPORATE THOSE TYPES OF
INTEGRATED CIRCUITS INTO THEIR PRODUCTS.
In 1999 and the first quarter of 2000, we derived a majority of our product
revenues from the sale of integrated circuits for DVD and Super Video CD
applications. We expect that sales of our products for DVD and Super Video CD
applications, digital audio applications and video editing applications will
continue to account for a significant portion of our revenues for the near
future. Our ability to sell our recently introduced products for filmless
digital camera applications will also have a significant impact on our financial
performance for the foreseeable future. If the markets for these products and
applications decline or fail to develop as expected, or we are not successful in
our efforts to market and sell our products to manufacturers who incorporate
integrated circuits into these products, our financial results will be harmed.
OUR CUSTOMERS EXPERIENCE FLUCTUATING PRODUCT CYCLES AND SEASONALITY, WHICH
CAUSES OUR SALES TO FLUCTUATE.
Because the markets our customers serve are characterized by numerous new
product introductions and rapid product enhancements, our operating results may
vary significantly from quarter to quarter. During the final production of a
mature product, our customers typically exhaust their existing inventory of our
products. Consequently, orders for our products may decline in those
circumstances, even if our products are incorporated into both mature products
and replacement products. A delay in the customer's transition to commercial
production of a replacement product would delay our ability to recover the lost
sales from the discontinuation of the related mature product. Our customers also
experience significant seasonality in the sales of their consumer products,
which affects their orders of our products. Typically, the fourth calendar
quarter represents a disproportionate percentage of sales for our customers due
to the holiday period, and therefore a disproportionate percentage of our sales.
We expect these sales fluctuations to continue for the foreseeable future.
PRODUCT SUPPLY AND DEMAND IN THE SEMICONDUCTOR INDUSTRY IS SUBJECT TO CYCLICAL
VARIATIONS.
12
<PAGE>
The semiconductor industry is subject to cyclical variations in product supply
and demand. Downturns in the industry often occur in connection with, or
anticipation of, maturing product cycles for both semiconductor companies and
their customers and declines in general economic conditions. These downturns
have been characterized by abrupt fluctuations in product demand, production
over-capacity and accelerated decline of average selling prices. In some cases,
these downturns have lasted more than one year. A downturn in the semiconductor
industry could harm our sales and revenues if demand drops or our gross margins
if average selling prices decline.
THE DEVELOPMENT AND EVOLUTION OF MARKETS FOR OUR INTEGRATED CIRCUITS IS
DEPENDENT ON FACTORS SUCH AS INDUSTRY STANDARDS, OVER WHICH WE HAVE NO CONTROL;
FOR EXAMPLE, IF MANUFACTURERS ADOPT NEW OR COMPETING INDUSTRY STANDARDS WITH
WHICH OUR PRODUCTS ARE NOT COMPATIBLE, OUR EXISTING PRODUCTS WOULD BECOME LESS
DESIRABLE TO THE MANUFACTURERS AND OUR SALES WOULD SUFFER.
The emergence of markets for our products is affected by a variety of factors
beyond our control. In particular, our products are designed to conform to
current specific industry standards. Manufacturers may not continue to follow
these standards, which would make our products less desirable to manufacturers
and reduce our sales. Also, competing standards may emerge that are preferred by
manufacturers, which could also reduce our sales and require us to make
significant expenditures to develop new products. The emergence of new markets
for our products is also dependent in part upon third parties developing and
marketing content in a format compatible with commercial and consumer products
that incorporate our products. If content compatible with commercial and
consumer products that incorporate our products is not available, manufacturers
may not be able to sell products incorporating our integrated circuits, and our
sales to manufacturers would suffer.
WE RELY ON INDEPENDENT FOUNDRIES AND CONTRACTORS FOR THE MANUFACTURE, ASSEMBLY
AND TESTING OF OUR INTEGRATED CIRCUITS, AND THE FAILURE OF ANY OF THESE THIRD
PARTIES TO DELIVER PRODUCTS OR OTHERWISE PERFORM AS REQUESTED COULD DAMAGE OUR
RELATIONSHIPS WITH OUR CUSTOMERS AND HARM OUR SALES AND FINANCIAL RESULTS.
We do not operate any manufacturing facilities, and we rely on independent
foundries to manufacture substantially all of our products. These independent
foundries fabricate products for other companies and may also produce products
of their own design. From time to time there are manufacturing capacity
shortages in the semiconductor industry. We do not have long-term supply
contracts with any of our suppliers, including our principal supplier, Taiwan
Semiconductor Manufacturing Company, or TSMC. Therefore, TSMC is not obligated
to manufacture products for us for any specific period, in any specific quantity
or at any specified price, except as may be provided in a particular purchase
order.
Our reliance on independent foundries involves a number of risks, including:
- the inability to obtain adequate manufacturing capacity;
- the unavailability of or interruption in access to certain process
technologies necessary for manufacture of our products;
- reduced control over delivery schedules;
- reduced control over quality assurance;
- reduced control over manufacturing yields and cost; and
- potential misappropriation of our intellectual property.
In addition, TSMC and some of our other foundries are located in areas of the
world which are subject to natural disasters such as earthquakes. While the
1999 earthquake in Taiwan did not have a material impact on our independent
foundries, a similar event centered near TSMC's facility could severely
reduce TSMC's ability to manufacture our integrated circuits. The loss of any
of our manufacturers as a supplier, our inability to expand the supply of our
products in response to increased demand, or our inability to obtain timely
and adequate deliveries from our current or future suppliers due to a natural
disaster or any other reason could delay or reduce shipments of our products.
Any of these circumstances could damage our relationships with current and
prospective customers and harm our sales and financial results.
13
<PAGE>
We also rely on independent contractors for the assembly and testing of our
products. At present, all of our semiconductor products are assembled by one of
three independent contractors: ASE, Amkor or ASAT. Our semiconductor products
are tested by these contractors or other independent contractors. Our reliance
on independent assembly and testing houses limits our control over delivery
schedules, quality assurance and product cost. Disruptions in the services
provided by our assembly or testing houses or other circumstances that would
require us to seek alternative sources of assembly or testing could lead to
supply constraints or delays in the delivery of our products. These constraints
or delays could damage our relationships with current and prospective customers
and harm our sales and financial results.
BECAUSE FOUNDRY CAPACITY IS LIMITED WE MAY BE REQUIRED TO ENTER INTO COSTLY
LONG-TERM SUPPLY ARRANGEMENTS TO SECURE FOUNDRY CAPACITY.
If we are not able to obtain additional foundry capacity as required, our
relationships with our customers would be harmed and our sales would likely be
reduced. In order to secure additional foundry capacity, we have considered and
will continue to consider various arrangements with suppliers, which could
include, among others:
- option payments or other prepayments to a foundry;
- nonrefundable deposits with or loans to foundries in exchange for
capacity commitments;
- contracts that commit us to purchase specified quantities of silicon
wafers over extended periods;
- issuance of our equity securities to a foundry;
- investment in a foundry;
- joint ventures; or
- other partnership relationships with foundries.
We may not be able to make any such arrangement in a timely fashion or at all,
and such arrangements, if any, may not be on terms favorable to us. Moreover, if
we are able to secure foundry capacity, we may be obligated to utilize all of
that capacity or incur penalties. Such penalties may be expensive and could harm
our financial results.
IF OUR INDEPENDENT FOUNDRIES DO NOT ACHIEVE SATISFACTORY YIELDS, OUR
RELATIONSHIPS WITH OUR CUSTOMERS MAY BE HARMED.
The fabrication of silicon wafers is a complex process. Minute levels of
contaminants in the manufacturing environment, defects in photomasks used to
print circuits on a wafer, difficulties in the fabrication process or other
factors can cause a substantial portion of the integrated circuits on a wafer to
be non-functional. Many of these problems are difficult to detect at an early
stage of the manufacturing process and may be time consuming and expensive to
correct. As a result, foundries often experience problems achieving acceptable
yields, which are represented by the number of good integrated circuits as a
proportion of the number of total integrated circuits on any particular wafer.
Poor yields from our independent foundries would reduce our ability to deliver
our products to customers, harm our relationships with our customers, and harm
our business.
TO BE SUCCESSFUL, WE MUST EFFICIENTLY DEVELOP NEW AND ENHANCED PRODUCTS TO MEET
RAPIDLY CHANGING CUSTOMER REQUIREMENTS AND INDUSTRY STANDARDS.
The markets for our products are characterized by:
- rapidly changing technologies;
- evolving industry standards;
- frequent new product introductions; and
14
<PAGE>
- short product life cycles.
We expect to increase our product development expenses, and our future success
will depend to a substantial degree upon our ability to develop and introduce,
on a timely and cost-effective basis, new and enhanced products that meet
rapidly changing customer requirements and industry standards. We may not
successfully develop, introduce or manage the transition to new products. Delays
in the introduction or shipment of new or enhanced products, lack of market
acceptance for such products or problems associated with new product transitions
could harm our sales and financial results.
WE FACE COMPETITION OR POTENTIAL COMPETITION FROM COMPANIES WITH GREATER
RESOURCES THAN OURS, AND IF WE ARE UNABLE TO COMPETE EFFECTIVELY WITH THESE
COMPANIES, OUR MARKET SHARE MAY DECLINE AND OUR BUSINESS COULD BE HARMED.
Competition in the compression technology market has historically been dominated
by large companies such as STMicroelectronics and companies that develop and use
their own integrated circuits, such as Sony. As this market continues to
develop, we face competition from other large semiconductor vendors, including:
- C-Cube Microsystems;
- LSI Logic;
- Cirrus Logic (Crystal Semiconductor);
- Fujitsu; and
- Motorola.
For example, in the markets for JPEG-based products for use in filmless digital
cameras, LSI Logic and Ricoh are providing system-on-a-chip solutions to third
parties. We also face competition from internally-developed solutions developed
and used by major Japanese original equipment manufacturers, who may also be our
customers.
Many of our existing and potential competitors have substantially greater
resources than ours in many areas, including:
- finances;
- manufacturing;
- technology;
- marketing; and
- distribution.
Many of our competitors have broader product lines and longer standing
relationships with customers than we do. Moreover, our competitors may foresee
the course of market developments more accurately than we do and could in the
future develop new technologies that compete with our products or even render
our products obsolete. In addition, a number of private companies have announced
plans for new products to address the same digital multimedia compression
problems that our products address. If we are unable to compete successfully
against our current and future competitors, we could experience price
reductions, order cancellations and reduced gross margins, any one of which
could harm our business.
The DVD market is just emerging, and additional competitors are expected to
enter the market for DVD players and software. We believe that several large
Japanese consumer electronics companies may be planning to enter this market and
may, accordingly, attempt to develop MPEG 2 hardware or software that may be
competitive with our products. Some of these potential competitors may develop
captive implementations for use only with their own PC and consumer electronics
products. It is also possible that application software vendors, such as
Microsoft, may attempt to
15
<PAGE>
enter the DVD application market in the future. This increased competition may
result in price reductions, reduced profit margins and loss of market share.
OUR PRODUCTS ARE CHARACTERIZED BY AVERAGE SELLING PRICES THAT DECLINE OVER
RELATIVELY SHORT TIME PERIODS; IF WE ARE UNABLE TO REDUCE OUR COSTS OR INTRODUCE
NEW PRODUCTS WITH HIGHER AVERAGE SELLING PRICES, OUR FINANCIAL RESULTS WOULD
SUFFER.
Average selling prices for our products decline over relatively short time
periods. Many of our manufacturing costs are fixed. When our average selling
prices decline, our revenues decline unless we sell more units, and our gross
margins decline unless we are able to reduce our manufacturing costs by a
commensurate amount. Our operating results suffer when gross margins decline. We
may experience these problems in the future and cannot predict when they may
occur or their severity.
WE DERIVE MOST OF OUR REVENUE FROM SALES TO A SMALL NUMBER OF LARGE CUSTOMERS,
AND IF WE ARE NOT ABLE TO RETAIN THESE CUSTOMERS, OR THEY RESCHEDULE, REDUCE OR
CANCEL ORDERS, OUR REVENUES WOULD BE REDUCED AND OUR FINANCIAL RESULTS WOULD
SUFFER.
Our largest customers account for a substantial percentage of our revenues. In
1999, sales to Fujifilm accounted for 37.3% of our total revenues and 41.0% of
our product sales. Our four largest customers in 1999 accounted for
approximately 56.9% of our total revenues. During 1998, our four largest
customers accounted for approximately 45.7% of our revenues with Fujifilm
accounting for 22.7% and Pinnacle 14.3%. Sales to these large customers have
varied significantly from year to year and will continue to fluctuate in the
future. These sales also may fluctuate significantly from quarter to quarter. We
may not be able to retain our key customers or these customers may cancel
purchase orders or reschedule or decrease their level of purchases from us. Any
substantial decrease or delay in sales to one or more of our key customers could
harm our sales and financial results. In addition, any difficulty in collecting
amounts due from one or more key customers could harm our financial results.
WE ARE DEPENDENT ON OUR RELATIONSHIP WITH FUJIFILM FOR A SIGNIFICANT PERCENTAGE
OF OUR PRODUCT SALES, AND IF THIS RELATIONSHIP WERE TERMINATED, OUR BUSINESS
WOULD BE HARMED.
Fujifilm has been our largest customer in three of the last five years. Fujifilm
purchases our products primarily as a distributor. Under our arrangement with
Fujifilm, Fujifilm acts as the primary distributor in Japan of products
developed by us under development contracts with Fujifilm. Fujifilm also sells
some of these products in Japan under its own name. We may sell these products
directly in Japan only to specified customers and must first buy the products
from Fujifilm. Fujifilm provides more sales and marketing support than our other
distributors. Fujifilm also has a nonexclusive license to distribute most of our
products outside of Japan. Fujifilm has provided wafer manufacturing services on
a most-favored terms basis to us since 1993 and has also provided funding to
support our development efforts. If our relationship with Fujifilm were
terminated, our business would be harmed.
OUR PRODUCTS GENERALLY HAVE LONG SALES CYCLES AND IMPLEMENTATION PERIODS, WHICH
INCREASES OUR COSTS IN OBTAINING ORDERS AND REDUCES THE PREDICTABILITY OF OUR
EARNINGS.
Our products are technologically complex. Prospective customers generally must
make a significant commitment of resources to test and evaluate our products and
to integrate them into larger systems. As a result, our sales process is often
subject to delays associated with lengthy approval processes that typically
accompany the design and testing of new products. The sales cycles of our
products often last for many months or even years. Longer sales cycles require
us to invest significant resources in attempting to make sales and delay the
generation of revenue.
Long sales cycles also subject us to other risks, including customers' budgetary
constraints, internal acceptance reviews and cancellations. In addition, orders
expected in one quarter could shift to another because of the timing of
customers' purchase decisions. The time required for our customers to
incorporate our products into their own can vary significantly with the needs of
our customers and generally exceeds several months, which further complicates
our planning processes and reduces the predictability of our operating results.
WE ARE NOT PROTECTED BY LONG-TERM CONTRACTS WITH OUR CUSTOMERS.
16
<PAGE>
We generally do not enter into long-term purchase contracts with our customers,
and we cannot be certain as to future order levels from our customers. When we
do enter into a long-term contract, the contract is generally terminable at the
convenience of the customer. In the event of an early termination by one of our
major customers, it is unlikely that we will be able to rapidly replace that
revenue source, which would harm our financial results.
WE ARE DEPENDENT UPON OUR INTERNATIONAL SALES AND OPERATIONS; ECONOMIC,
POLITICAL OR MILITARY EVENTS IN A COUNTRY WHERE WE MAKE SIGNIFICANT SALES OR
HAVE SIGNIFICANT OPERATIONS COULD INTERFERE WITH OUR SUCCESS OR OPERATIONS THERE
AND HARM OUR BUSINESS.
During the first quarter of 2000, 83% of our total revenues were derived from
international sales. We anticipate that international sales will continue to
represent a significant portion of our total revenues for the foreseeable
future. In addition, substantially all of our semiconductor products are
manufactured, assembled and tested outside of the United States by independent
foundries and subcontractors.
We are subject to the risks inherent in doing business internationally,
including:
- unexpected changes in regulatory requirements;
- fluctuations in exchange rates;
- political and economic instability;
- imposition of tariffs and other barriers and restrictions; and
- the burdens of complying with a variety of foreign laws.
The majority of our research and development personnel and facilities and a
significant portion of our sales personnel are located in Israel. Political,
economic and military conditions in Israel directly affect our operations. Some
of our officers and employees in Israel are obligated to perform up to 39 days
of military reserve duty annually. The absence of these employees for
significant periods during the work week may cause us to operate inefficiently
during these periods.
During 1998, we opened an office in Shenzhen, China. Our operations in China
are subject to the economic and political uncertainties affecting that
country. For example, the Chinese economy has experienced significant growth
in the past decade, but such growth has been uneven across geographic and
economic sectors and has recently been slowing. This growth may continue to
decrease and any slowdown may have a negative effect on our business. The
Chinese economy is also experiencing deflation which may continue in the
future. This deflation could result in devaluation of the Chinese Yuan, which
could reduce our sales to the Chinese market.
THE PRICES OF OUR PRODUCTS MAY BECOME LESS COMPETITIVE DUE TO FOREIGN EXCHANGE
FLUCTUATIONS.
Foreign currency fluctuations may affect the prices of our products. Prices for
our products are currently denominated in U.S. dollars for sales to our
customers throughout the world. If there is a significant devaluation of the
currency in a specific country, the prices of our products will increase
relative to that country's currency and our products may be less competitive in
that country. Also, we cannot be sure that our international customers will
continue to be willing to place orders denominated in U.S. dollars. If they do
not, our revenue and operating results will be subject to foreign exchange
fluctuations.
OUR ABILITY TO COMPETE COULD BE JEOPARDIZED IF WE ARE UNABLE TO PROTECT OUR
INTELLECTUAL PROPERTY RIGHTS FROM CHALLENGES BY THIRD PARTIES.
Our success and ability to compete depend in large part upon protecting our
proprietary technology. We rely on a combination of patent, trade secret,
copyright and trademark laws, non-disclosure and other contractual agreements
and technical measures to protect our proprietary rights. These agreements and
measures may not be sufficient to protect our technology from third-party
infringement, or to protect us from the claims of others. Monitoring
unauthorized use of our products is difficult and we cannot be certain that the
steps we have taken will prevent unauthorized use of our technology,
particularly in foreign countries where the laws may not protect our proprietary
rights as fully as in the
17
<PAGE>
United States. The laws of certain foreign countries in which our products are
or may be developed, manufactured or sold, including various countries in Asia,
may not protect our products or intellectual property rights to the same extent
as do the laws of the United States and thus make the possibility of piracy of
our technology and products more likely in these countries. If competitors are
able to use our technology, our ability to compete effectively could be harmed.
WE COULD BECOME SUBJECT TO CLAIMS AND LITIGATION REGARDING INTELLECTUAL PROPERTY
RIGHTS, WHICH COULD SERIOUSLY HARM OUR BUSINESS AND REQUIRE US TO INCUR
SIGNIFICANT COSTS.
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. In the past, we have
been subject to claims and litigation regarding alleged infringement of other
parties' intellectual property rights. We could become subject to litigation in
the future either to protect our intellectual property or as a result of
allegations that we infringe others' intellectual property rights. Claims that
our products infringe proprietary rights would force us to defend ourselves and
possibly our customers or manufacturers against the alleged infringement. These
claims and any resulting lawsuit, if successful, could subject us to significant
liability for damages and invalidation of our proprietary rights. These
lawsuits, regardless of their success, would likely be time-consuming and
expensive to resolve and would divert management time and attention. Any
potential intellectual property litigation could force us to do one or more of
the following:
- stop selling our products that incorporate the challenged intellectual
property;
- obtain from the owner of the infringed intellectual property right a
license to sell or use the relevant technology, which license may not
be available on reasonable terms or at all;
- pay damages; or
- redesign those products that use such technology.
If we are forced to take any of the foregoing actions, our business could be
severely harmed.
IF NECESSARY LICENSES OF THIRD-PARTY TECHNOLOGY ARE NOT AVAILABLE TO US OR ARE
VERY EXPENSIVE, OUR PRODUCTS COULD BECOME OBSOLETE.
From time to time we may be required to license technology from third parties to
develop new products or product enhancements. Third party licenses may not be
available to us on commercially reasonable terms, if at all. If we are unable to
obtain any third-party license required to develop new products and product
enhancements, we may have to obtain substitute technology of lower quality or
performance standards or at greater cost, either of which could seriously harm
the competitiveness of our products.
IF WE ARE NOT ABLE TO APPLY OUR NET OPERATING LOSSES AGAINST TAXABLE INCOME IN
FUTURE PERIODS, OUR FINANCIAL RESULTS WILL BE HARMED.
Our future net income and cash flow will be affected by our ability to apply our
net operating losses, which totaled approximately $48.0 million for federal tax
reporting purposes as of December 31, 1999, against taxable income in future
periods. Our net operating losses incurred prior to the consummation of our
initial public offering in 1995 that we can use to reduce future taxable income
for federal tax purposes are limited to approximately $3.0 million per year.
Changes in tax laws in the United States may further limit our ability to
utilize our net operating losses. Any further limitation on our ability to
utilize our net operating losses could harm our financial condition.
ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND SEVERELY HARM OUR
FINANCIAL CONDITION.
We intend to consider investments in complementary companies, products or
technologies. While we have no current agreements to do so, we may acquire
businesses, products or technologies in the future. In the event of any future
acquisitions, we could:
- issue stock that would dilute our current stockholders' percentage
ownership;
18
<PAGE>
- incur debt;
- assume liabilities;
- incur amortization expenses related to goodwill and other intangible
assets; or
- incur large and immediate write-offs.
Our operation of any acquired business will also involve numerous risks,
including:
- problems combining the purchased operations, technologies or products;
- unanticipated costs;
- diversion of management's attention from our core business;
- adverse effects on existing business relationships with customers;
- risks associated with entering markets in which we have no or limited
prior experience; and
- potential loss of key employees, particularly those of the purchased
organizations.
We may not be able to successfully integrate any businesses, products or
technologies or personnel that we might acquire in the future and any failure to
do so could disrupt our business and seriously harm our financial condition.
OUR PRODUCTS COULD CONTAIN DEFECTS, WHICH COULD REDUCE SALES OF THOSE PRODUCTS
OR RESULT IN CLAIMS AGAINST US.
We develop complex and evolving products. Despite testing by us and our
customers, errors may be found in existing or new products. This could result
in, among other things, a delay in recognition or loss of revenues, loss of
market share or failure to achieve market acceptance. These defects may cause us
to incur significant warranty, support and repair costs, divert the attention of
our engineering personnel from our product development efforts and harm our
relationships with our customers. The occurrence of these problems could result
in the delay or loss of market acceptance of our products and would likely harm
our business. Defects, integration issues or other performance problems in our
products could result in financial or other damages to our customers or could
damage market acceptance of our products. Our customers could also seek damages
from us for their losses. A product liability claim brought against us, even if
unsuccessful, would likely be time consuming and costly to defend.
IF WE DO NOT MAINTAIN OUR CURRENT DEVELOPMENT CONTRACTS OR ARE UNABLE TO ENTER
INTO NEW DEVELOPMENT CONTRACTS, OUR BUSINESS COULD BE HARMED.
We historically have generated a significant percentage of our total revenues
from development contracts, primarily with key customers. These development
contracts have provided us with partial funding for the development of some of
our products. Under these contracts, we receive payments upon reaching certain
development milestones. If we fail to achieve the milestones specified in our
existing development contracts, if our existing contracts are terminated or we
are unable to secure future development contracts, our ability to
cost-effectively develop new products would be reduced and our business would be
harmed.
WE MAY NEED ADDITIONAL FUNDS TO EXECUTE OUR BUSINESS PLAN, AND IF WE ARE UNABLE
TO OBTAIN SUCH FUNDS, WE WILL NOT BE ABLE TO EXPAND OUR BUSINESS AS PLANNED.
We may require substantial additional capital to finance our future growth,
secure additional foundry capacity and fund our ongoing research and development
activities beyond 2000. Our capital requirements will depend on many factors,
including:
- acceptance of and demand for our products;
- the types of arrangements that we may enter into with our independent
foundries; and
19
<PAGE>
- the extent to which we invest in new technology and research and
development projects.
To the extent that our existing sources of liquidity and cash flow from
operations are insufficient to fund our activities, we may need to raise
additional funds. If we raise additional funds through the issuance of equity
securities, the percentage ownership of our existing stockholders would be
reduced. Further, such equity securities may have rights, preferences or
privileges senior to those of our common stock. Additional financing may not be
available to us when needed or, if available, it may not be available on terms
favorable to us.
IF WE FAIL TO MANAGE OUR FUTURE GROWTH, IF ANY, OUR BUSINESS WOULD BE HARMED.
We anticipate that our future growth, if any, will require us to recruit and
hire a substantial number of new engineering, managerial, sales and marketing
personnel. Our ability to manage our growth successfully will also require us to
expand and improve our administrative, operational, management and financial
systems and controls. Many of our key operations, including the major portion of
our research and development operations and a significant portion of our sales
and administrative operations, are located in Israel. A majority of our sales
and marketing and certain of our research and development and administrative
personnel, including our President and Chief Executive Officer and other
officers, are based in the United States. The geographic separation of these
operations places additional strain on our resources and our ability to
effectively manage our growth. If we are unable to manage growth effectively,
our business would be harmed.
WE RELY ON THE SERVICES OF OUR EXECUTIVE OFFICERS AND OTHER KEY PERSONNEL, WHOSE
KNOWLEDGE OF OUR BUSINESS AND INDUSTRY WOULD BE EXTREMELY DIFFICULT TO REPLACE.
Our success depends to a significant degree upon the continuing contributions of
our senior management. The loss of key management personnel could delay product
development cycles or otherwise harm our business. We may not be able to retain
the services of any of our key employees. We believe that our future success
will also depend in large part on our ability to attract, integrate and retain
highly-skilled engineering, managerial, sales and marketing personnel, both in
the United States and in Israel. Competition for such personnel is intense, and
we may not be successful in attracting, integrating and retaining such
personnel. Failure to attract, integrate and retain key personnel could harm our
ability to carry out our business strategy and compete with other companies.
THE ISRAELI RATE OF INFLATION MAY NEGATIVELY IMPACT OUR COSTS IF IT EXCEEDS THE
RATE OF DEVALUATION OF THE NEW ISRAELI SHEKEL AGAINST THE U.S. DOLLAR.
A portion of the cost of our operations, relating mainly to our personnel and
facilities in Israel, is incurred in New Israeli Shekels. As a result, we bear
the risk that the rate of inflation in Israel will exceed the rate of
devaluation of the New Israeli Shekel in relation to the dollar, which will
increase our costs as expressed in dollars. To date, we have not engaged in
hedging transactions. In the future, we may enter into currency hedging
transactions to decrease the risk of financial exposure from fluctuations in the
exchange rate of the U.S. dollar against the New Israeli Shekel. These measures
may not adequately protect us from the impact of inflation in Israel.
THE GOVERNMENT PROGRAMS WE PARTICIPATE IN AND TAX BENEFITS WE RECEIVE REQUIRE US
TO MEET SEVERAL CONDITIONS AND MAY BE TERMINATED OR REDUCED IN THE FUTURE, WHICH
WOULD INCREASE OUR COSTS.
In the year ended December 31, 1999, we received an aggregate of $484,000 in
grants for research and development from the Chief Scientist in Israel's
Ministry of Industry and Trade. To continue to be eligible for these grants, our
development projects must be approved by the Chief Scientist on a case-by-case
basis. If our development projects are not approved by the Chief Scientist, we
will not receive grants to fund these projects, which would increase our
research and development costs. We also receive tax benefits, in particular
exemptions and reductions as a result of the "Approved Enterprise" status of our
existing operations in Israel. To be eligible for these tax benefits, we must
maintain our Approved Enterprise status by meeting conditions, including making
specified investments in fixed assets located in Israel and investing additional
equity in our Israeli subsidiary. If we fail to meet these conditions in the
future, the tax benefits would be canceled and we could be required to refund
the tax benefits already received. These tax benefits may not be continued in
the future at their current levels or at any level. Israeli governmental
authorities have indicated that the government may reduce or eliminate these
benefits in the future, which would harm our business.
20
<PAGE>
WE HAVE ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND THERE ARE
PROVISIONS OF DELAWARE LAW THAT COULD PREVENT OR DELAY A CHANGE IN CONTROL OF
OUR COMPANY.
Our certificate of incorporation, our bylaws and Delaware law contain provisions
that could make it more difficult for a third party to acquire us, even if doing
so would be beneficial to our stockholders. These include provisions:
- prohibiting a merger with a party that has acquired control of 15% or
more of our outstanding common stock, such as a party that has
completed a successful tender offer, until three years after that
party acquired control of 15% of our outstanding common stock;
- authorizing the issuance of up to 3,000,000 shares of "blank check"
preferred stock;
- eliminating stockholders' rights to call a special meeting of
stockholders; and
- requiring advance notice of any stockholder nominations of candidates
for election to our board of directors.
OUR STOCK PRICE HAS FLUCTUATED AND MAY CONTINUE TO FLUCTUATE WIDELY.
The market price of our common stock has fluctuated significantly since our
initial public offering in 1995. Between January 1, 1999 and December 31, 1999,
the sale price of our common stock, as reported on the Nasdaq National Market,
ranged from a low of $8.875 to a high of $55.75. During the first quarter of
2000 the sale price ranged from a low of $45.1875 to a high of $74.3125. The
market price of our common stock is subject to significant fluctuations in the
future in response to a variety of factors, including:
- announcements concerning our business or that of our competitors or
customers;
- quarterly variations in operating results;
- announcements of technological innovations;
- the introduction of new products or changes in product pricing
policies by us or our competitors;
- proprietary rights or other litigation;
- changes in analysts' earnings estimates;
- general conditions in the semiconductor industry; and
- developments in the financial markets.
In addition, the stock market has, from time to time, experienced extreme price
and volume fluctuations that have particularly affected the market prices for
semiconductor companies or technology companies generally and which have been
unrelated to the operating performance of the affected companies. Broad market
fluctuations of this type may reduce the future market price of our common
stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risks including changes in interest rates and
foreign currency exchange rates.
The fair value of our investment portfolio or related income would not be
significantly impacted by either a 10% increase or decrease in interest rates
due mainly to the short-term nature of the major portion of our investment
portfolio.
A majority of our revenue and capital spending is transacted in U.S. dollars,
although a portion of the cost of our operations, relating mainly to our
personnel and facilities in Israel, is incurred in New Israeli Shekels. We have
not engaged in hedging transactions to reduce our exposure to fluctuations that
may arise from changes in foreign exchange
21
<PAGE>
rates. Based on our overall currency rate exposure at March 31, 2000, a
near-term 10% appreciation or depreciation of the New Israeli Shekel would
have an immaterial affect on our financial condition.
22
<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, 2000.
23
<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 15, 2000 /S/ KARL SCHNEIDER
-----------------------------------
KARL SCHNEIDER
VICE PRESIDENT FINANCE
AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
24
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 15,300
<SECURITIES> 132,162
<RECEIVABLES> 19,812
<ALLOWANCES> 0
<INVENTORY> 7,196
<CURRENT-ASSETS> 177,136
<PP&E> 13,678
<DEPRECIATION> 7,872
<TOTAL-ASSETS> 185,392
<CURRENT-LIABILITIES> 17,506
<BONDS> 0
0
0
<COMMON> 14
<OTHER-SE> 167,872
<TOTAL-LIABILITY-AND-EQUITY> 185,392
<SALES> 14,222
<TOTAL-REVENUES> 17,642
<CGS> 8,136
<TOTAL-COSTS> 8,136
<OTHER-EXPENSES> 3,269
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,106
<INCOME-TAX> 616
<INCOME-CONTINUING> 3,490
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,490
<EPS-BASIC> 0.25
<EPS-DILUTED> 0.23
</TABLE>
